The Global Phenomena That is Facebook Advertising

The Global Phenomena That Is Facebook Advertising

Charles Schulze

Florida International University

Executive MBA Program

Course: Global Financial Strategy

Professor: Krishnan Dandapani

Facebook ….The Global Phenomena 1

Tables of Contents

Introduction 3

What is Facebook? 4

Popularity 5

Not Just a People Connect Media 7

Advertising Specificity – Targeting Your Customers 8

Cost to Advertise vs Traditional Media Outlets 9

S.W.O.T. Analysis 10

Financial Data 14

Mergers & Acquisitions 17

Conclusion 18

Bibliography 19

Appendix A 22


INTRODUCTION

Business survives by customers to buy their products or services; one does not need a

business degree for that information. In order to succeed and grow, business owners and

managers must tell their customers about their products or services, this is done through

advertising. Marketing staffs throughout the world struggle each day to maximize corporate

advertising dollars. Which media to covet; which demographic to target; which advertising

agency to use; all major questions that if answered incorrectly could destroy a business. But

what if a company came along and said, “We can hit millions of your selected demographic, with

a page you design and we won’t charge you until you know exactly how many we have

reached.” “What would this be worth to you Mr. or Ms. Business Owner?” It is true and very

lucrative for businesses who advertise on Facebook. This global phenomenon is taking business

by storm and is winning in every way. We will see why this advertising media is so strong. We

will attempt to explain the theories behind their success and why their success just may be

around a long time.


WHAT IS FACEBOOK

Through a tumultuous start, Mark Zuckerberg, then a 19 year old Harvard Sophomore,

had a vision of a social media site where people could have a site to interact. Users could vote

on different topics, post comments and find friends who may not be members. At this time the

site was called Facemash. The tumultuous start for Mark was that his site was very similar to the

one that some Harvard Seniors had created. In fact Mark was accused of hacking into their

Harvard Connection site for personal information that aided in starting his version.1 On January

11, 2004 Mark Zuckerberg registered the domain name THEFACEBOOK.COM. The early

versions of Facebook were a direct chat feature where a person can chat with people on their

friends list. People could choose who their friends were and not select anyone they wished not to

have. Users could build their own profiles with photos and the like. It was a few months later in

September of 2004 when “The Wall” made its debut.2 This was a place where members could

post anything on their mind and anyone who was a member could see the post and respond to it.

Data from: Karocreations.com retrieved from - http://ts1.mm.bing.net/th?&id=HN.608015018225109893&w=300&h=300&c=0&pid=1.9&rs=0&p=0

POPULARITY1 http://www.businessinsider.com/how-facebook-was-founded-2010-3?op=12 http://mashable.com/2011/02/04/facebook-7th-birthday/


In its first seven years, Facebook went from one million to 800 million users. The world

has never seen anything like this. According to United Nations Population Fund (UNFPA) in

October 2011 there were seven billion people on earth, 11.4% of the entire world were Facebook

members.3 The many 800 million users were from five or six countries mostly from the U.S.,

Canada, England, Australia, and some from Germany and some from Japan.

Data from: Joanne Pressi retrieved from - http://joannecipressi.com/wp-content/uploads/2011/11/facebook-growth.png

Just when the majority of the populous said Facebook is as big as it can get. Zuckerberg said,

“Not so fast.” In the next two years Facebook grew to 1.23 billion users.4 (See chart below) By

the end of 2013, Facebook boasted 1.23 billion monthly active users worldwide, adding 170

million in just one year.

3 http://www.unfpa.org/public/home/publications/pid/87264 from http://static.guim.co.uk/sys- images/Guardian/Pix/pictures/2014/2/4/1391511321556/Facebookusers.png


http://joannecipressi.com/wp-content/uploads/2011/11/facebook-growth.png

Data from: Facebook Newsroom retrieved from http://static.guim.co.uk/sys- images/Guardian/Pix/pictures/2014/2/4/1391511321556/Facebookusers.png

Facebook states that as of December 31, 2013, 757 million users log on to Facebook daily.5

There is not a television show, radio show, print media that reaches that many people so fast.

