Facebook & Google Strategy!

1. 1

2. TABLE OF CONTENTS
INTRODUCTION................................................................................................................ 4
1. COMPANIES OVERVIEW............................................................................................... 6
1.1. Facebook ................................................................................................................... 6
1.2. Google .................................................................................................................... 10
2. BUSINESS MODEL DEVELOPMENT ............................................................................ 13
2.1. Facebook business model .......................................................................................... 13
2.1.1. Target Group ..................................................................................................... 15
2.2.2. Viral network ..................................................................................................... 16
2.2.3. Credibility ......................................................................................................... 17
2.2.4. Platform with alliances ........................................................................................ 17
2.2.5. Innovation and risks............................................................................................ 18
3. CAPABILITIES DEVELOPMENT .................................................................................. 24
3.1 Facebook Capabilities ................................................................................................ 24
3.2. Strategic Alliances .................................................................................................... 27
4. DISCUSSION ................................................................................................................ 30
4.1 Facebook success strategy .......................................................................................... 30
4.1.1 Innovation and risks ............................................................................................ 30
4.1.2 Strategical alliances ............................................................................................ 31
4.1.3 Capabilties ......................................................................................................... 31
4.2 Google’s reactions ..................................................................................................... 32
5. INNOVATIVE BUSINESS MODEL ................................................................................ 34
5.1 The future of social networks ...................................................................................... 34
5.2 The future of internet connections ............................................................................... 35
5.3 Future of search engine .............................................................................................. 36
5.4 Business model ......................................................................................................... 36
CONCLUSION.................................................................................................................. 39
ACKNOWLEDGMENTS ................................................................................................... 40
REFERENCES .................................................................................................................. 41
APPENDIXES ................................................................................................................... 44
Appendix 1. Interview with executive director of OKIA Lauri Ilison..................................... 44
Appendix 2. Interview with Margo Veskimägi, TNS Emor, April 24, 2011 ............................ 48
Appendix 3. An interview with Marko Saue, GOAL creative director ................................... 51
Appendix 4. An interview with Silver Hage, co-founder of Ivy ............................................ 60
Appendix 5. The word map of social networks ................................................................... 68

3. ABSTRACT
Once upon a time, there were two princes of Internet, also known as Sergey Brin and Larry
Page. Their magical touch enabled them to invent superior services customers had never
dreamed of on Internet, starting with web search, e-mail applications and proceeding with
advertising tools and social network. Their magic word was Google, the whole world was
Googled. Their company went from zero to twenty billion dollars in revenues in four
hundred weeks (Auletta 2009).
But then another handsome student–prince, named Mark Zuckerberg, hit the
lightning sky. Google social network Orkut was launched in January 2004, and all of a
sudden, in February 2004 there was another social network called Facebook in the Web. In
seven years, Facebook has grown from a student project to one of the most-trafficked sites
in the world. Nowadays Facebook is the major player in social networks area. Google’s
fairytale in the World Wide Web is endangered, especially in the field of social networks.
Google versus Facebook is the most reflected confrontation in the Internet business.
The showdown is intriguing. In our research we would like to explore why Google failed to
invent the most popular social network ever seen; what are the key success factors of
Facebook and what could be the future business model of social networking and web
search.
3

4. INTRODUCTION
Mark McLaughlin, president and chief executive officer, VeriSign, has said: “Over the past
25 years, the internet has strengthened communities, transformed economies and allowed
people all over the world to come together. All this simply wouldn’t have been possible
without the vision, talent and creativity of these companies and individuals. The hundreds
of millions of people who now use the internet daily have these trailblazers to thank for the
rich online experiences they enjoy today – most of which were unimaginable back in 1985
when the first .com domain name was registered.” [WWW]
(dazeinfo.com/2010/06/01/paypal-facebook-twitter-among-top-com-ventures).
Two companies, who have been facilitating people all around the world to come
together, are Facebook and Google. Google has invested in Internet search, cloud
computing, and advertising technologies. Google's rapid growth, since its incorporation,
has triggered a chain of products, acquisitions, and partnerships beyond the company's core
web search engine. Facebook social networking service has more than 600 million active
users, so Facebook has impacted on the social life and activity of people. One of such
impacts is the ability to unite family members and friends.
Both companies generate their profits primarily from advertising, so these are the
biggest advertising companies, although their business is put in World Wide Web. Both
companies have been met with controversies: blocked in several countries, criticism on
users’ safety, claims over intellectual properties, etc., yet these two are very different
companies.
Nevertheless, Google and Facebook have been extremely successful and are going
through a rapid growth.
In this paper we would like to explore and find answers to the following questions:
- How did companies, who started as student-projects, become so successful?
- How did Facebook manage to be become one of the most influential companies in
the world?
4

5. - How did Facebook’s core capabilities develop and which were the essential
alliances to grow?
- What are the differences between business models of Google and Facebook?
- Why did Google fail in social networking?
- What is the future innovative business model in the World Wide Web?
5

6. 1. COMPANIES OVERVIEW
1.1. Facebook
Facebook is a social utility that helps people to communicate more efficiently with their
friends, family and co-workers. Facebook is one of the most-trafficked sites in the world
and has had to build infrastructure to support this rapid growth, while the company has the
largest users’ base in the world. Facebook is a part of millions of people’s lives all around
the world providing unparalleled distribution potential for applications and the opportunity
to build a business that is highly relevant to people’s lives. The company develops
technologies that facilitate the sharing of information through the social graph, the digital
mapping of people’s real-world social connections [WWW] (facebook.com/press).
Facebook was founded by Mark Zuckerberg in February 2004, initially as an
exclusive network for Harvard students. Prior to launching Facebook, Mark Zuckerberg
had experimented with a number of different web products. In fact, his first attempt
targeted at the Harvard student body was called FaceMash, which drew criticism from the
niversity and some students, prompting Mark to drop the service. The original idea for the
term Facebook came from Zuckerberg’s high school (Phillips Exeter Academy). The
Exeter Face Book was passed around to every student as a way for students to get to know
their classmates for the following year. It was a physical paper book until Zuckerberg
brought it to the Internet. Once the site Facebook was ready for users, the Facebook
founders blasted e-mails to Harvard students to let people know about the site. The team
had access to the e-mail addresses of Harvard students at each dorm. Thus e-mail
marketing, viral feature sets, and word of mouth was how Facebook was launched. Given
the immediate positive reaction that Facebook received at Harvard, Facebook began rolling
out the service to other universities. It was a huge hit: in 2 weeks, and within four months,
Facebook added 30 more college networks. Facebook members skyrocketed in 12 months
from 13 to 24 million active members. Facebook did not use a targeted geographic roll-out
strategy in the early days; they received registration requests from students at other schools,
6

