Chapter 11 Facebook Platforms Privacy and Big Business from the Social Graph PDF

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11 Facebook: Platforms, Privacy, and Big Business from the Social Graph 11.1 Introduction Facebook had one of the highest IPO in history. IPO (Initial Public Stock Offering): the first time a firm makes shares available via a public stock exchange, also known as “going public” Despite the firm’s rapid growth and initially high stock market valuation, Facebook faces several challenges, including generating more revenue from its customer base, growing advertising, monetizing mobile, transitioning to a mobile-centric world where competitive conditions differ, protecting user privacy, potential for abuse, and competing with a slew of new competitors, some challenging Facebook’s openness edict—all amid rising personnel and infrastructure costs. -

Mobile was an early concern–the firm made no money on mobile at the time of its IPO. Today, mobile brings in over 90 percent of Facebook advertising revenue.

The firm had become one of Silicon Valley’s most aggressive practitioners of the acqui-hire, referring to “acquiring” a firm as a way to “hire” talent. The firm’s rapid growth and high user engagement allowed Facebook’s founder to demand and receive an exceptionally high degree of control over the firm—even as the firm went public. -

It can be easier to recruit employees before a firm goes public, since staff granted shares and options may see an upside at IPO. Facebook also finds that in a voraciously competitive high-end technical job market, the firm no longer has the promise of a massive IPO pay-day as a recruiting lure.

We study Facebook because distinguishing the reality from the hype and balancing risk vs. reward is a critical managerial skill. Short Selling is an attempt to profit from a falling stock price. Short sellers sell shares they don’t own with an obligation of later repayment. They do so in the hope that the price of sold shares will fall. They then repay share debt with shares purchased at a lower price and pocket the difference (spread) between initial share price and repayment price Many entrepreneurs accept start-up capital from venture capitalists (VCs), investor groups that provide funding in exchange for a stake in the firm and often, a degree of managerial control (usually in the form of a voting seat or seats on the firm's board of directors).

11.2 Lengthening Leaders, Quick Catch-Ups, and the Challenging Rise of Mobile At the heart of Facebook’s appeal is a concept Zuckerberg calls the social graph, the global mapping of users and organizations and how they connected – Facebook’s ability to collect, express, and leverage the connections between the site’s users. There is also a strong network effect to Facebook.

Network Effect: Also known as Metcalfe’s Law, or network externalities. When the value of a product or service increases as its number of users expands. The switching costs for Facebook are also extremely powerful. Trust created through user verification and friend approval requiring both parties to consent encouraged Facebook users to share more and helped the firm establish a stronger social graph than other social networking rivals Switching Costs: the cost a consumer incurs when moving from one product to another. It can involve actual money spent (e.g. buying a new product) as well as investments in time, any data loss, and so forth. Feeds catalyze virality and promote information sharing. Facebook’s position as the digital center of its members’ online social lives has allowed the firm to envelop related businesses such as photo and video sharing, messaging, bookmarking, and link sharing. Facebook has opportunities to expand into other areas as well. Facebook’s dominance on the desktop has allowed the firm to encroach in new markets by essentially turning on features that, in many cases, allowed the firm to dominate categories pioneered by other firms. Envelopment: A strategy whereby a firm with a significant customer base adds a feature to an existing product or service and eliminates the need for any rival, stand-alone platforms. Think Apple adding video tom cameras, crushing the market for the flip cam. The mobile market differs from the desktop in many key ways that alter competition. Access to address books, media libraries, the cloud, push notifications, home screen icons, and limited screen real estate are enforcing a new competitive reality on Facebook and rivals. Many of the dynamics above caused Facebook to lose the lead in mobile photo sharing and messaging, but the firm’s deep pockets have allowed it to acquire leading firms, removing threatening rivals and strengthening the firm’s competitive assets. Facebook has also invested in Oculus VR, an unproven but promising startup that may transform computing by making high-quality virtual reality accessible at a reasonable cost. Much of the site’s content is in the deep Web, unable to be indexed by Google or other search engines. Some suggest this may create an opportunity for Facebook to challenge Google in search. Partnerships with Bing and Facebook’s own Graph Search attempt to harness the firm’s deep Web asset to answer questions. Facebook’s growth requires a continued and massive infrastructure investment. The site is powered largely on commodity hardware, open source software, and proprietary code tailored to the specific needs of the service.