Let’s try to put the sheer magnitude of the power of Facebook in perspective. The most watched

program ever in history was the 2012 Ravens v 49ers Super Bowl XLVIII with 115.3 million

viewers. The 1983 final episode of M*A*S*H had 105.9 million viewers.6 The top three

American Magazine Monthly publications in 2013 were:

Rank Name Circulation Founded Publisher1 AARP The Magazine 22,274,096 1958 AARP2 AARP Bulletin 22,244,820 1960 AARP3 Costco Connection 8,654,464 2003 Costco WholesaleData from: Wikipedia retrieved from http://en.wikipedia.org/wiki/List_of_magazines_by_circulation

If we were to review the top 100 monthly magazines in circulation in America it would not add

up to 1.23 billion. To quote a personal favorite show in Star Trek, Facebook – “Goes where no

man or one has gone before.”

5 http://www.theguardian.com/news/datablog/2014/feb/04/facebook-in-numbers-statistics6 http://en.wikipedia.org/wiki/List_of_most_watched_television_broadcasts


http://en.wikipedia.org/wiki/List_of_magazines_by_circulation

http://static.guim.co.uk/sys-

NOT JUST A PEOPLE CONNECT MEDIA

While it is unknown how many servers Facebook currently has, in 2012 they boasted

60,000 servers, more than any other social media company. Here are some stats that simply

boggle the minds of techies everywhere.7

•2.5 billion content items shared per day (status updates + wall posts + photos + videos +

comments)

•2.7 billion Likes per day

•300 million photos uploaded per day

•100+ petabytes of disk space in one of FB’s largest Hadoop (HDFS) clusters

•105 terabytes of data scanned via Hive, Facebook’s Hadoop query language, every 30 minutes

•70,000 queries executed on these databases per day

•500+terabytes of new data ingested into the databases every day.

Some analysts state that this amount of data is nearly 2000 times the total mail delivered by the

U.S. Postal Service each day. So why Facebook would collect and retain all of this data posted

by its users? Someone has to pay for all of that storage and the programmers and the like. If

Facebook is free to join and use, who is paying for all of this? Advertising!

7 http://gigaom.com/2012/08/22/facebook-is-collecting-your-data-500-terabytes-a-day/


ADVERTISING SPECIFICITY – TARGETING YOUR CUSTOMERS

With this forum it is a highly tedious task to circumvent all the protocols that Facebook

uses for target marketing by its users, however, let just use one example. You’re a small

business making say golf gloves that are different colors, outside the traditional white and black

that they are normally designed. You have advertised in golf magazines and on some golf

television tournaments but sales are not moving as you like. In walks Facebook and they have a

proposal for you. Facebook uses a CPC methodology. CPC is Cost Per Click. They may charge

a small business with say five users about $400 a month for an ad with unlimited clicks. But here

is the winning formula; their target campaign for you will be to attach an ad to everyone’s home

page that has golf in their hobbies. That conceivably could be 250 million people. For everyone

that has clicked onto your ad a report is generated and sent to you.8 This report give you the

specificity of you target campaign. Who likes you and who is reading you ads? When members

hit their like buttons you instantaneously see the fans growing on your ad page.

Marketing Managers are giddy with the fact that their advertising efforts have immediate returns

and they can see what is working and what is not. This specificity is critical to Facebook’s

marketing success. With unlimited data storage they can target any group anywhere, anytime.

Of course Google, Twitter and some others do this as well, but not to the level of Facebook.

Their profile page is as detailed as any and they store everything you post, ask for and anyone

you talk to. Your specialty golf glove business is now exploding. You’re adding colors brought

on by Facebook friends asking for other colors. You’re even adding designs on them. Odds are

your marketing team is spending thousands or tens of thousands less on advertising and you’re

selling much more product.

