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    C ASE : E-406DATE : 05/12/11

    Arar Han (MBA 09) wrote this case using publicly available sources under t he supervision of Thomas M. SiebelProfessor of Business Leadership, Strategy, and Organizations William P. Barnett as the basis for class discussionrather than to illustrate either effective or ineffective handling of an administrative situation. Historical details of Facebook are largely drawn from Stanford GSB Case E- 220, Facebook, revised May 22, 2008.

    Copyright 2011 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order copies or request permission to reproduce materials, e-mail the Case Writing Office at: cwo@gsb.stanford.edu or write: Case Writing Office, Stanford Graduate School of Business, 518 Memorial Way, Stanford University,Stanford, CA 94305-5015. No part of this publication may be reproduced, stored in a retrieval system, used in aspreadsheet, or transmitted in any form or by any means electronic, mechanical, photocopying, recording, or otherwise without the permission of the Stanford Graduate School of Business. Every effort has been made torespect copyright and to contact copyright holders as appropriate. If you are a copyright holder and have concernsabout any material appearing in this case study, please contact the Case Writing Office at cwo@gsb.stanford.edu.

    F ACEBOOK IN 2011

    F ACEBOOK IN 2004

    The original Facebook website went live on February 4, 2004 as a digital directory of undergraduate students enrolled at Harvard University. It was coded by then-sophomore Mark

    Zuckerberg, who wanted to combine the sch ools dorm -exclusive online directories into aschool-wide resource. Those who joined Facebook could create a profile with their first and lastname, photo, residence, contact information, relationship status, personal interests, and evencourse schedule. A profile could be viewed by other users who had a confirmed digital friendrelationship with the owner of that profile ( Exhibit 1 : Sample Profile).

    Facebook spread quickly. By the end of February, there were 10,000 Harvard users registered onthe site. Students at Columbia, Stanford, and Yale were invited to join on February 25, 26, and29, respectively. i Over half of the undergraduate student body at Stanford signed up in the firstweek. By June, Facebook spanned some 30 colleges and had approximately 150,000 users.

    Zuckerberg was surprised by the demand for Facebooks services: Early on, we werent intending this to be a company. We had no cash to run it.We actually operated it for the first three months for $85 a month the cost of renting one ser ver. We had a network of banner ads, but its not like we weremaking money. ii

    He decided to spend the summer of 2004 in Silicon Valley growing Facebook and fleshing outits business potential.

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    Facebook in 2011 E-406 p. 2

    Social Networking Sites

    When Zuckerberg arrived at Facebooks rented Palo Alto house in June 2004, there were at leastthree other companies offering internet-based social networking services:

    Friendster , which was founded in 2002, was a prominent dating site with 1.5 million uniquevisitors in September 2003, up from just 110,000 in April. iii In October 2003, it rejected a$30 million buyout offer from Google, instead raising $13 million in a venture round led byKleiner Perkins Caufield & Byers and Benchmark Capital. iv

    MySpace was founded in July 2003 as a self-desc ribed online community that lets you meetyour friends friends. It offered a range of services such as invitations, events, classifiedadvertising, and forums, and raised $11 million in a round led by Redpoint Ventures. v

    Orkut was started by a Google programmer in January 2004. Membership to Orkut was byinvitation only, so the network grew organically through an existing network of trustedfriends. By July 2004, it had over 1 million users, many of whom lived in Brazil.

    Facebook was set apart from other social networking sites in that it grew from college to college,using a dot- edu email address as verification of a new users identity and collegiate affiliation.Other services did not have explicit divisions within the overall network, nor an expansionstrategy that targeted colleges . Facebooks customer support page in 2004 explained that divisionby school was for the sake of user privacy:

    Facebook was intentionally designed to limit the availability of your profile toonly your friends and other students at your school. This simple but importantsecurity measure promotes local networking and makes sure that your informationis seen by people you want to share it with, and not seen by folks you dont.

    As Zuckerberg commented:

    Were not asking anyone to put anything out there that they wouldnt becomfortable with. Were not forcing anyone to publicize any information aboutthemselves. We give people pretty good control over their privacy.