7. and then prioritized which schools to open, based on the number of these requests.
[WWW] (www.startup-review.com, www.crunchbase.com)
In summer 2004, Facebook got its first investment $500,000. Now, with millions of
users, Friendster attempted to acquire the company for $10 million in the mid 2004.
Facebook turned down the offer and received subsequently $12.7 million in funding.
Facebook continued to grow, opening up to high school students in September 2005 and
adding an immensely popular photo sharing feature the next month. Facebook subsequently
opened up to work networks, eventually amassing over 20,000 work networks. Finally in
September 2006, Facebook was opened to anyone with an e-mail address [WWW]
(www.crunchbase.com).
In the summer of 2006, Yahoo attempted to acquire the company for $1 billion
dollars. Reports actually indicated that Zuckerberg made a verbal agreement to sell
Facebook to Yahoo. A few days later when Yahoo’s stock price took a dive, the offer was
lowered to $800 million and Zuckerberg walked away from the deal. Yahoo later offered
$1 billion again, but this time Zuckerberg turned Yahoo down and earned instant notoriety
as the “kid” who turned down a billion [WWW] (www.crunchbase.com).
One sour note for Facebook has been the controversy with social network
ConnectU. The founders of ConnectU, former classmates of Mark Zuckerberg at Harvard,
allege that Zuckerberg stole their original source code for Facebook. The ordeal has gone to
court, and has now been resolved. Notwithstanding this lingering controversy, Facebook’s
growth in the fall of 2007 was staggering. Over a million new users signed up every week,
200,000 daily, totaling over 50 million active users. Facebook received 40 billion page
views a month. Long gone were the days of Facebook as a social network for college
students. 11% of users are over the age of 35, and the fastest growing demographic are
users over 30. Facebook has also seen huge growth internationally; 15% of the user base is
in Canada (see more for Appendix 5). Facebook users’ passion, or addiction, to the site is
unparalleled: more than half use the product every single day and users spend an average of
19 minutes a day on Facebook. Facebook is tightly integrated into the daily media practices
of its users. More than 2.5 million websites have integrated with Facebook. Facebook is 6th
7

8. most-trafficked site in the US and top photo sharing site with 4.1 billion photos uploaded
[WWW] (www.facebook.com/press).
In October 2007, Facebook was valued over $15 billion, making it the 5th most
valuable US Internet company, yet with only $150 million in annual revenue. [WWW]
(www.crunchbase.com). Facebook timeline is shown on Drawing 1.
Facebook’s income is generated mainly from the brand advertising, Facebook ads
working on the same basis as Google Adwords, they are paid ads, and there are two ways to
keep a track of them:
1. You can pay a certain amount per thousand impressions (also known as CPM),
which denotes the number of people who see the ad. Facebook keeps track of how
many people click it. You can also pay for each time a person actually clicks an ad.
This is known as cost per click (CPC).
2. You can keep everything very simple by seeing if you can get some extra traffic,
fans, or sales, or you can get sophisticated and carefully monitor the traffic to see if
you can calculate your return on investment. You can spend as little or as much as
you want. Generally, the strategy is to try running an ad over a certain period of
time such as a week or a month and see how many people view it. If you are
advertising a Facebook page, you can see how many people become fans based on a
certain number of dollars spent, if you are selling a product. Ideally, you see how
many sales of the product result (Kelsey, 2010).
The average advertising revenue generated by Facebook for every 1,000 searches
conducted on its website has declined from an estimated $8 to $5 currently. Revenue per
search (RPS) is primarily a function of the click through rate (CTR) on ads placed
alongside search results, as well as the price paid by advertisers for every user click (CPC).
Facebook's RPS is expected to decline over time as Facebook is not yet a search engine at
its core like Google, Microsoft's Bing or Baidu. It also is not an open web portal like Yahoo
or AOL and requires users to login to run searches. Also the international mix of total
searches increases will lead to RPS decline [WWW] (community.nasdaq.com).
Facebook’s main competitors include MySpace, Bebo, Friendster, LinkedIn,
Tagged, Hi5, Piczo, and Open Social.
8

9. News Feed and Mini Feed introduced,
registration for anyone
(Sept)
Expanded to add Marketplace launched, Facebook Platform Facebook Connect
work networks launched with 65 developers and over 85 became generally
M.Zukerberg and co-founders launced Share feature
Facebook grew to support more than (May) applications available
Facebook from Harvard added
800 college networks (Nov) (May) (Dec.)
(Feb)
(May)
Facebook
mobile feature Over 400M
launced Virtual gift shop Facebook Ads Facebook Chat active users
Facebook expanded to Standford, Facebook added high launched launced launched More than 200M
(Apr.) (Feb.)
Columbia and Yale schools networks (Feb.) (Nov.) (Apr.) active users
(Mar.) (Sept.) (Apr.)
2004 2005 2006 2007 2008 2009 2010
Facebook
Photos were added to application, added Usernames
More than 20M
international schools network More than 100 M launched
active users
(Oct.) Development platform launced, notes active users (June)
(Apr.)
application introduced, strategic relationship (Aug.)
Groups of applications, the Wall is formed with Microsoft for banner ad
added as profile feature syndication
Over 150M
(Sept.) (Aug,) More than 50M active users, active users
More than 12M Facebook Platform for Mobile (Jan.)
active users launched
(Dec) (Oct.)
1M active users
(Dec)
More than 5,5M active users
(Dec)
Drawing 1. Facebook timeline and key facts.
9

10. 1.2. Google
Google’s software initiatives encroach on every media industry, from telephone to
television to advertising to newspapers to magazines to book publishers to Hollywood
studios to digital companies. More than 70 percent of all searches worldwide have been
done through Google search box (for key facts see Table 1). The search makes 97 percent
of their money. Google’s YouTube does two-thirds of all Web video traffic. Google’s
DoubleClick is the foremost digital advertising service company. Google’s advertising
revenues reaching 30 billion dollars a year, account of 40 percent on all the advertising
dollars spent online. Google News aggregates 25,000 news sites daily (Auletta, 2009).
Google has been always seeking to construct a formula, an algorithm that graphs
and predicts behavior. Google believes that every aspect in the world is unlocked with data.
They require facts, beta testing, mathematical logic. Their ideal is to have so much
information about their users that Google can devise an algorithm that provides a single
perfect answer. Google’s goal is to store 100 percent of each individual’s data, what Google
calls “transparent personalization”. This would allow Google to choose which information
to show you, reducing inefficiencies. The goal of the company is customer satisfaction
thinking Google as one product (Auletta, 2009).
Google began in January 1996 as a research project by Larry Page and Sergey Brin
when they were both PhD students at Stanford University in California. While conventional
search engines ranked results by counting how many times the search terms appeared on
the page, the two theorized about a better system that analyzed the relationships between
websites. They called this new technology PageRank, where a website's relevance was
determined by the number of pages, and the importance of those pages, that linked back to
the original site. Eventually, they changed the name to Google, originating from a
misspelling of the word "googol", the number one followed by one hundred zeros, which
was picked to signify that the search engine wants to provide large quantities of information
for people. Originally, Google ran under the Stanford University website, with the domain
google.stanford.edu. [WWW] (/en.wikipedia.org/wiki/Google).
10

11. On September 7, 1998 was the day when Google was officially incorporated by a
mission to organize the world’s information and make it universally accessible and useful
[WWW] (/en.wikipedia.org/wiki/Google).
Today, the company’s influence on the Web is undeniable. Practically every
webmaster wants his or her site listed high on Google's search engine results pages
(SERPs), because it almost always translates into more traffic on the corresponding Web
site. “The Internet,” said Google chief economist, Hal Varian, “makes information
available, Google makes information accessible.” Google’s servers contain a tremendous
amount of data about its users, and this database grows exponentially as search and the
variety of Google services multiply (Auletta, 2009).
Google's influence is not limited to just the Web. Google services include: Gmail,
Google Earth, Google Maps, Google Video, Picasa, Orkut, cloud computing applications
such as Desktop or Docs, etc. (for Google facts see Drawing 2). Google does its part to
address global warming – it places on its roofs the installations of solar photovoltaic panels
(Auletta, 2009).
11