8 https://www.facebook.com/business/products/measurement#ads-manager


COST TO ADVERTISE VS TRADITIONAL MEDIA OUTLETS

In 2011, a 30 second television commercial cost about $350,000 to produce a national

television ad. Far less for a local one as the t.v. station would aid in the production. To run that

costly produced ad for one 30 second spot was about $100,000.9 The real problem here is not the

cost of the ad but whether anyone was really seeing it? Target demographics are not a truism in

t.v. ratings. After all if you running an ad during a football game, you’re expecting males

between the ages of 18-31 to see the ad. Do they really watch the ads? There is no sound data

that I could find on this question; I can only say that most of my programs are on a DVR with me

work schedule and school. I do not watch a single commercial as I fast forward through them. At

$4 to $5 million for a Super Bowl ad – including production costs, they are banking on you

watching them. For the most we do. They are funny and entertaining and are the talk at most

water coolers for days after the big game. Can the companies who advertise during the Super

Bowl really monitor sales as a regard to the ad? Most cannot. On Facebook, however, they can

see immediately who likes them, what they like about their product and people all over the world

are sending out messages on that product. It can be a wonderful thing for a successful product

and a disaster for one that fails. If 250 million people do not like the product, odds are you’re

not selling it. Ad prices on Facebook are based on company size and target market.10 But in this

case, it is not what is spent on the ad that is as relevant as the price per view. With Facebook,

advertisers know how many looked, when they looked, and if they went into the company web-

site from the ad page. Far better monitoring for the advertising dollar than any other media.

9 http://smallbusiness.chron.com/much-television-advertising-really-cost-58718.html10 http://www.qwaya.com/facebook-advertising-costs


S.W.O.T ANALYSIS

Strengths

Facebook has not stopped growing since the day it was born. Now a truly global entity

with worldwide appeal.

Data from: Dreamgrow.com retrieved from - http://www.dreamgrow.com/wp-content/uploads/2013/03/facebook-user-trends-2013.png

Facebook has under-developed nations’ interest as well. They are growing in Africa

faster than any business that operated there. (see chart below)

Data from: Techloy.com retrieved from - http://techloy.com/wp-content/uploads/2012/10/facebook-users-africa-october-2012-graph1.png

Major acquisitions of WhatsApp, Little Eye Labs – An Android based Performance

Anaylsis Tool, Instagram-Photo Sharing App, Snaptu – a Mobile app develop, have

Facebook well on its way to expanding into other areas.


http://techloy.com/wp-content/uploads/2012/10/facebook-users-africa-october-2012-graph1.png

http://techloy.com/wp-content/uploads/2012/10/facebook-users-africa-october-2012-graph1.png

http://www.dreamgrow.com/wp-content/uploads/2013/03/facebook-user-trends-2013.png

http://www.dreamgrow.com/wp-content/uploads/2013/03/facebook-user-trends-2013.png

As of January 2014, Facebook had 1.31 billion users and a market capitalization of

US$177.78 billion, in other words approximately $136 per Facebook user.11

Facebook’s projected growth is nearly off any chart that could be made – but we did find

one. ByLimedesign.com believes that Facebook could continue to show user growth into

2018 before leveling off. (see chart below)

Data from: bylimedesign.com Retrieved from - http://bylimedesign.com/facebook_user_growth.png

Weaknesses

Many Wall-Street analysts believe that Facebook has peaked. To some extent,

Facebook’s biggest problem is the law of large numbers: It is difficult for a company that

already has close to a billion users to continue to grow at phenomenal rates, unless you

assume that eventually everyone on earth will belong to the network.

When it comes to powering e-commerce via retail “storefronts” on Facebook, there are

skeptics here, too. Many of them point out that a number of significant retailers,

including J.C. Penney and Nordstrom, have closed their Facebook stores after lackluster

11 http://en.wikipedia.org/wiki/List_of_acquisitions_by_Facebook


sales. Forrester analyst Sucharita Mulpuru said in a report released last year that when it

comes to e-commerce, Facebook may already be as big as it is going to get, because

Facebook stores are largely ineffective, particularly when it comes to big retailers.12

Facebook is already pulling in close to $1 billion in revenue per quarter, but the $100

billion market valuation that many are expecting from its IPO presumes Facebook will be

able to increase that by several orders of magnitude — something that is exceedingly

rare. In fact some have already raised red flags about the fact that the company currently

makes about $5 for every user it has, much lower than other technology companies. 13

OPPORTUNITES

The constant emmergence of the mobile phone and its capabilities. Facebook founder

Mark Zuckerberg has made it clear that mobile growth is a top priority for the company.

“There is no argument,” he told Wall Street analysts earlier this year. “Facebook is a

mobile company.”14

Increase ads by enhancing graphics and streaming capabilities.

Continue to be the social media leader in development of ideas by hiring the best

computer minds in the world.

