Facebook’s Business Model Canvas: From College Experiment to Becoming the King of Social Media | Profitable Business Models

TL;DR: Summary of the Facebook’s history

• Facebook’s success is due to its focus on innovation, platform development, and its ability to adapt quickly to changes in the social media landscape.
• Zuckerberg had been coding and programming since the age of 11, and he continued to develop his skills while attending college.
• The Social Network landscape in 2002 was dominated by Friendster, Myspace, and Second Life, all of which had free user bases and relied on advertising for revenue.
• Zuckerberg created Facemash, an early Facebook prototype that allowed Harvard students to compare female student’s pictures side by side and rank them based on attractiveness, but it was shut down before it even took off.
• Mark Zuckerberg created The Facebook, a social networking site exclusive to Harvard students, in February 2004.
• The Facebook platform was hit with its first lawsuit soon after its incorporation, with the plaintiffs alleging that Zuckerberg had stolen their idea.
• Zuckerberg and Saverin started selling small advertising spaces to companies and individuals to offset the cost of running and maintaining the platform servers while getting the company off the ground.
• Zuckerberg partnered with Sean Parker and Peter Thiel to help grow The Facebook in its early stages.
• Facebook focused on controlled and staged growth, which attracted investors, users, and great engineers and designers.
• Facebook’s Business Model Canvas: The Early Days
• 2006 was a big year for Facebook as they made several site improvements, went mobile, and partnered with Microsoft.
• Facebook had a busy year in 2008, hiring Sheryl Sandberg as COO, launching Facebook chat, Facebook Connect, and the Facebook for iPhone mobile app, and settling the ConnectU Lawsuit.
• 2009 saw the launch of the iconic like button, Facebook’s expansion into gaming, and the release of the Facebook Timeline.
• Facebook started as a social networking site for students, but has since evolved into a business, entertainment, and news platform.
• Facebook’s Business Model Canvas: The King of Social Media

Introduction

Undeniably, Facebook has become part of our daily routine. Opening the Facebook app on your phone has become second nature. The way Facebook has effortlessly integrated into the daily lives of users is by design. It’s hard to imagine life before Facebook, which is reflected in how well the company has done financially.

As of August 2021, the social media giant has been ranked with a market cap of more than $1.024 Trillion, making it the world’s 6th most valuable company. Facebook has 2.80 billion monthly active users and 1.84 billion daily active users.

A survey conducted in January 2021 found that of the five most popular social media platforms (YouTube, Facebook, WhatsApp, Facebook Messenger, and Instagram), Facebook owns four. This means that Facebook has significant control over crucial data and advertising.

From its inception in 2004, Facebook and its chief founder Mark Zuckerberg, have been at the forefront of innovation and the development of social media. It revolutionized the way people connected online and has made information sharing a breeze. Millions of businesses rely on the Facebook platform to advertise their products and services. Therefore giving Facebook the title of “King of Social Media” seems very apt.

Nevertheless, its rise to giant status has not been without missteps, controversies, and criticism. Marred with lawsuits from the very beginning, Facebook has managed to sustain its monopoly and dominance using various tactics, including a razor focus on innovation and platform development.

While the idea of a social network did not originate from Zuckerberg, his tenacity, adaptability, and quickness at launching the site gave him an advantage. Being a latecomer into the social network scene, Facebook has managed to disprove the proverbial theory that the early bird always gets the first worm.

So let’s take an in-depth look at how Facebook did it. How it managed to evolve from a free networking site for a few select college students to a multi-billion dollar empire with over a billion users worldwide.

2002-2005: How Facebook was born

2002: The History of Zuckerberg’s Programming Passion & the State of Social Networking

Mark Zuckerberg had been dabbling in coding and programming since the age of 11. Seeing a growing interest in the industry, his parents hired a software developer named David Newman to teach him. He successfully created an internal instant messaging program called ZuckNet for his father’s dentist’s practice through this tutoring. 

A few years later, while attending an elite boarding school called Phillips Exeter Academy, Zuckerberg attracted the interest of Microsoft and AOL, who offered him a job. Both companies were looking at purchasing Synapse, a software that used AI to map a user’s music taste. Zuckerberg declined and chose to go to Harvard instead.

He decided to major in psychology and took several classes in computer science. This might seem like an odd choice for a kid with a knack for coding. However, his selection would prove to be very strategic in developing the very ‘addictive nature of Facebook and social media.

The Social Networking landscape 

The Social Network landscape in 2002 was just in its infancy. Before Zuckerberg landed on his idea, several other social networking sites captured the interest of young teens and college students at that time.