12. Table 1. The number of Google employees and growth in revenue and profit
Drawing 2.Timeline of Google progress [WWW] (google.com/intl/en/corporate/history)
12

13. 2. BUSINESS MODEL DEVELOPMENT
2.1. Facebook business model
Facebook business model is based on the network effect which causes a service to have a
value to a potential customer dependent on the number of customers already owning that
good or service. According to Sheryl Sandberg, Facebook business is merely advertising,
that is what they are focused on and it is working well [WWW] (businessweek.com).
Facebook started as a social network project, rather than a serious business, but the rapidly
growing userbase made it possible to also grow as a business.
Facebook functioned as a successful platform for educational institutions in earlier
years attracting investors and developers, but it functioned without a significant profit. In
2007, when the website became public, the revenues started to grow and the company was
fully oriented to business (see Table 2).
Table 2. Facebook growth model 2007-2010 [WWW] researched by authors
When Facebook platform went public and revenues started increasing, the profits were
made from Gifts and Ads (Marketplace). The value Facebook offers has remained more or
13

14. less same through the years, although customer segments and revenue sources have
changed (Drawing 3).
Drawing 3. Facebook business model starting in 2004.
In 2010, Facebook offers social networking platform just as in 2004, but is working
its way out of the boundaries of Internet. The main focus in development is in the mobile
network and rapidly increasing revenue streams come mainly from advertising (Drawing
4).
14

15. Drawing 4. Facebook business model in 2010
The success of Facebook business model does not lay in only intelligent business
solution, the main reason for revenue growth was the gigantic user base Facebook managed
to gather. So the key factors are the main reasons that helped to grow the number of
Facebook users.
2.1.1. Target Group
Facebook was created with a clear idea of the service they wanted to provide the user with.
They managed to reach the right target group, which had a large impact on its success.
Zuckerberg developed a personal niche for his site in making it specifically for college and
15

16. university communities. Facebook, being a closed environment for students, had enormous
growth in a very short period of time.
Picture 1. The interace of thefacebook.com (2004-2005)
2.2.2. Viral network
In addition to wisely selected target group, one of the key factors for success was using the
network effect and leading the users to create the needed content. The information
published on each profile — relationship statuses, location, interests — has little value, if
you are browsing strangers. Having a network with people you have met or might meet,
and getting access to the information they share, adds value for people to join in. And each
person joining adds value to anyone using Facebook. What made the user base number
grow so large was the wall feature. The wall made it possible to share more information
and interact with more contacts. The viral algorithm and constantly updated live feed are
the key factors why the growth was surprisingly rapid (Appendix 4). Google is still
16

17. scrambling to develop a secret social networking like website (Google Me to rival
Facebook) [WWW] (dazeinfo.com). Google has been pinched by the core due to enormous
rise of Facebook and company has barely anything in hand that can encounter such a
situation, besides being just a spectator; at least for now.
2.2.3. Credibility
Social networks have not been as successful in the past for being too one-dimensional and
unreal. Facebook was able to create a network where people would use their own picture
and real name instead of a pseudonym. Mr. Lauri Ilison, the executive director of OKIA,
believes that this aspect is one of the key factors of Facebook growth: “This has created a
completely new quality in the content. As people use their own name, they have an inner
control mechanism that stops them from writing improper things. They just do not want to
let others see and read what they might anonymously write.” (Appendix 1). In earlier social
networks (such as Friendster, MySpace) it is possible to browse through various people’s
profiles and add them as friends, but the likelihood of you actually meeting these online
friends is very small. Facebook, on the other hand, is the opposite. The network of real
people has a factor of credibility, which on one hand helps to keep the information flow
modest and on the other hand makes people want to be a part of it.
2.2.4. Platform with alliances
With such database, Facebook was able to lure in more and more investors and developers,
and co-operation with developers helped to increase the time spent on Facebook.
Applications created on the Facebook platform helped to keep users entertained and spend
more time on the webpage. Attracting the interest of enterprises, Facebook launched
Facebook Ads in 2007.
In 2007, the Revenue growth was 188% from $52 million to $150 million, which
indicates that Facebook is on the right path and makes strategically useful alliances
[WWW] (en.wikipedia.org/facebook). Alliances can be defined as voluntary arrangements
17

18. between enterprises in order to create more innovative ideas, products and technologies. In
Facebook case the alliances go further. The whole business model concept is built on an
idea that while providing an effectively working viral social platform, the content can be
added by partners. Applications provided through alliances were beneficial to Facebook
firstly, by keeping users on the platform for longer period of time and secondly, the
developers were boosting the revenue stream (Gulanti, 1998).
Facebook Connect, launched in 2008, was also an innovative solution. Facebook
users were provided with an opportunity to use various other websites while keeping their
identity via Facebook. Zuckerberg was able to successfully integrate user database with
partners the users could benefit from. As Teece suggests, managing efficient alliances can
be a key factor in succeeding. “The ability to manage alliances effectively has been
suggested to be a firm-level dynamic capability that enables a firm to integrate, build and
reconfigure internal and external competences to address rapidly changing environments in
order to create innovative forms of competitive advantage given path dependencies and
market positions.” (Teece, 1997).
Facebook Places together with Facebook Deals has opened another market to
Facebook. Enterprices benefit from the advertising via Facebook and reaching large target
group, which keeps them offering deals. The deals in turn keep users logging in to places
and creating a more detailed social graph for Facebook.
2.2.5. Innovation and risks
One of the success factors was Zuckerberg’s ability to take risks in order to find innovative
solutions. Facebook had more technical solutions that helped Facebook to develop, for
example, the opportunity to tag people on pictures. It was revolutionary at that time
(Appendix 4). The whole concept of Facebook as a social network has been innovative
from the start. Innovations always deal with change. It cannot be viewed from only one
process perspective focusing on technological or project management issues. Innovations
are about people, organizations, and culture (Pontiskoski, Asakawa 2010). Facebook
18

19. consistently approaches innovation and privacy changes with a do-it-first-and-then-see-
what-happens attitude. Zuckerberg is keenly aware of the importance of rapid deployment
and iteration. At the heart of the process is the notion of "hacking", which Zuckerberg
insists is not about breaking and entering: "It's about being unafraid to break things in order
to make them better.".
However, it has often done a bad job in explaining to users what it is doing, why,
and when, as well as what kind of control users have over this. But Facebook's
aggressiveness on the privacy front is a big reason for the site's success. From a business
perspective, Facebook's approach to innovation is smart. And if Facebook wants to
maintain its competitive edge, it will do what it has to do to smooth over the latest blow-up,
and then go forth with the same approach and attitude it has had all along. Facebook
designer Soleio Cuervo says: "What we make won't last, but we make things fast and get to
test our ideas quickly with real users. We're in it for the impact." [WWW]
(www.fastcompany.com). If Facebook were to radically change its approach to innovation,
meanwhile, seeking prior approval for every change it makes, its innovation would slow to
a crawl. It would also sacrifice the opportunity to roll out innovations that initially freak
people out.
2.2. Google business model
The Google’s business model is based on selling advertising.
Ninety-seven percent of Google's revenue is derived from its advertising programs.
Google has implemented various innovations in the online advertising market that helped
make them one of the biggest brokers in the market. Using technology from the company
DoubleClick, Google can determine user interests and target advertisements so they are
relevant to their context and the user that is viewing. Google Analytics allows website
owners to track where and how people use their website, for example by examining click
rates for all the links on a page. Google advertisements can be placed on third-party
websites in a two-part program. Google's AdWords allows advertisers to display their
19

