Facebook: A Brilliant Business Model

In business school, case studies of successful companies often involve a story of an innovator who created physical products and services, mass media, or services at scale for global consumers.  Yet I’d assert that web-based Facebook is one of the most brilliant business models we’ve ever seen.  If you use the service, Facebook has you to thank for all your hard work.

Despite yesterday’s IPO closed at nearly opening price, it’s important to pause and think about how this company’s market cap reached $100 billion (for context, Pepsi is at par at $106b).  We’re already seeing many become wealthy, from newly minted millionaires in brand new M3s at the local car wash in silicon valley, to the investors, VC, and ecosystem that will benefit from the revenues, we need to pause and think why.

So what is so important to pause and think about? Why do I say the Business Model is “Brilliant”?  Facebook’s business model smashed the traditional manufacturing style we see with consumer products, and instead built a  ’consumer platform’ that enabled many around them. In fact, the Facebook business model is brilliant for the following reasons:

  1. Brilliant because the users do the work.   In many companies, hiring paid or unpaid interns is a source of scale, or even off shoring work to developing regions.  In the case of Facebook, there are 900,000,000+ unpaid members that are generating meaningful content and value to each other.   In fact, official Facebook stats indicate that 526million of them are active each day, many of which are using mobile devices and applications to connect to Facebook as they traverse the world.  While Facebook continues to grow, third parties are observing that the rate of growth may retarding, what’s important to remember  is that most of the commercial base that brands want to seek are likely within Facebook.
  2. Brilliant because the brands send the traffic and inject the revenue.   That’s right, this couldn’t have been done without brands.  In fact, as one of the largest monetary streams for Facebook, they are spending dollars to reach the commercial base inside of the Facebook experience (despite GM pulling ads).  In fact, Altimeter research indicates 90% of corporate websites link to their social media accounts, showing how 10+ years of hard earned traffic spent on SEO and SEM with Google has now been shifted to send that traffic right to Facebook.com.   It goes without saying the partner ecosystem of Social Media Management System has also contributed –and generated associated revenues.
  3. Brilliant because a small company stayed agile.   Despite revenues being $3.7b, their cost of goods is only $860m. Facebook has published their employee base is a mere  3500+ employees at their Silicon Valley HQ and beyond, a small cadre compared to headcount of Google (33k employees), Apple (60k), and Microsoft (90k).  This lean and mean team was able to stay hungry, focused, and innovative to constantly roll out new features and products (both loved and hated) that captured the attention of the world.  Even large software enterprise companies like Salesforce have modeled their software to emulate the features inside of company.   Despite that there is no shortage of investors, the leadership team was able to maintain control and act against Mark’s clear vision, hopefully evading some corporate bureaucracy.

Facebook Success is Here Because of Your Contribution
This business model is notable as it involved millions in creating a consumer company at tremendous scale (without traditional, manufacturing, distribution or a person-to-person sale), in fact, anyone who’s used Facebook as a consumer, or as a brand marketer should also be to thank.  Now that the IPO has happened, those who have purchased the stock may feel even more connected as they have some financial ownership to the company.

The Facebook business model is brilliant, as everyone around them helped to do the work.

  • Mudassirhashmi

    I dont really Facebook as a brilliant Business Model. Its a fantastic social media site. Yes, people in the past couple of years have been carried away that Facebook will provide the neceassry insights to the brands, corps etc.  But the reality is, with everyday passing by, Facebook gets new competitors who are taking a leaf out of Facebook’s page and are making their own portals, for ex. Pinterest. This was started in 2012 now doing a great job. Its a simple photo pinning social media portal. So Facebook till now has been a destination for everything but doesnt mean that they are going to go strength to strength. Half or more of the users are allergic to ads and many have no interested whatsoever to engage with their brands as if there is no tomorrow. So its time to take it easy and stop praising and marketing Facebook, as it just doesnt make sense anymore. Atleast after the first day IPO Dud… Wake up, guys.

  • http://www.facebook.com/paul.mooney Paul Mooney

    How many shares of FB did you have? 

  • http://www.facebook.com/paul.mooney Paul Mooney

    BTW your cheerleading wasn’t enough as Morgan Stanley, the lead underwriter in Facebook #FB public offering, stepped in to prop up the stock from dipping below its $38 IPO price

  • http://www.312digital.com Sean McGinnis

    Where do you rate the opening of the platform to developers? I always thought that was an important, strategic move that created entire new arenas for users to play in.

