Facebook finds the 'secret sauce'

By Katherine Rushton

As the social network prepares to celebrate its 10th anniversary, Katherine Rushton considers its future and how mobile is changing the business - and how it can continue to hold the attention of younger teens.

Last week Facebook's market capitalisation passed US$150 billion for the first time. Photo / AP
Last week Facebook's market capitalisation passed US$150 billion for the first time. Photo / AP

It takes a fairly precocious 22-year-old to turn down an offer of US$1 billion ($1.23 billion) for a loss-making company. But that was Mark Zuckerberg's reaction when Facebook was just 2 years old.

Yahoo! wanted to buy the burgeoning social network and was prepared to dig deep. Analysts were astonished when Zuckerberg said no.

With hindsight, of course, there is no question that it was the right decision.

Last week, the company's market capitalisation passed US$150 billion for the first time. Tomorrow it celebrates its 10th birthday. Only Google has grown so much, so fast.

In the decade since Zuckerberg launched "Thefacebook", as it was then known, the website has attracted 1.23 billion members - nearly half of the global population with internet access. Some 750 million of those use Facebook every day.

Mark Zuckerberg. Photo / AP
Mark Zuckerberg. Photo / AP

The social network's original appeal may have been novelty but today analysts see it as a utility.

For many it is now the main platform they use for sharing photographs and communicating with friends. It has become so embedded in people's lives even resentful users find it hard to kick the habit.

Facebook is still attracting users, but its growth rate has started to slow as it has reached saturation point in mature markets. Analysts are also increasingly concerned that it is losing its appeal to teenagers. How can a website be "cool" when their parents and grandparents are using it as well?

Facebook has admitted that growth among younger teens is levelling off, stoking fears that a generation of influential users will ditch the site for new alternatives. The business is under pressure to keep on innovating.

But Zuckerberg, who turns 30 in May, has been buying up potential rivals before they became too threatening.

Just before Facebook joined the public markets in 2012, it bought Instagram, forking out US$1 billion for a loss-making company with just 13 employees. Analysts were stunned, but Zuckerberg recognised the potential threat. Many users rely on Facebook to swap photographs, a function that Instagram does just as well.

More recently, Facebook made a US$3 billion play for Snapchat, a service beloved by teenagers, which allows users to send messages and pictures that are automatically erased after a few seconds. This one proved tougher quarry.

Snapchat rejected the offer so Facebook did the next best thing and ploughed ahead with its own new app.

"They couldn't buy Snapchat, so they made a feature which does 80 per cent of that," said Brian Blau, an analyst at Gartner. It was a sensible move, he says, but he also expresses concern at its lack of originality. Facebook and other networks are all trying to expand by imitating each other's best features, and looking homogenous as a result, he said.

"They seem to have a tough time with innovation today and for the long term they need to have those killer features that continue to attract and keep users."

Zuckerberg is used to such flak, and used to tackling major strategic challenges. Until very recently, many critics feared the company would not adapt its business model fast enough to keep pace with the rapid shift away from desktop computers to smartphones.

Change in user behaviour helped to fuel huge growth in the social network's popularity with users but also made it harder to monetise. Advertisers are unwilling to pay as much for space on small mobile phone screens as on big PCs, and Facebook struggled to work out how to create revenue from its burgeoning mobile audience effectively.

Zuckerberg has admitted the business was too slow to crack the formula, saying last week that the shift was "not as quick as it should have been".

Certainly the company had a few false starts. At one point, Facebook looked at developing a smartphone of its own. At another, it launched Facebook Home, a portal for phones which run on Google's Android software. It failed to take off.

The mobile problem is shared by Google, Yahoo! and a host of other companies which became major players before smartphones arrived. That did not help to allay investor fears and Facebook spent the year after its troubled flotation in May 2012 with its shares trading below US$38, the initial public offering price.

However, the doom-mongers who predicted Facebook's rapid demise have been silenced, at least for the moment. The company's fourth-quarter results last week demonstrated that the business has found what Americans like to call "the secret sauce" for making money out of its existing users, regardless of how they log on to the website.

Facebook made 25 per cent more per member than it did in the last three months of 2012, and 71 per cent more per user visit. More than US$1 billion of its US$2.6 billion revenues came from mobile advertising. As chief operating officer Sheryl Sandberg noted on the company's results call, this figure was larger than Facebook's total advertising revenues in the fourth quarter the previous year.

"Facebook has pretty consistently surprised us with its ability to turn around the business and focus on mobile, and its ability to attract new users," says Debra Aho Williamson, a digital advertising analyst at eMarketer. "It's definitely become a maturing business."

She stops short of describing it as a mature business, because it still "has a lot of work to do to persuade advertisers to devote more budget to social media".

This is a battle every social network faces, but it is also one that has intensified since rival Twitter started trading as a public company towards the end of last year. Both companies are scrapping for the same advertising dollars, from companies that have traditionally used billboards and TV commercials.

One of Facebook's masterstrokes in this campaign has been to devise a set of metrics to help marketing executives measure the financial impact of advertisements they buy on the social network. It has formed a partnership with Datalogix, the sales analysis firm, to use information from loyalty card schemes to work out how much business money spent on Facebook advertising generates offline.

More recently, the social network has enabled users to send advertisements, via Facebook, directly to customers on existing mailing lists. Invasive? Quite possibly. Effective? Without a doubt.

The next step for the social network is to start using the data it has about its users to sell targeted advertising on other websites. Facebook has not confirmed it will make such a move, but advertisers see it as a given.

"Facebook is sitting on a huge repository of very valuable information about its users. One of its challenges is working out what it can actually use," Aho Williamson says. "Privacy will continue rearing its head as Facebook tries new things."

The social network is continually embroiled in controversy about how much data it is collecting, particularly in Europe, where privacy laws are much tighter than on the US company's home turf.

Many users have become much more careful about self-censoring, after being bombarded with advertising that transparently mines the content they post to friends. Women who announce their engagements on Facebook can rely upon advertisements for wedding dresses. Give it a year and the wedding dresses are pushed out in favour of maternity wear.

Some users find this second-guessing invasive, but from Facebook's perspective it is doing users a favour by offering content users are likely to find interesting.

"Our goal is to reach a point where the ads are as relevant and timely as the content your friends share with you," Zuckerberg said on a conference call with analysts last week.

The entrepreneur, who "made" US$3.2 billion from the surge in Facebook's shares which followed its results last week,

talked excitedly about its plans to keep attracting new users worldwide.

"Only one-third of the world's population has access to the internet today, and for many of those their internet experience remains pretty weak. In 2014, we're going to focus on deepening our relationships with mobile operators around the world and working to develop new models for internet access. Helping more people get connected is important to developing the global knowledge economy."

- Telegraph Group Ltd

Network milestones

February 2004: Mark Zuckerberg creates Facebook with his college room-mates Eduardo Saverin, Andrew McCollum, Dustin Moskovitz and Chris Hughes. The website's membership is limited to Harvard students.

May 2005: Venture capitalists Accel Partners invest US$12.7 million and Accel partner Jim Breyer adds US$1 million of his own money.

September 2006: Site is opened to everyone.

April 2012: Facebook announces it is to buy Instagram for US$1 billion.

May 2012: Zuckerberg sees US$4 billion wiped off his fortune after the company's initial public offering.

December 2012: Makes sweeping changes to its privacy controls.

December 2013: Anthropologist Daniel Miller says Facebook is "dead and buried" to teens because they're "embarrassed to be associated with it" and prefer Twitter or Snapchat.

- Observer

- Daily Telegraph UK

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