20. advertisements in the Google content network, through either a cost-per-click or cost-per-
view scheme. The sister service, Google AdSense, allows website owners to display these
advertisements on their website, and earn money every time ads are clicked. [WWW]
(/computer.howstuffworks.com/internet/basics/google)
Google opened online advertising to many small businesses, which normally had
nowhere else to turn. (Auletta, 2009)
Google entered the enterprise market in February 2002 with the launch of its
Google Search Appliance, targeted toward providing search technology for larger
organizations. Google launched the Mini three years later, which was targeted at smaller
organizations. Late in 2006, Google began to sell Custom Search Business Edition,
providing customers with an advertising-free window into Google.com's index. Another
one of Google's enterprise products is Google Apps Premier Edition. The service, and its
accompanying Google Apps Education Edition and Standard Edition, allow companies,
schools, and other organizations to bring Google's online applications, such as Gmail and
Google Documents, into their own domain. The Premier Edition specifically includes
extras over the Standard Edition such as more disk space, API access, and premium
support. [WWW] (/en.wikipedia.org/wiki/Google)
Google generates three percent of its revenues by charging corporations for
premium services. [WWW] (/en.wikipedia.org/wiki/Google)
A company like Google enters fields where they scale meaning they have the
infrastructure to enter fairly cheaply and without huge diversions of resources. With
millions of computers and servers processing searches and collecting and digesting data,
this architecture makes it possible for Google to scale into cloud computing, to store and
search and sell digital books to host the fitteen hours of video uploaded each minute on
YouTube. (Auletta, 2009)
At that moment, is Google experiencing “The innovator’s dilemma” as top
companies do. Is Google confronted by new technologies or new business models,
floundered by fiercely defending their existing business models and not changing fast
enough? Google’s power flows from different source, they have produced a machine for
building data which has its own network effect – the more people use it, the more data
20

21. generated, the more advertisers flock to it. Everything sits on top of that layer, starting with
search, every time searched, Google is given some value because a certain result is picked
and every time Google learns about it. (Auletta, 2009)
Google has been accused as being company that doesn’t set priorities. In the spring
of 2008 Google executives to make tough choices among the 150 products Google
produced. Brin: “I worry about complexity, I admire Steve Jobs. He has been able to keep
his products simple.” (Auletta, 2009)
Drwaing 4. The business model of Google Inc
21

22. 2.3. Differences between Google and Facebook business models
In 2007 there were several skirmishes (e.g. court hearings with Viacom, Authors Gild) for
Google, including the lighting of Facebook, the fastest growing social network with more
than 50 million active users in summer of 2007, Facebook doubled in size every six
months. According to Mark Zuckerberg, Facebook is not a content company, “In some
ways Facebook is like a telephone conversation, with all your friends on the same call. But
on this call, your friends can share photographs, text, and political summons to action,
video, and music or can click to make purchases.” This is precisely why Google began to
worry about Facebook. If Facebook community of users got more of their information
through this network, their Internet search engine and navigator might become Facebook,
not Google. Google depends more and more people surfing the web. Relations were
strained when Microsoft outbid Google laying claim to 1.6 percent ownership of Facebook
and establishing Microsoft as Facebooks advertising sales agent. (Auletta, 2009)
Another reason Google fretted about Facebook is, that the social networking site is
operating on a different business model than Google. Facebook is a hybrid – company that
takes the share efforts to many and build communities that help create commercial value.
Facebook is not strictly part of a commercial economy, as Google is, nor are they strictly
part of the non-profit sharing economy. The hybrids are those that combine making money
with sharing. As community-building site like Facebook, Google was free, but it was not
building a community. (Auletta, 2009)
The Google model is based on getting users out of Google ant to other sites, on
maintaining the Internet as the primary platform. Facebook and other social networks seek
to keep users on their sites, to become the hub of their online lives. Social networks might
pose a threat to Google search which is a “pull model”- the search program aggregates data
and lets users decide what is useful, but it is difficult for users to “pull” the data they want
from the hundreds of thousands of links received in response to a search query, much is
considered as spam. There is a mob of voices on the Web that search results produce too
much useless information. (Auletta, 2009)
22

23. A substitute could be “push model” with which friends who are part of a social
network could push tips to friends, share what they purchased etcetera. It would also allow
participants to ask questions of friends, who are likely to deliver more precise and trusted
answers. This could pose a threat to Google, for although it has a broader base of data,
social networks retain more in-depth information about individuals and their community of
friends. (Auletta, 2009)
Facebook used to be closed off from Google – you had to be logged into Facebook
to see people’s profiles. But when Facebook started publishing public profiles so that when
you search on Google for someone, their Facebook profile pops up in the search results.
That generates additional incoming traffic and therefore money for Facebook. (Auletta,
2009)
23

24. 3. CAPABILITIES DEVELOPMENT AND
STRATEGIC ALLIANCES
3.1. Facebook capabilities
Each organization is a collection of unique resources and capabilities that provides the basis
for its strategy and the primary source of its returns. In the 21st century hyper-competitive
landscape, a firm is a collection of evolving capabilities that is managed dynamically in
pursuit of above-average returns. Thus, differences in a firm's performances across time are
driven primarily by their unique resources and capabilities rather than by an industry's
structural characteristics [WWW] (www.1000ventures.com).
Resources are inputs of a firm's production process, such as capital, equipment, the
skills of individual employees, patents, finance, and talented managers. Resources are
either tangible or intangible in nature. With increasing effectiveness, the set of resources
available to the firm tends to become larger. Individual resources may not yield to a
competitive advantage. It is through the synergistic combination and integration of sets of
resources that competitive advantages are formed [WWW] (www.1000ventures.com).
A capability is the capacity for a set of resources to integratively perform a stretch
task or an activity. Through continued use, capabilities become stronger and more difficult
for competitors to understand and imitate. As a source of competitive advantage, a
capability "should be either so simple that it is highly imitable nor so complex that it defies
internal steering and control." [WWW] (www.1000ventures.com).
A core competency is a deep proficiency that enables a company to deliver unique
value to customers. It embodies an organization’s collective learning, particularly on how
to coordinate diverse production skills and integrate multiple technologies (Leonard-Barton
1992). The value of the core competencies can be enhanced by combination with the
appropriate complementary assets (Teece, Pisano, et al. 1997). Such a core competency
creates sustainable competitive advantage for a company and helps it to branch into a wide
variety of related markets. Core competencies also contribute substantially to the benefits
24