There had been several early movers around the globe from as far back as the late 90s. When SixDegrees.com was launched in 1997, it became the first website to combine the basic features that we associate social media with today. Features such as; “…user profiles, listing of “friends,” and the ability to browse[ through a] friend’s list.”  was developed by Six Degrees.

Three sites were trendy and quite successful before Facebook came onto the scene. These were; Friendster, Myspace, and Second Life. All three sites functioned on a non-subscription-based business model, meaning users could use the site for free. The aim was to make money by selling advertising to companies who want to reach the vast number of users.

Friendster, in particular, was launched in 2002. Within a few months, the company had more than three million monthly active users. Unfortunately, the Friendster platform was riddled with glitches and had too many restrictions for the user. These problems resulted in many early adopters migrating to MySpace the following year. 

2003: Facemash, an Early Facebook Prototype & Competition from MySpace

Still, in his freshman year, Zuckerberg created an early Facebook prototype called Facemash. This new website allowed Harvard students to compare female student’s pictures side by side and rank them based on attractiveness.

Within a few hours, Facemash had garnered over 22 000 photo views. It was a smash hit; unfortunately, the website was shut down before it even took off. Zuckerberg didn’t have permission to use student photos from the Harvard student system for his website. Fortunately, he was not expelled for breaking the rules, and after a public apology, he set his sights on the next big thing.

That same year MySpace burst into the market and became an instant hit. It was a place for users to connect and build a private community to share blogs, groups, music, photos, and videos.

The platform was similar to Friendster’s model but focused more on sound infrastructure and scalability. It allowed users to personalize and continuously added new features based on user demand. By the end of the year, MySpace was established and dominated the social networking market.

2004: The Facebook is launched, tackling the first Lawsuit & Taking on MySpace & Friendster

Mark’s experience with his prototype helped him create a new site vastly different from Facemash. He noticed the mistakes and problems that sites like MySpace and Friendster were having.

Mainly the fact that Friendster was beginning to face challenges with managing their rapid new subscriber rate. The site often crashed, was slow to load, and the Friendster team didn’t bother with improving the platform design.

While MySpace was growing in leaps in bounds, Zuckerberg felt it necessary to control the growth of his new venture. He began working on a social networking site that connected Harvard students using their school email addresses and photos. Unlike MySpace, where the platform was open to anyone, The Facebook was exclusive to Harvard students only at first.

The platform was straightforward. Students could upload photos, share their interests and connect with people they knew at first.

Once he had worked on the platform for a few weeks, he told a few friends who suggested that Zuckerberg share the site on one of the school’s mailing lists. He launched the new site on the 4th of February 2004, incorporating it as a Florida LLC.

The strategy was a hit, and at least 1,200 students had signed up within a day of launch. The appeal was that this was a safe and exclusive place for Harvard students to meet each other.

The First Lawsuit from ConnectU

Barely a week after its first incorporation in February, The Facebook platform received the first of many lawsuits to follow. Zuckerberg was accused by three senior Harvard students of having stolen the idea from them.

The three students alleged that they had engaged Zuckerberg as a programmer to help them figure out a similar platform to The Facebook that they were calling ConnectU. This allegation soon developed into a full lawsuit.  This started a cascade of legal issues that would plague Facebook for decades.

Monetizing the site

From the get-go, Zuckerberg saw the platform’s potential but needed a way to sustain it. So far,

Zuckerberg and his friend Eduardo Saverin absorbed the costs of operation from their own funds.

Borrowing the idea from MySpace who had lots of adverts running on their site, Saverin and Zuckerberg started a Flyer project to generate ad revenue in April. They started selling small advertising spaces to companies and individuals. They marketed services, job listings, T-Shirts, and other products from students.

While it wasn’t particularly sophisticated, it gave them a cushion to offset the cost of running and maintaining the platform servers while getting the company off the ground.

Within a month, at least 50% of all Harvard undergraduates had a profile. Around April 2004, The Facebook became available to college students from Yale, Columbia, and Stanford. Sensing the potential growth of the platform, Zuckerberg moved out of his Harvard dormitory in June and rented a house in Palo Alto, California, to serve as the company’s headquarters.

Getting Investors

He partnered with Sean Parker, who in 1999 had co-founded Napster, a file-sharing service that would change the way music was consumed. Parker became the first President of The Facebook when the company was incorporated in July in Delaware. 

Parker went on the hunt for investors. After getting rejected by a few investors, he was directed to PayPal co-founder Peter Thiel. After an initial meeting with Zuckerberg and Parker, Thiel agreed to make a $500,000 investment for a 10.2% control of the company. Thiel became a member of the board and helped steer more people towards The Facebook.

As the year ended, The Facebook accepted membership from almost all universities in the U.S and Canada. They closed off their first year of operations with over 1 million active users and 7 employees.