    Indeed, Facebook allowed users to restrict who could access their profiles: friends, friends of friends, and certain networks of users. This was similar to other social networking sites, whichsupported similar restrictions, though not by school as Facebook did.

    Facebook Becomes a Business

    By the end of the summer of 2004, Facebook had achieved the following milestones:

    Redesigned and relaunched the Facebook site. Upgraded and added to Facebooks back -end infrastructure. Appointed Sean Parker, co-founder of Napster and Plaxo, as president. Received $500,000 in seed capital from prominent venture capitalist Peter Thiel.

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    Facebook in 2011 E-406 p. 3

    More important, Zuckerberg became convinced of the sites potential as a business: When wecame out to the Bay Area, we realized that no other site really had this kind of activity, that itcould be a big business, and it might be fun to do. Zuckerberg dropped out of Harvard to pursueFacebook full time, as its CEO.

    2005-2006: G ROWTH AND C HALLENGES

    Facebook hit 1 million users in December 2004. By May 2005, the site had 2.8 million users atmore than 800 colleges. Its growth reportedly sparked a bidding war among a dozen venturecapital firms eager to participate in Facebooks success. The winner was Accel Partners, whi chinvested $12.7 million in a deal valuing Facebook at $100 million. Thrilled, Accel partner JimBreyer praised the Facebook management team as intellectually honest and breathtakingly

    brilliant in understanding the college student experience.

    Facebook was on its way to capturing the 13.4 million U.S.-based college student audience, vi with a penetration rate of over 80 percent at each of the colleges it served. But $100 million wasa surprising value for a company that had little revenue and served only college students. Breyerhimself said in an interview, Certainly relative to many other deals, especially deals at this samestage, the price was significantly higher . Some in the venture capital industry wondered whetherAccels investment was testament to the return of the internet investment bubble of the 1990s. vii

    In September 2005, Facebook entered the 17.1 million student high school market. Existing, i.e.collegiate, users could invite high school students they knew, and the first wave of high schoolstudents to join could invite their peers. Facebook grew quickly among the high school set.Although MySpace was already an established player, it took Facebook just seven months toreach 1 million registered high school users.

    In April 2006, Facebook started offering membership to those affiliated with a limited number of corporations. viii These included Accenture, Amazon, Apple, EA, Gap, Intel, Intuit, Microsoft,Pepsi, PWC, and Teach for America. New users could register using their dot-com work emailaddresses. Later the same year, Facebook started expanding internationally by offeringmemberships to schools like the Indian Institutes of Technology and select high schools in Israel.

    Competition

    By the end of 2006, Facebook was the second largest social networking site after MySpace. At12 million active users, it was about a quart er of MySpaces estimated 43 million. ix The averageFacebook user spent about one hour on the site per day, a figure that grew each month, while theequivalent metric for MySpace, which was purchased by News Corp. in 2005 for $580 million,was holding steady at about two hours. x According to web traffic monitor comScore, MySpacewas the fifth most popular website in the U.S. as measured by number of page views. It was saidto have become a music destination, with over 350,000 bands and artists using it as a platformfor publicity and communications with fans. xi With 36 million members worldwide, Friendsteralso remained a prominent social networking site, though it was unclear how many of itsmembers were active users. xii Orkut was the dominant social networking site in Brazil and hadlaunched in India, to promising results.

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    Facebook in 2011 E-406 p. 4

    In addition to the growth of the big four social networking sites, the social networking industrysaw aggressive investment into technology applications with a social focus:

    Blogger was started in 1999 and bought by Google in 2003 for an undisclosed sum. Flickr, a photo sharing site, was launched by a Canadian gaming company in 2004 and

    purchased by Yahoo! in 2005 for $35 million. Yelp, a social restaurant and business review site founded in 2004, had received a total of $12 million in venture capital financing by 2006.

    Twitter, a microblog site with RSS functionality, launched in 2006 and in 2007 receivedbetween $1 million and $5 million in venture l