25. the company’s products offer customers. Understanding core competencies allows
companies to invest in the strengths that differentiate them and set strategies that unify their
entire organization (Rigby 2007).
Facebook develops technologies that facilitate the sharing of information through
the social graph, the digital mapping of people’s real-world social connections. At the
beginning of 2006, Facebook became an opened platform for general public. Facebook
started to create more different applications to keep users informed about each other, share
moments, and enrich social life without the need to browse profiles. Facebook built a
variety of core applications: Photos, Events, Videos, Groups, and Pages. This way the links
did not dissolve, but added relevance to the social network as it grew. Later on they added
more core applications, for instance, the Like button. Like button is deeply integrated with
one’s profile and helps Facebook get a very accurate reading on the type of stuff one is
interested in. With the Like button, users do not even have to log in anymore; they are
always connected to Facebook. Since the Like button was introduced, it was seen one
billion times in the first 24 hours [WWW] (www.bloomtools.com).
In 2010, Facebook launched a new application: Facebook Places. Facebook Places
is a location based on service for use within the Facebook social network through mobile
devices. It competes with other stand-alone location-based check-in services including
Foursquare and Gowalla. The Facebook Places feature lets users check into physical
locations so that others can see where they are. The interface also shows users checking in
who else is located nearby. In addition to the information about the user locations being
spread across groups of friends, each location will also have its own newsfeed listing recent
actions and check-ins that have taken place. Users checking in are also able to tag friends
who are visiting along with them in a similar format to how photos are tagged. Facebook
stated at the Places launch event that the service serves three core purposes. With Facebook
Deals it is possible for the user to see what offers are nearby and share those deals with his
or her friends. It allows the users to state where they are for other people to see, it helps the
users to find out where other people currently are, and it also shows what is going on at
nearby locations. When logged in, the users can view lists of friends that are in physical
locations nearby and connect with them through the service as well as in person [WWW]
25

26. (www.mahalo.com). Facebook Places together with Facebook Deals has opened another
market to Facebook. Enterprices benefit from the advertising via Facebook and reaching
large target group, which keeps them offering deals, and the deals keep users logging in to
places and creating a more detailed social graph for Facebook.
Dynamic capabilities are the firm’s ability to integrate, build, and reconfigure
internal and external competencies to address rapidly changing environments. The term
“capabilities” emphasizes the key role of strategic management in appropriately adapting,
integrating, and reconfiguring internal and external organizational skills, resources, and
functional competences to match the requirements of a changing environment. Firm
capabilities need to be understood not in terms of balance sheet items, but mainly in terms
of the organizational structures and managerial processes which support productive activity
(Teece, Pisano, et al. 1997).
Dynamic capabilities thus reflect an organization's ability to achieve new and
innovative forms of competitive advantage given path dependencies and market positions.
(Leonard-Barton 1992). A dynamic capability framework is that today’s rapidly changing
markets force firms to respond quickly and to be innovative.
One of the innovative solutions was the News Feed. Facebook News Feed is all-
important page that users see when they first log on to the site. News Feed, a personalized
feed of one’s friends updates. News Feed has evolved quite a bit since it launched in 2006,
they offered some insight into the algorithms that allow News Feed to show you relevant
content, collectively called EdgeRank. News Feed only displays a subset of the stories
generated by one’s friends - if it displayed everything, there is a good chance one would be
overwhelmed. At a high level, the EdgeRank formula is fairly straightforward. Every item
that shows up in one’s News Feed is considered an Object. If one have an Object in the
News Feed (say, a status update), whenever another user interacts with that Object they are
creating what Facebook calls an Edge, which includes actions like tags and comments
[WWW] (www.techcrunch.com).
26

27. Each Edge has three components important to Facebook’s algorithm:
- First, there’s an affinity score between the viewing user and the item’s creator — if
you send your friend a lot of Facebook messages and check their profile often, then
you’ll have a higher affinity score for that user than you would, say, an old
acquaintance you haven’t spoken to in years.
- Second, there’s a weight given to each type of Edge. A comment probably has more
importance than a Like, for example.
And finally there’s the most obvious factor - time. The older an Edge is, the less
important it becomes [WWW] (www.techcrunch.com).
Facebook did not create a community where one never existed before; rather they
provided an important information and communication service to a pre-existing offline
community. Facebook created a high utility online service for enabling pre-existing social
behaviors within an offline community.
3.2. Strategic Alliances
Leading companies, particularly in such dynamic industries as biotechnology, computers,
and infotechnology, have increasingly used different kinds of cooperative inter-
organisational relationships (e.g., contractual alliances, consortia, joint ventures) to improve
their resource endowment and to master strategic uncertainty better than their competitors
To implement corporate and business strategies successfully, firms often cannot rely on
single high-profile alliances. They need a comprehensive alliance portfolio strategy that
provides access to required external resources, using several coordinated alliances
(Hofmann 2007).
The strategic alliance is cooperation or collaboration which aims for a synergy
where each partner hopes that the benefits from the alliance will be greater than those from
individual efforts. The alliance often involves technology transfer (access to knowledge and
expertise), economic specialization, shared expenses and shared risk. (Mowery, Oxley et.
al. 1996).
27

28. One of the fastest growing trends for business today is the increasing number of
strategic alliances. Creating different strategic alliances has been one of the key success
factors for Facebook. Thereof Facebook has assured the rapid progress of its platform. In
2007, Facebook and Microsoft Corp. announced that the two companies would expand their
advertising partnership and that Microsoft will take a $240 million equity stake in
Facebook’s next round of financing at a $15 billion valuation. Under the expanded strategic
alliance, Microsoft will be the exclusive third-party advertising platform partner for
Facebook.
In 2009, The Nielsen Company and Facebook announced a multi-year, strategic
alliance to help marketers’ better use the Internet to develop and market new products. The
alliance combines Facebook’s global consumer reach with Nielsen’s market research
expertise to provide better insight and information to marketers around the world. Sheryl
Sandberg, “Facebook is an increasingly vital link between consumers and brands,” said
John Burbank, CEO of Nielsen’s online division. “We will now be able to add deep
knowledge of this important social network to our unmatched media measurement and
consumer insight across all three screens. Together we will be able to provide the missing
elements to clients seeking better understanding of how Web content and online advertising
affect consumer behavior.” [WWW] (www.adoperationsonline.com).
In 2010, Facebook announced an alliance with PayPal, which will now be a
payments provider for Facebook Credits. Now, Facebook users can buy Facebook
advertising and its virtual currency, Credits, using the online payment service. Hundreds of
millions of dollars were spent last year on the social games that are played on Facebook’s
platform, analysts estimate. Companies such as Zynga and Playfish sell virtual goods to
users who play games such as Mob Wars and Restaurant City. But until now Facebook has
not taken a cut of those transactions. The social game companies turned instead to PayPal
and a handful of other payments providers to sell credits for individual games. Facebook is
testing the use of Credits within games and other applications on its platform. By allowing
users to pay for in-game purchases with Credits, Facebook hopes to simplify the
experience, allowing users to have a Facebook wallet of sorts, and likely taking a small
commission on the payments. “We want to give the people who use Facebook, as well as
28