2005: Early Expansion, Changing Name & Zuckerberg drops out

In May 2005 The Facebook received more capital. They got $12.7m from Accel and $1m from a venture capitalist Jim Breyer. All this money was being absorbed by the costs of operating, maintaining and developing the site. Selling ad space was still their only source of revenue. The platform was beginning to gain traction now, and a lot of people were paying attention.

Introducing Facebook.com

In August, they dropped the ‘the’ and renamed the company Facebook. They bought the facebook.com domain for a whopping $200,000 and continued to expand. Facebook continued to make improvements to the site, introducing a high school version of the platform in September and photos.

They expanded the site to allow Microsoft and Apple employees. They were soon ready to move beyond being a student platform. In October, Facebook expanded to the U.K and other countries, opening the site for up to 21 universities.

In November, Zuckerberg decided to drop out of Harvard and focus his efforts on running the company as CEO. By the end of the year, Facebook had expanded to Australia, New Zealand, Canada, Mexico, and Ireland. It had over 6 million users and 15 employees.

By avoiding the temptation to grow rapidly and instead opting for controlled and staged growth, Facebook built and developed a solid infrastructure to support the growing number of users. This attracted investors, users, and great engineers and designers who would create new products and features that catered to Facebook users. It was clear, Facebook was out for blood, and everyone could see it coming.

Facebook’s Business Model Canvas: The Early Days

At this point, Facebook’s Business Model Canvas looked like this:

Business Model Canvas of Facebook: The Early Days

2006-2012: Facebook to the World, Some Strategic Acquisitions & Going Public

2006: Facebook becomes available to everyone and goes mobile

2006 saw several significant changes to the site. Firstly, Facebook redesigned the group and events features to make them more accessible. They also launched a My Messages Page, a Browser Page, and several other improvements to their site. This made the site more user-friendly and convenient by allowing people to instantly connect with each other

Facebook took advantage of the rising availability of broadband and went mobile. They capitalized on the rise of smartphones and introduced additional networks that allowed people with corporate email addresses to join in May.

About two months later, Yahoo sent an acquisition offer of $1 billion to Facebook. Zuckerberg rejected it because he thought that Yahoo was grossly undervaluing Facebook’s potential. (Boy, was he right!)

As internet participation began to spread among diverse groups of people, social media was slowly becoming entrenched in the daily lives of individuals, schools, and families. Sensing this, Facebook lowered the age of users to 13, signally that they were a much ‘safer’ space for the youth and more family-friendly than MySpace.

Later that year, they launched the News Feed feature, which gathered users’ posts into one place. This made the site even more user-friendly. However, the change was met with resistance and outrage as certain users felt that Facebook was breaching their privacy. This outrage was to become a common thing for the company.

Partnership and Investment from Microsoft

Several vital things happened in 2007 for Facebook. Firstly, in October, Microsoft became highly interested in Facebook and purchased a 1.6% stake for $240 million. This new investment raised Facebook’s value to $15 billion. A month later, Facebook and Microsoft entered into a partnership intending to launch their Beacon ad program.

The aim of the program was to track a Facebook user’s behavior on third-party platforms. The product was highly unpopular and turned into a public relations nightmare because of user privacy concerns. Eventually, the many legal issues and lawsuits over the program forced Facebook and Microsoft to shut it down.

Acquisition of Parakey

The second significant event was Facebook’s first acquisition of a small startup called Parakey. Parakey was a crucial acquisition mainly because its founders Blake Ross and Joe Hewitt, were programming geniuses accredited for creating the Firefox web browser. They joined Facebook to help develop its platform and website.

Their programming and web development talents were immediately felt at Facebook with the launch of Facebook Marketplace for classified listings. The marketplace was a feature aimed at maximizing Facebook’s advertising revenue. The pair also helped create video posting and Facebook Ads and Pages. They were instrumental in developing the Facebook Application Developer platform aimed at developers who wanted to build their own applications and games integrated with Facebook.

It was clear that Facebook was now looking beyond personal user profiles. They were focusing on how businesses could use the site. By the end of the year, the platform had over 100,000 companies registered. Facebook’s value and appeal was accessibility, even for the smallest of businesses.

The decline of MySpace

The third critical event that occurred in 2007 was the beginning of MySpace’s decline. Although valued at a whopping $12 billion, MySpace was losing users to Facebook for several reasons. The platform was overloaded with advertising that made it extremely annoying to use. Its loading time was slower compared to Facebook. They were being beaten left, right and center in terms of innovation and features by Facebook. Facebook closed off the year with a membership of 58 million.