11.3 Lessons from Platform Facebook; Big Growth, Bad Partners, APIs, and a Mobile Melee Facebook has created a set of services and a platform for hosting and integrating with other services, helping the firm foster its stated mission to “make the world more open and connected."

Facebook’s platform allows the firm to further leverage the network effect. Developers creating applications create complementary benefits that have the potential to add value to Facebook beyond what the firm itself provides to its users. APIs: Programming hooks, or guidelines, published by firms that tell other programs how to get a service to perform a task such as send or receive data. For example, Amazon.com provides APIs to let developers write their own applications and websites that can send the firm orders Most Facebook applications are focused on entertainment, and although Zynga’s initial success has waned, several have built million-dollar-plus businesses. Running a platform can be challenging. Copyright, security, appropriateness, free speech tensions, efforts that tarnish platform operator brands, privacy, and the potential for competition with partners can all make platform management more complex than simply creating a set of standards and releasing this to the public. The Cambridge Analytica scandal shows what can happen when a firm builds a business from access to user data, violates user expectations, and fails to recognize and deal with unscrupulous partners. The fallout from users leaving Facebook is likely less severe than the impact on employee morale, potential hires, partners growing leery of associating with a firm with a tarnished reputation, and potentially increasing government regulation. Several major global messaging apps, including WeChat and Line, have evolved into platforms that host other apps and services, creating substantial revenue opportunities along the way. Facebook Messenger is evolving into a platform. Messenger now supports payments, while developers can create apps linked to Messenger and offered via the Messenger app store. Corporate communications via Messenger are especially attractive when e-mail may be segregated from a main inbox and quarantined in a “Promotions and Offers” folder. If it realizes its goals, Facebook-backed Libra will be decentralized, blockchain powered, government-less cryptocurrency that lowers transactions costs and enables microtransactions. Facebook has extended its reach by allowing other websites to leverage the site. Using the firm’s Open Graph tools, Facebook partners can add the “Like” button to encourage viral sharing of content, leverage Facebook user IDs for log-in, and tap a user’s friend and feed data to personalize and customize a user’s experience. Stories, now open to third parties, has the potential to involve into a similarly strong platform. These efforts come with risks, including enabling free riders that might exploit the firm’s content without compensation and the potential for privacy and security risks. Free rider problem: when others take advantage of a user or service without providing any sort of reciprocal benefit. While Facebook’s website is easy to update and push out to all users, or to test on a subset of users on a smaller scale, the firm does not have this kind of control over mobile apps.

Some fear that Facebook may be an all-too-powerful walled garden that may stifle innovation, limit competition, and restrict the free flow of information. Colossal Walled Garden: A closed network of single set of services controlled by one dominant firm

11.4 Advertising and Social Networks: A Challenging Landscape but a Big Payof Issues of content adjacency and user attention can make social networking ads less attractive than ads running alongside search and professionally produced content sites. Content Adjacency: concern that an advertisement will run near offensive material, embarrassing an advertiser, and/ or degrading their products or brands Google benefits from much of its advertising being associated with intent-to-purchase. Users are on a “hunt” to find information when they enter Google, and ads can be seen as quite helpful. Facebook users are not necessarily seeking anything related to purchase. Display ads and video ads are often charged based on impression. Facebook ads can be precisely targeted since the firm has a large amount of actual data on users’ selfexpressed likes, interests, and demographics. Facebook has also taken steps to allow third-party databases to be incorporated into targeting ads on site while preventing the possibility that databases can be combined to reveal online information to offline partners or vice versa. Mobile traffic is growing, and despite initial concerns over Facebook’s ability to find growth in this space, the firm’s mobile ads in particular have grown at a tremendous rate and are solidly profitable. Ads in the news feed have the advantage of falling directly within the screen real estate that a consumer is focused on. As such, they are considered superior to ads that may occupy easy-to-ignore spaces on the right-hand side of a content window. Facebook has cut the number of ads it shows its users, and the scarcity this builds, along with better targeting, has allowed the firm to charge more. This has improved the user experience while improving profits. CPM (Cost per thousand impressions): the amount charged every time an ad appears 1000 times “Social Context” ads, which include the names of friends who have liked a firm’s page, perform better on recall and sales lift than conventional ads, enhancing Facebook’s advertising appeal. These ads also use a type of “social proof,” leveraging friend interest to improve the likelihood of customer engagement. Facebook has also found success in mobile install ads. Some gaming firms are willing to spend as much as $10 per install for these ads. The Facebook Audience Network provides a way for firms to allow Facebook to gather advertisers, target and serve ads on third-party sites and apps, and collect revenue for them. “Instant Articles” allow Facebook to host, cache, and serve content from media firms. Faster article loads should increase article engagement and allow partners to make more money. Facebook hopes partners