29. advertisers and developers, a fast and trusted way to pay across our service,” Dan Levy,
director of payment operations at Facebook, said in a press release. “As our business has
grown, offering local methods of payment has become increasingly important for
advertisers who want to buy Facebook Ads. Teaming with PayPal, a global leader in online
payments makes this possible.” [WWW] (www.socialmedia.globalthoughtz.com).
Also, in 2010 Facebook and FarmVille’s Zynga enter into five-year alliance.
Facebook and Zynga have entered into a five-year strategic relationship that increases their
shared commitment to social gaming on Facebook and expands use of Facebook Credits in
Zynga's games. The agreement provides a solid foundation for both companies to continue
to work together to provide millions of people with a compelling user experience for social
games [WWW] (www.ditii.com).
29

30. 4. DISCUSSION
4.1. Facebook success strategy
There are various reasons why a small start-up enterprise was able to gain market share at
the expence of a large corporate brand. What made the success possible was a number of
strategially right moves.
4.1.1. Innovation and risks
Facebook software engineer Alex Moskalyuk said that Facebook has no direct strategy to
attract users from competitor sites. "You can spend your time worrying about the
competitors or you can spend your time innovating your product," he said. "We chose to do
the latter and not the former." [WWW] (smh.com.au). Facebook moto has been “to break
things”. In order to reach some new level on knowledge or content, something needs to be
broken. While Google is considering failing an acceptable norm as long as the process is
occurring fast and progress in some other field is made, Facebook had a different approach.
Facebook values the process of experimenting and getting results and willingness to break
the pattern. While unlearning is a difficult process, re-learning and executing it the hardest
for human psychology [WWW] (http://www.fastcompany.com).
Facebook had more technical solutions that helped it to develop, for example, the
opportunity to tag people on pictures. It was revolutionary at that time (Appendix 4). The
whole concept of Facebook as a social network has been innovative from the start.
Innovations always deal with change. It cannot be viewed from only one process
perspective focusing on technological or project management issues. Innovations are about
people, organizations, and culture (Pontiskoski, Asakawa, 2010).
30

31. 4.1.2. Strategical alliances
Applications created on the Facebook platform helped to keep users entertained and
spending more time on the webpage. Facebook business model concept is built on an idea,
that while providing with an effectively working viral social platform, the content can be
added by partners. Applications provided through alliances were beneficial to Facebook
firstly by keeping users on the platform for longer period of time and secondly, the
developers were boosting the revenue stream (Gulanti, 1998).
Zuckerberg was able to successfully integrate user database with partners the users
could benefit from. As Teece suggests, managing efficient alliances can be a key factor in
succeeding. “The ability to manage alliances effectively has been suggested to be a firm-
level dynamic capability that enables a firm to integrate, build and reconfigure internal and
external competences to address rapidly changing environments in order to create
innovative forms of competitive advantage given path dependencies and market positions.”
(Teece, 1997).
In addition to the developers, Facebook managed to involve a large number of
partners through Facebook Connect, Facebook Places, Facebook deals. Zuckerberg was
able to successfully integrate user database with partners the users could benefit from and
also creating a more detailed social graph for Facebook.
Companies have three ways to win by adopting distributed concreation. First, they
can capture value from the cocreated product itself. Second, companies can capture value
by providing a complementary product or service. Third, they can benefit indirectly from
the cocreation process – for example, through enchanced brand or strategic position
(Bughin J, Chui M, et.al. 2008).
4.1.3. Capabilties
Dynamic capabilities are the firm’s ability to integrate, build, and reconfigure internal and
external competencies to address rapidly changing environments. Google has wide variety
services and products whether Facebook is concentrating only on social networking.
31

32. Thereof Facebook can focus more on development of one certain platform. Capabilities
need to be understood not in terms of balance sheet items, but mainly in terms of the
organizational structures and managerial processes which support productive activity.
(Teece, Pisano et al. 1997)
Facebook growth has been enormous because of its great competencies. A core
competency is a deep proficiency that enables a company to deliver unique value to
customers. It embodies an organization’s collective learning, particularly of how to
coordinate diverse production skills and integrate multiple technologies. (Leonard-Barton
1992) The value of core competencies can be enhanced by combination with the
appropriate complementary assets. (Teece, Pisano et al. 1997)
Dynamic capabilities thus reflect an organization's ability to achieve new and
innovative forms of competitive advantage given path dependencies and market positions.
(Leonard-Barton 1992) A dynamic capability framework is that today’s rapidly changing
markets force firms to respond quickly and to be innovative.
Facebook did not create a community where one never existed before; rather they
provided an important information and communication service to a pre-existing offline
community. Facebook created a high utility online service for enabling pre-existing social
behaviors within an offline community.
4.2. Google’s reactions
At the beginning of 2008, two key executives left Google (Sheryl Sandberg and Elliot
Schrage), one accepting the title of chief operating officer at Facebook and one get in
charge of overseeing Facebook’s relations with outside developers. Their move drew
attention to Facebook and highlighted the strained Google. Google was already anxious
about Facebook, and their leave elevated Google’s discomfort. Facebook had 123 million
unique visitors in May 2008, a 162 percent increase over the previous May, and Facebook
had passed its rival MySpace. Nevertheless, it would have been a mistake for either
32

33. company to rush to compete while the danger is orienting your strategy to what the other is
doing (Auletta, 2009).
Nevertheless, Google is challenged. Its social network site Orkut, has seen its
market share slip in countries like India and Brazil, where it was once dominant. Even in
search, there has been slippage in Russia; a private start-up named Yandex has a market
share approaching 50 percent, well ahead of Google. Companies like Apple are angry about
Android. Amazon is mounting a cloud-computing challenge as Google is mounting an
electronic book challenge. Google knows that one day its cold war with Facebook would
turn hot (Auletta, 2009).
Facebook built up a community of two hundred million users in just five years.
Facebook is a glass house. Google is removing all subjectivity and just looks at the data.
And the data eventually becomes a crutch for every decision, paralyzing the company and
preventing it from making any daring design decisions (Auletta, 2009).
Google’s biggest future concern is size, growing too big and losing focus and
becoming bureaucratic. Critics both inside and outside Google believe the company has
real management issues. Google can be seen overmanaged and undermanaged at the same
time having a control mechanism at the top that has inordinate control and although there is
too much freedom. Google is just focused on central processing computers and ignores the
processing of the human brain. Google’s engineers are too wedded to their algorithms. As
Google search has become more dominant, a chorus of complaints will be heard. By giving
so much weight to the numbers of links a page received rather than the quality of the
information reported (Auletta, 2009).
33

34. 5. INNOVATIVE BUSINESS MODEL
5.1. The future of social networks
The most important issues regarding social networks are security and privacy. In order to
continue growth, social networks must reorganize the social relationships and make it
possible for users to rank their relationships. As people in real life can choose what amount
of their “self” they would like to share, the same should apply to social networks. For
example - a business contact we would like to keep could become a contact on our
Facebook profile, but the information we share to our close friends might jeopardize that
formal connection. The perception of person via ones profile needs to be different
according to the role of the relationship starting from a profile picture and basic information
to sharing thoughts and links. Also, value from a Facebook service can be very different
depending on the main purpose of using social network, and also by demographical factors
(Heide, Kenneth, 2006).
Relationships between individuals are in constant progress, but social networks, as
vivid as they may be, show only linear connections. When connection is made, one is
befriended, until chosen to end the relationship. What would help the growth of a social
network is an algorithm that would help a relationship grows naturally. When connection is
made, the person will become a contact, which you interact with by showing your polite
formal “self”. By frequent interaction, sharing and communication, the person will
automatically become a closer acquaintance.
The longer we are a member of a social network, the bigger the number of contacts
inevitably gets. Large number of contacts needs to be organized, but most people find even
the existing contacts to difficult to maintain. When people don’t have to tune the privacy
settings themselves and it is done automatically, the system is more likely to succeed. As
the problem is that most settings are too difficult and complex for common users to
understand (Appendix 1, 3, 4).
Since people have a need to keep some amount of information they share more
private, there are trends for that need reflect in social networks. For example, Facebook
34