2008: Key Hires and settling lawsuits

Facebook started the year with a bang. In March, they hired Google executive Sheryl Sandberg as COO. Sandberg had extensive leadership experience and significant political acumen from her tenure as chief of staff for the Treasury Department under the Bill Clinton administration. This hire would prove crucial later on in the year when the financial crisis hit.

In April, Facebook launched Facebook chat, giving users an instant connection to their friends and family. The company also added Spanish as a language option, giving millions of Spanish speakers easier access to the side.

Another significant platform development was Facebook Connect, which allowed members to link their Facebook profiles to third-party sites. Lastly, they launched the Facebook for iPhone mobile app partnering with Apple.

Settling the ConnectU Lawsuit

After four years of back and forth, Facebook finally settles the lawsuit with the three senior Harvard students who claimed Zuckerberg had stolen their idea.

Navigating the Financial Crisis

When the global financial crisis hit, Facebook was just a small startup that relied heavily on ads for revenue. The situation made it challenging for this business model to survive. Fortunately, with Sandberg at the helm, Facebook managed to weather the storm by changing its advertising pricing and adapting the way it advertised.

2009: The Like Button Arrives and Product Expansion

2009 saw the launch of the iconic like button, allowing people to endorse other people’s posts. The launch was made possible through Facebook acquiring FriendFeed, a social media feed aggregator with many similar features to Facebook. As part of the acquisition, all 12 employees of FriendFeed joined Facebook, including its four founders, who played a crucial role in developing Google products such as Gmail and Google Maps.

Facebook also ventured into gaming, releasing Farmville in June. Within two months, the game had 10 million daily active users.

In 2011, Facebook purchased Snaptu, a small Israeli app developer tasked with redesigning and launching Facebook’s mobile app. Within a few years, the app had been downloaded by 100 million users. The same year Facebook retired the “Wall” and introduced the Facebook Timeline. This changed the platform’s user interface, reorganizing a user’s posts and putting them in chronological order.

2012: Disappointing IPO & Acquiring Instagram

The 18th of May, 2012, was a momentous day for Facebook. The company had the largest and most anticipated IPOs in history. They were offering 421,233,615 shares at $38 per share. Although they raised $16 billion through that offering, the IPO failed to meet expectations.

The stock fell immediately at opening, and the share prices plummeted by over 40% over the next few months. By August, Facebook had made a total loss of $50 billion. So why the lousy IPO turnout? The problem was that 57% of the shares sold on the IPO originated from Facebook insiders. This lack of confidence in the stock came from within Facebook itself.

Regardless of the disappointing IPO, the year 2012 saw Facebook make one of its most significant acquisitions. They bought Instagram, a photo-sharing social network that was integrated into the Facebook platform itself. This acquisition allowed Facebook to expand its user base and revenue from adverts. The year ends with Facebook announcing 1 billion active users.

2013-Present: A Maniacal focus on Advertising, Acquisitions & Product Launches

2013: HTC Phone Fail

In one of its few ill-advised ventures, Facebook partners with HTC to create a Facebook phone. The phone featured a home screen that was based on Facebook’s design and technology. It failed to garner any attention, and within a month, the selling price dropped from $99 to just $ 0.99. There were simply better phones on the market.

2014: Buying WhatsApp

In 2014, Facebook bought WhatsApp, a messaging app that increased Facebook’s reach. Despite already having a messaging system, Facebook wanted to have access to a younger user base and overseas users. This acquisition boosted Facebook’s presence in the mobile world, ensuring that their presence was felt one way or another.

2015-Present: Growing beyond Social Networking

From the years 2015 onward, Facebook continued to buy up everything in sight they felt was relevant for the company’s survival. Their advertising-dependent business model relied heavily on mining user’s data, behavior, and content. This landed them in trouble on several occasions, with privacy breaching complaints and lawsuits following them at every turn.

Nevertheless, Facebook continued to evolve beyond a place where students connect. It slowly grew into a business, entertainment, and news platform. Soon every business, organization, government, and individual was clamoring to be on Facebook. Its integration with third-party apps made it the most sought-after social media platform. Not to mention the thousands of updates, added features, and upgrades the platform introduced over the years.

Without a doubt, in today’s world, Facebook is the “King of Social Media”!

Facebook’s Business Model Canvas: The King of Social Media

At this point, Facebook’s Business Model Canvas looked like this:

Business Model Canvas of Facebook: The King of Social Media

Sources

• https://companiesmarketcap.com/facebook/marketcap/
• https://www.statista.com/statistics/272014/global-social-networks-ranked-by-number-of-users/
• https://www.forbes.com/sites/gilpress/2018/04/08/why-facebook-triumphed-over-all-other-social-networks/?sh=2b526c4a6e91