  • Gene

    UGC alone is not a sustainable business model as MySpace, Friendster and GeoCities have shown. Live by the sword, die by the sword…

  • http://twitter.com/evoljennifer Jennifer Bohmbach

    These tenets may have been brilliant to get them here but now that they took all this money – they will have to figure out how to incent all the users and brands to keep doing the work. The sustainability of this brilliance is in question but only time will tell. 

  • http://twitter.com/jowyang Jeremiah Owyang

    This is also key for innovation that FB as a company can’t do alone.  Also strategic. 

  • http://www.connectme360.com/ Brian Hayashi @connectme

    If Facebook was a one-trick pony like the examples you cited I’d agree with you. In my view what is impressive is that Facebook has used their market power to make dramatic changes to their user experience for the purpose of adding more granular control over personal privacy settings, without huge churn. It’s similar to my experience watching TV Guide grow, an early company many people pooh-poohed as being yet another commodity listings company: TV Guide went from static listings to dynamic listings that could be embedded not only in the core product but also in daily newspapers around the country. It sounds incredibly common sense in 2012, but many smart people underestimated them during the latter half of the 20th century.

  • http://web-strategist.com/blog Jeremiah Owyang

    Some interesting discussions happening here on Google+ too https://plus.google.com/111654284395316165338/posts

  • http://twitter.com/sapountzis Ted Sapountzis

    Jeremiah,

    Although I agree that the value of having 900M ‘unpaid’ contributors is interesting, I am not sure Facebook has yet figured out how to monetize this network, while still being dependent on advertising for 85% of their revenues.  At the same time remember, Google was 3x the size of Facebook when they were 8 years old, while having lower Sales & Marketing costs and spending more on R&D.  Only time will tell what happens next….

  • Gene

    As Jeremiah stated FB at 3000 employees is incredibly nimble compared to companies with same magnitude of users. However no amount of nimbleness can ANY company keep abreast of popular trends forever.  A smaller, hungrier, 5 person startup will always be in the wing to pick up a cultural shift.  Live by popularity, die by popularity.

  • Gene

    And TV Guide is a very poor counterexample to provide – the print side was sold off to PE for pennies to dollar, and the digital side was sold to Rovi to add to their portfolio of expiring patents.

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  • http://profile.yahoo.com/HYZF4BGYFFKQJYLE3O45KAE6IQ Ken

    Facebooks revenue comes from display ads. I don’t call that brilliant at all, it’s an old business model that will fail unless they reinvent themselves. I think facebook users are counted by everyone that has clicked into a FB users page. Of the 100+ people I know, only a few people do facebook

  • http://travisestell.com/ Travis

    Most websites that sell ads are responsible for both building the website and producing the content that gets people to visit.

    Facebook, on the other hand, builds the website and lets other people show up and do the rest of the work. Some people spending hours a day adding content to Facebook.

    That’s the point of the article. Facebook sits back and collects ad revenue while its users add the content and promote their Facebook pages and profiles.

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  • http://www.connectme360.com/ Brian Hayashi @connectme

    As a twenty-five year veteran of the space, I agree with your comment about agility — Ray Ozzie was famous for saying that a small, entrepreneurial staff could maneuver circles around a larger company entrenched in a specific business model. However, I disagree with your characterization of Facebook as being in the same class as MySpace, Friendster and GeoCities.

    All three had significant user bases at the respective height of their market power. None of them asked the right question — “what information am I willing to make available in exchange for ” — which is why all three of them faded just as quickly as they rose to prominence. 

    It is incredibly difficult for anyone, of any size, to replicate the unique journey that led to the fine-grained privacy controls now managed by Facebook. I’m certainly happy to revisit this issue in five years, although I suspect that this will be painful reading for you by that time.

    Lastly — while you may have picked up on the headlines why TV Guide was sold at such a discount in 2007, it was sold because of poor business practices by Dr Henry Yuen, who had merged with TV Guide only after the company had already enjoyed some 50 years of market domination. You’re missing the underlying value story inherent in today’s information vending businesses. Every business that is in information publishing tends to become monopolistic in scope, which is why antitrust went after IBM, Microsoft, Google, etc., in that order. 

  • http://joakimnilsson.com/ Joakim Nilsson

    5 months later this business model looks less brilliant… FB needs to create complementing revenue streams to ads

  • http://www.iwebxpert.com/business-facebook-page/ Business Facebook Page

    Now with over 750 million members, there’s no doubt that Facebook should be a part of your business’ social media marketing strategy. At this point, it’s almost insane to think that your own prospects and customers aren’t on Facebook, which is why many businesses are realizing they need to create an engaging and valuable Facebook presence for their fans that also serves as a viable channel for generating traffic and leads for their business.

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