35. enables private groups that are widely used (Appendix 3, 4). In order the social networks to
keep growing, there is a need for a more complex social graph.
5.2. The future of internet connections
The trend of the networks in general is to become more flexible and mobile. Social
networks are expanding their barriers and stepping outside the known frames. New smart
phones collect enormous amount of data, it is possible to gather and store digital data on
calls made and received and how long each lasted. In addition, the chips in the phone’s
GPS track a user’s location, the length of stay, and other mobile users in touch. Tapping
this sort of data is reality mining compared to Google’s data mining. Mobile phone will
replace your credit card, your keys becoming your personal remote control to life [WWW]
(http://uk.finance.yahoo.com).
Facebook has also taken steps to make the mobile application of Facebook more
versatile and is focused on expanding its mobile service [WWW]
(http://www.reuters.com).Considering what opportunities technology offers, Facebook may
soon expand from a platform you have to log in to visit.
Taking Apple iPhones popular application as an example – application called Bump
allows persons to befriend each other by bumping their iPhones together. Luxury cars use
smart remote controls that adjust the settings – seat, mirrors, heating, etc – by the needs of
the user. Technical solutions inspired from these examples could make is possible to add
applications to mobile phones that would recognize people’s Facebook profiles, suggest
friendships or enable adding contacts, for example, by shaking hands. Together with
intelligent privacy control, the network of connections could have even more significant
value.
35

36. 5.3. Future of search engine
Google search engine has a very complex method of getting the most accurate results. But
leaving the click rate, popularity and the time spent on the pages aside, the search results
are very anonymous. What could add a value and credibility to the search would be the
social connections. 2010 Google Search algorithms did not consider social networking
elements for searches conducted for certain websites, but things have changed since then.
Google has added a feature that finds connections via networks like Twitter or Blogger, but
that data is in most cases very poor, while Facebook would give a wide overview of
connections. The more versatile and complex the network, the more useful the data can be
for users [WWW] (http://socialbarrel.com).
5.4. Business model
The future business model is to integrate social networks with a search engine to create a
personal value for information. Facebook has an enormous base of users, but they are also
struggling to devise ad-friendly formats. Social networks might be able to sell more ads if
they share more of their users’ private information with advertisers, but when Facebook
tried that approach in 2007 with an ad program called Beacon, they failed to get willingness
to participate (Auletta, 2009).
36

37. Drawing 4 The future business model for a serch engine based on social network (Gnit).
Social media has become a powerful tool that influences what people buy. The
inaugural Asia Pacific Social Media Report states that from China and India to Australia,
online reviews are a major influence in buying electronics items, cosmetics, cars and food,
among other things. Developments in social media cannot be overlooked: “Businesses can
no longer afford to simply observe the social media phenomenon, they need to embrace it.”
[WWW] (http://www.physorg.com).
Integrating the two most commonly used features in the web: search engine and
social network, it is possible to offer personalized services. With personalization comes
37

38. credibility that adds value to the advertisers. When advertising is so accurately targeted that
it takes references from social contacts in consideration, it is possible to get larger fees and
increase revenues.
38

39. CONCLUSION
This research described the strategies and alliances that Facebook made in order to succeed
as a business and outperformed Google with a social network platform. There are various
reasons why a small start-up enterprise was able to gain market share in expense of a large
corporate brand.
Facebook was created with a clear idea of the service they wanted to provide the
user with. They managed to reach the right target group, which had a large impact on their
success. Zuckerberg developed a personal niche for his site in making it specifically for
college and university communities. Facebook functioned as a successful platform for
educational institutions in earlier years attracting investors and developers, but functioned
without significant profit. In 2007, when the website became public, the revenues started to
grow and the company was fully oriented to business.
There are various reasons why a small start-up enterprise was able to gain market
share in expense of a large corporate brand. What made the success possible was a number
of strategically right moves: innovative and bold attitude towards risk taking and managing
strategically useful alliances.
39

40. ACKNOWLEDGMENTS
This paper was written in February and March 2011. We could not have this story without
many wonderful persons. First of all, we would like to thank Mr. Alar Kolk, who was
extremely patient in listening our business model developments and for asking critical
questions as a regard to the value proposition of the innovation.
Our special thanks goes to Mr. Marko Saue, creative director of Goal Marketing,
who gave us crucial insights of how to compare two incomparable territories. We
appreciate the contribution of Mr. Silver Hage, the co-founder of Ivy Creative Collective,
whose enthusiasm, considering endless opportunities in Facebook, gave us a lot of
inspiration how to shape the future business model in searching and social networking
business. We would like to thank Mr. Margo Veskimägi, the head of Baltic region in TNS
Emor, who opened the outback, why there should be a dose of skepticism regarding the
future of social networks and advertising. We have received valuable advice from Mr.
Lauri Ilison, the head of business development in OKIA, who described the technical
solutions and future opportunities in Google and Facebook.
We have received generous help from Ms. Siret Laasner, who gave a close initial
reading to correct our English. We would also like to share credit with Mr. Erki Närep and
Ms. Tiina-Katrina Kaber, who helped us putting the interviews into clean-cut English.
And last but not least, our respect goes to two friends Mr. Kristjan Gabral and Mr.
Priit Pärle, who designed the jacket of our research.
40

41. REFERENCES
Auletta, K. (2009). Googled. Virgin Books
Boulton C., Foating on Carr’s cloud, eWEEK, April 7, 2008 ,11.
Bughin J, Chui M, Johnson B. (2008). The next step in open innovation. The McKinsey
Quarterly, 1-8.
Davenport T.H., Iyer, B. (2008). Reverse Engineering: Google’s Innovation Machine.
Harvard Business Review, April 2008, 59-68.
Gulanti, R. (1998). Alliances and Networks. Strategic Management Journal, 19(4): 293-
317.
Heide J. B., Kenneth H. W. (2006). Friends, Businesspeople, and Relationship Roles: A
Conceptual Framework and a Research Agenda. Journal of Marketing Vol. 70 , July, 90-
103
Hoffmann, W. H. (2007), Strategies for managing a portfolio of alliances. Strategic
Management Journal, 28(7): 827–856
Iyer, B., Davenport, T.H., (2008), Reverse Engineering Google’s Innovation Machine.
Harvard Business Review, April, 59-68
Kelsey, T. (2010). Social Networking Spaces: From Facebook to Twitter And Everything
In Between. Apress: 26-50, 147-178.
Leonard-Barton, D. A. (1992). Core Capabilities and Core Rigidities: A Paradox in
Managing New Product Development." Strategic Management Journal 13: 111-125.
Mowery, D.C., Oxley, J,E ,. Silverman B, S, (1996) Strategic Alliances and Interfirm
Knowledge Transfer, Strategic Management Journal, Vol. 17, Special Issue: Knowledge
and the Firm pp. 77-91
Pontiskoski e., Asakawa K., Overcoming Barriers to Open Innovation at Apple, Nintendo
and Nokia. International Journal of Human and Social Sciences, 5:1 2010, 27.
Rigby, D.K. (2007). Managament Tools: 22. Boston: Bain & Company.
Teece, D., J. , Pisano G., et al. (1997). Dynamic Capabilities and Strategic Management.
Strategic Management Journal 18(7): 509-533.
41