THREATS12-13 http://research.gigaom.com/report/the-real-issue-behind-facebooks-ipo-how-much-bigger-can-the-company-get/13

14 http://business.time.com/2013/05/02/why-mobile-growth-is-the-key-to-facebooks-future/


FB Dominance Will Be Hard to Maintain: A recent Princeton study posited that

Facebook will lose 80% of its users between 2015 and 2017. And whether or not you

believe this stat, it’s important to understand that most tech fads and social media fads

wax and then wane. (Remember MySpace? How about AOL (AOL) Instant Messenger?)

Already we are seeing Facebook face flatlining users in North America and Europe as the

company reaches critical mass.15

Sentiment Is Crumbling: Of course, my earlier point was that usefulness or dominance

doesn’t necessarily add up to profits for investors. It’s important to notice that amid these

headwinds to the balance sheet, there also are real headwinds for FB stock. Consider that

shares are down about 17% from their 52-week high in March above $72, and high-

growth tech stocks across the board — from Twitter (TWTR) to Amazon.com (AMZN)

— are drifting lower. Even if all things continue to go well for FB stock in the next few

earnings reports, this kind of negative sentiment could have a very real impact.16

Over the past seven years if Facebook was in need of something they would just go out

and buy it. If Facebook’s market prowess continues to wain, it will be harded to obtain

these competitors, or they will simply have to pay more for it.

Myspace, Google and other mega social sites have not withered in Facebook’s wake.

Google has shown impressive growth along side of of Facebook.

15-16 http://slant.investorplace.com/2014/05/fb-stock-facebook-threats/16


FINANCIAL DATA

Facebook yearly income statement for a four year period.

Annual Income Statement (values in 000's) Period Ending: Trend 12/31/2013 12/31/2012 12/31/2011 12/31/2010Total Revenue $7,872,000 $5,089,000 $3,711,000 $1,974,000Cost of Revenue $1,875,000 $1,364,000 $860,000 $493,000Gross Profit $5,997,000 $3,725,000 $2,851,000 $1,481,000Operating ExpensesResearch and Development $1,415,000 $1,399,000 $388,000 $144,000Sales, General and Admin. $1,778,000 $1,788,000 $707,000 $305,000Non-Recurring Items $0 $0 $0 $0Other Operating Items $0 $0 $0 $0Operating Income $2,804,000 $538,000 $1,756,000 $1,032,000Add'l income/expense items $6,000 $7,000 ($19,000) ($2,000)Earnings Before Interest and Tax $2,810,000 $545,000 $1,737,000 $1,030,000Interest Expense $56,000 $51,000 $42,000 $22,000Earnings Before Tax $2,754,000 $494,000 $1,695,000 $1,008,000Income Tax $1,254,000 $441,000 $695,000 $402,000Minority Interest ($9,000) ($21,000) ($332,000) ($234,000)

Equity Earnings/Loss Unconsolidated Subsidiary

$0 $0 $0 $0

Net Income-Cont. Operations $1,491,000 $32,000 $668,000 $372,000Net Income $1,491,000 $32,000 $668,000 $372,000Net Income Applicable to Common Shareholders

$1,491,000 $32,000 $668,000 $372,000

These numbers are decent. Revenues climbed over the period about $1.2 billion annually. The

reason Facebook’s $7.8 billion in revenues are not abundantly impressive is that Facebook has a

$170 billion market cap. For example Amazon has a Market cap of $165 billion; however, they

did $74.5 billion in revenues in 2013.17 I believe that Facebook’s high market cap revolves

around investors dreaming of what could be not what really is as in the case of Amazon. As we

review some of their ratios, perhaps we can look further into their future.