may be more inclined to use its ad network, as well. Video ads cached and served on Facebook are also booming, with Facebook serving as many videos a day as YouTube. Some are concerned that allowing Facebook to host and serve content reinforces Facebook’s walled garden, where users rarely venture out, and where Facebook grows even more powerful as a vital partner in content distribution.

11.5 Move Fast and Break Things: Fumbles, Fake News, and Global Growth Challenges Facebook empowers its engineering staff to move quickly, at times releasing innovations before they are perfect. The hope is that this will foster innovation and allow the firm to gain advantages from moving early, such as network effects, switching costs, scale, and learning. While moving early has its advantages, Facebook has also repeatedly executed new initiatives and policy changes in ways that have raised public, partner, and governmental concern. Word of mouth is the most powerful method for promoting products and services, and Beacon was conceived as a giant word-of-mouth machine with win-win benefits for firms, recommenders, recommendation recipients, and Facebook. Beacon failed because it was an opt-out system that was not thoroughly tested beforehand and because user behavior, expectations, and system procedures were not completely taken into account. Partners associated with the rapidly rolled out, poorly conceived, and untested effort were embarrassed. Several faced legal action. Facebook also reinforced negative perceptions regarding the firm’s attitudes toward users, notifications, and their privacy. This attitude served only to focus a continued spotlight on the firm’s efforts, and users became even less forgiving. The fake news crisis is motivated by various bad actors, including those seeking to make money by attracting users to fake news sites that make money by running advertising, to the consorted effort identified in the US indictment of Russian interference in the US election. Similar efforts to interfere with politics have been uncovered in other regions of the world. Facebook was slow to acknowledge the extent and impact of fake news and its possible influence on the 2016 US election. The firm has subsequently experimented with several efforts. Flagging content as fake actually increased the intensity of sharing. The firm also enlists third-party fact-checking organizations and artificial intelligence, and demotes news deemed deliberately deceptive. The firm has also increased steps to close and prevent fraud accounts, stop advertising linked with fake news sites and accounts, and prevent organizations with a track record of misinformation from using Facebook’s advertising and targeting tools. Global growth is highly appealing to firms, but expensive bandwidth costs and low prospects for ad revenue create challenges akin to the free rider problem. Despite concern, Facebook is investing in new technologies and access services that promise to dramatically lower Internet access barriers, with a goal to bring billions of customers online. Consumers

not only represent potential ad revenue growth as markets develop and incomes increase but also entirely new product lines, such as mobile banking, may emerge from within emerging markets. Most of the world’s population live within cell tower range or near other means to access the Internet. Cost, compelling content, and technical issues to make services available on low-end hardware are the three main factors that conspire to limit Internet use. Crowdsourcing localization: adapting products and services for different languages and regional differences Many have criticized Facebook, Internet.org, and the set of services branded as Free Basics, as violating principles of net neutrality and extending Facebook’s walled garden as a de facto proxy for the Internet; however, Internet.org has opened their services to any provider that can meet a basic set of criteria, and claims that its efforts have provided free access to over 100 million people worldwide. Providing technology can sometimes lead to tragic unintended consequences. Facebook has been identified as a tool used to spread hatred and violence against the Rohingya people in Myanmar, as well as in Cambodia, the Philippines, and Sri Lanka....