17 http://www.marketwatch.com/investing/stock/amzn/financials


Facebook Fundamentals Better Than Average Worse Than Average Compare Facebook to competition

Facebook Peer Average

Return On Equity 13.47 % (10.56) %Return On Asset 13.25 % (13.62) %Profit Margin 21.57 % (1.86) %Operating Margin 40.64 % (11.69) %Current Valuation 162.43 B 307.1 BShares Outstanding 2.57 B 566.68 MShares Owned by Insiders 8.00 % 6.99 %Shares Owned by Institutions 46.70 % 17.39 %Number of Shares Shorted 46.13 M 3.32 MPrice to Earning 88.27 times 43.94 timesPrice to Book 10.26 times 10.12 timesPrice to Sales 19.37 times 14.24 timesRevenue 8.92 B 17.1 BGross Profit 6 B 15.45 BEBITDA 4.66 B 1.87 BNet Income 1.91 B 852.56 MCash and Equivalents 12.63 B 4.8 BCash per Share 4.92 times 6.08 timesTotal Debt 392 M 10.63 BDebt to Equity 0.02 times 0.61 timesCurrent Ratio 13.56 times 3.82 timesBook Value Per Share 6.56 times 19.05 timesCash Flow from Operations 4.79 B 1.17 BShort Ratio 0.90 times 2.33 timesOne Year High 72.59 39.53One Year Low 24.15 28.13Earnings Per Share 0.77 times 1.69 timesPrice to Earnings To Growth 1.32 times 1.07 timesBeta 1.08 0.24Market Capitalization 174.67 B 33.57 BTotal Asset 19.03 B 74.73 BRetained Earnings 3.8 B 19.14 B


Working Capital 13.02 B 3.76 BCurrent Asset 14.06 B 24.24 BCurrent Liabilities 1.04 B 21.36 BZ Score 267.0 601.16Probability Of Bankruptcy 1.00 % 39.27 %

Data from: Macroaxis Inc, Retrieved from - http://www.macroaxis.com/invest/market/FB--fundamentals--Facebook-Inc

Facebook is posting mixed numbers with all of their ratios. Based on latest financial disclosure

Facebook Inc. reported $8.92 billion of revenue. This is 27.18% higher than that of the

Technology sector, and 290.04% higher than that of Internet Information Providers industry; the

revenue for all stocks is 47.84% higher than the company. Facebook Price to Earnings Ratio is a

staggering 88.27 times, twice the number of the industry.

Data from Macroaxis Inc. retrieved from - http://www.macroaxis.com/invest/market/FB--valuation--Facebook-Inc

MERGERS & ACQUSITIONS

Facebook has acquired some 40 companies with its largest acquisition being the purchase of

WhatsApp, paying more than $40 per WhatsApp user. Rather extreme considering that a

WhatsApp user pays .99 per year to use service. It also purchased the defunct company

ConnectU in a court settlement and acquired intellectual property formerly held by rival


Friendster. The majority of the companies acquired by Facebook are based in the United States,

and in turn, a large percentage of these companies are based in or around the San Francisco Bay

Area. Facebook has also made investments in LuckyCal and Wildfire Interactive. A complete list

of Facebook’s acquisitions is listed on Appendix A.

CONCLUSION

Through the rough start and ten years of reasonable success, Facebook has entrenched itself into

a global commerce that few can compare. But the jury is still out on their end game. Just how

big will they grow? There are certainly more happy advertisers than unhappy ones. After all


who can argue with having their product or service shown to hundreds of millions of people

every day? For far less money than conventional media advertising companies can go global

every minute of the day. Facebook will need to sell more advertising if they are going to get their

ratios back in line with industry standards. With more and more smart phones hitting the street

and Facebook buying an Android interface company, there could be significant growth in this

area. No can currently deny the industry force that Facebook has become, but there are many that

doubt their continued growth and their successful future. Facebook and Zuckerberg are big

enough to create their own pathways. They do not follow anyone, however, their path is not laid

in gold and they need to get creative if this giant is to succeed its next ten years. During this year

FIFA World Cup, Facebook had ONE billion interactions in ONE day.18 No other entity can

reach those masses, so quickly. If Facebook can continue demonstrating advertising suitability

to its clients that road just may be repaved in gold. That could not be too soon for investors.

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APPENDIX A

# Acquisition date Company Business Location Value (USD)

1 August 23, facebook.c AboutFace USA, Boston $200,000



2005 om domain name

2 July 19, 2007 Parakey Offline applications/Web OS

USA, Mountain View, CA

3 June 23, 2008 ConnectU Social networking USA, Cambridge, MA $31,000,000

4 August 10, 2009 FriendFeed Social networking

aggregator USA, Mountain View,

CA $47,500,000

5 February 19, 2010 Octazen Contact importer Malaysia, Taman

Melawati, Kuala Lumpur6 March 2, 2010 Divvyshot Photo management USA, San Francisco

7 May 13, 2010 Friendster patents

Intellectual property/patents

USA, Mountain View, CA / Malaysia, Kuala Lumpur

$40,000,000

8 May 26, 2010 ShareGrove Private conversations/Forums USA, San Mateo, CA

9 July 8, 2010 Nextstop Travel recommendations USA, San Francisco $2,500,000

10 August 15, 2010 Chai Labs Internet applications USA, Mountain View,

CA $10,000,000

11 August 20, 2010 Hot Potato Check-ins/status

updates USA, Brooklyn ~$10,000,000

12 October 29, 2010 Drop.io File hosting and

sharing USA, Dumbo, Brooklyn ~$10,000,000

13 November 15, 2010

FB.com domain name

American Farm Bureau Federation USA, Washington, D.C. $8,500,000

14 January 25, 2011 Rel8tion Mobile advertising USA, Seattle undisclosed

15 March 2, 2011 Beluga Group messaging USA, Palo Alto, CA undisclosed

16 March 20, 2011 Snaptu Mobile app developer Israel $70,000,000

17 March 24, 2011 RecRec Computer vision USA, San Francisco undisclosed

18 April 27, 2011 DayTum Information graphics USA, SoHo, New York City

19 June 9, 2011 Sofa Software design Netherlands, Amsterdam20 June 9, 2011 MailRank Email prioritization USA, New York

21 August 2, 2011 Push Pop Press Digital publishing undisclosed

22 October 10, 2011 Friend.ly Social casual Q&A

service app USA, Mountain View,

California undisclosed

23 November 8, Strobe HTML5 mobile apps, USA, San Francisco undisclosed



2011 SproutCore

24 December 2, 2011 Gowalla Location Based

Service USA, Austin

25 April 9, 2012 Instagram Photo sharing USA, San Francisco $1,000,000,00026 April 13, 2012 Tagtile Customer loyalty app USA, San Francisco, CA undisclosed

27 May 5, 2012 Glancee Social discovery platform USA, San Francisco undisclosed

28 May 15, 2012 Lightbox.com Photo sharing UK, London undisclosed29 May 21, 2012 Karma Social gifting USA undisclosed

30 June 18, 2012 Face.com Face recognition platform Israel, Tel Aviv $100,000,000

31 July 14, 2012 Spool Mobile bookmarking and sharing content USA, San Francisco undisclosed

32 July 20, 2012 Acrylic Software

RSS app Pulp and secure database app Wallet

Canada, Vancouver undisclosed

33 August 24, 2012 Threadsy

Threadsy is a social aggregator, Maker of social marketing tool Swaylo

USA, San Francisco undisclosed

34 February 28, 2013 Atlas Atlas advertiser suite USA, Seattle,

Washingtonless than $100,000,000

35 March 2013 osmeta Mobile software USA, Mountain View, CA

36 March 14, 2013 Hot Studio Design agency USA, New York, NY,

San Francisco, CA

37 April 23, 2013 Spaceport Cross-platform game framework

38 April 25, 2013 Parse Mobile app backends USA, San Francisco, CA

39 July 18, 2013 Monoidics Automatic verification software UK, London

40 August 12, 2013 Jibbigo Speech translation

app

41 October 13, 2013 Onavo Mobile analytics

42 December 17, 2013

SportStream

Sports conversation analysis USA, San Francisco, CA

43 January 8, 2014

Little Eye Labs

Performance analysis and monitoring tools for Android

India, Bangalore, India $15,000,000[53]

44 January 13, 2014 Branch Web conversation

platform USA, New York, NY $15,000,000



45 February 19, 2014 WhatsApp Mobile instant

messaging USA, Mountain View,

CA $19,000,000,000

46 March 25, 2014 Oculus VR Virtual reality

technology USA, Irvine, CA $2,000,000,000

47 April 24, 2014 ProtoGeo Oy

Fitness tracking app Moves Finland, Helsinki undisclosed

Data from Wikipedia Retrieved from - http://en.wikipedia.org/w/index.php?title=List_of_mergers_and_acquisitions_by_Facebook&printable=yes


The Global Phenomena That is Facebook Advertising

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