42. [WWW] Business Week Online: Sheryl Sandberg on Facebook’s Future
http://www.businessweek.com/technology/content/apr2009/tc2009048_429871.htm
(23.03.2011)
[WWW] Business Week Online: Ignore The Screams - Facebook's Aggressive Approach Is
Why It Will Soon Become The Most Popular Site In The World. Henry Blodget
(24.03.2011)
[WWW] Bloomtools: Bloomtools leads the way with new Facebook innovation.
http://www.bloomtools.com/articles/bloomtools-leads-the-way-with-new-facebook-
innovation.html (12.03.2011)
[WWW] EdgeRank: The Secret Sauce That Makes Facebook’s News Feed Tick
http://techcrunch.com/2010/04/22/facebook-edgerank/ (27.03.2011)
[WWW] Facebook Ties Up with PayPal for Online Transactions
http://socialmedia.globalthoughtz.com/index.php/facebook-ties-up-with-paypal-for-online-
transactions/ (27.03.2011)
[WWW] Facebook Factsheet.
http://www.facebook.com/press/info.php?factsheet (13.02.2011)
[WWW] Facebook fends off attack of the clones. Paul Sonne.
http://news.smh.com.au/technology/facebook-fends-off-attack-of-the-clones-20080729-
3me7.html (26.03.2011)
[WWW] Facebook, Twitter powerful business tools: research group
http://www.physorg.com/news197093859.html (01.03.2011)
[WWW] Facebook Statistics
http://www.facebook.com/press/info.php?factsheet#!/press/info.php?statistics (13.02.2011)
[WWW] Facebook Timeline.
http://www.facebook.com/press/info.php?factsheet#!/press/info.php?timeline (13.02.2011)
[WWW] Facebook and FarmVille’s Zynga enter into five-year alliance.
http://www.ditii.com/2010/05/18/facebook-and-farmvilles-zynga-enter-into-five-year-
alliance/ 10.02.2011
[WWW] Fastcompany: #1 Facebook.
http://www.fastcompany.com/mic/2010/profile/facebook (08.03.2011)
[WWW] Facebook Places
http://www.mahalo.com/facebook-places/ (28.03.2011)
42

43. [WWW] Google
http://en.wikipedia.org/wiki/Google (01.03.2011)
[WWW] Google Confirms Social Networking Impact on Search
http://socialbarrel.com/google-confirms-social-networking-impact-on-search/2880/
(23.03.2011)
[WWW] Google history
http://www.google.com/intl/en/corporate/history.html (28.02.2011)
[WWW] Paypal, Facebook, Twitter among Top .com ventures
dazeinfo.com/2010/06/01/paypal-facebook-twitter-among-top-com-ventures (21.03.2011)
[WWW] Resource- Based View (RBV) of Firms.
http://www.1000ventures.com/business_guide/mgmt_stategic_resource-based.html
(28.03.2011)
[WWW] Reuters: Facebook to buy mobile app developer Snaptu. Reporting by Maria
Aspan; Editing by Marguerita Choy
http://www.reuters.com/article/2011/03/20/us-facebook-snaptu-idUSTRE72J39B20110320
(28.03.2011)
[WWW] Sustainable Competitive Advantage
http://www.1000ventures.com/business_guide/crosscuttings/sca_main.html (28.03.2011)
[WWW] The Nielsen Company and Facebook Form Strategic Alliance
http://www.adoperationsonline.com/2009/09/30/the-nielsen-company-and-facebook-form-
strategic-alliance/
[WWW] Will your mobile phone replace your credit card?
43

44. http://uk.finance.yahoo.com/news/Will-mobile-phone-replace-yahoofinanceuk-
819430351.html?x=0 (12.03.2011)
APPENDIXES
Appendix 1. Interview with executive director of OKIA Lauri
Ilison
Who are the main competitors for Facebook at the moment?
It is difficult to say. Today there is no one else with similar capacity. All other
players on the field are clearly smaller. It might be better to think of possible competitors in
the future.
What separates Facebook from other social networks?
We should rather wonder why is Facebook so big. For me the logic behind
Facebook finding a critical amount of users is very simple. Thanks to the great number of
users the snowball kept growing. Small networks may try, but the snow will not stick
anymore.
Looking at the bigger picture, the qualitative difference is made with forums and virtual
worlds.
What factors influenced the growth of Facebook?
Facebook was the first to have people use their real names and actual pictures. No
other network, including Orkut, managed that and people could join using a pseudonym.
There have been forums and other ways to communicate, but Facebook managed to show
44

45. people the benefits of using their real names and pictures. This has created a completely
new quality in the content. As people use their own name, they have an inner control
mechanism that stops them from writing improper things. They just do not want to let
others see and read what they might anonymously write.
Privacy has been an essential part of Facebook. Do you see anonymity returning?
Anonymous users are not credible. When the Internet reached the masses, it was fun
to comment newspaper articles and in forums, but no one would take these comments
seriously. A recent case with the newspaper Äripäev acts as an example here. Information
was published that was statistically false. An anonymous comment was added stating: “The
numbers are incorrect, fix it”, but nothing was done. Had the commentator used their real
name, the problem would probably have been fixed.
Where is Facebook headed, what is being developed?
I think Facebook will try out every gadget that has been used in the previous
networks, for example the trading opportunity. We can see Facebook coming out with
Deals. Today there is already the subgroups possibility where users can create groups with
limited visibility in order to keep information only in a close circle without even the friends
of friends being involved. There are prototypes of different ideas out there that have not
worked out yet and are easy for Facebook to pick up and utilise thanks to their massive
number of members. Facebook does not have to do much to remain fresh. It is difficult to
compete with Facebook because they just have so many users. Statistically, fourth of all
web clicks in the USA are made in Facebook. When you think about it you realise it is
really a monopoly and it is scary to imagine a world without Facebook. On the other hand it
can be seen how Facebook offers an added value in the crisis situations of today’s world
starting with what is happening in the Middle East to elections in North Africa.
How could Facebook develop as a commercial means?
I think it is similar to everything else – it is promising in the beginning, then comes
the phase of excessive use or even abuse which is followed by a cooling and stabilising
45

46. period. Take, for example, the Google advertising engine. It only makes sense to use it to a
certain degree as eventually you want your product or service to be found on its own. A
web banner blindness exists also in Facebook. If you are using Gmail, you probably do not
pay attention to the column on the right. We now have developed a skill to view Facebook
while avoiding advertisements and only finding our friends’ updates.
Will Facebook stick to the minimalistic adverts instead of flash solutions?
Facebook is dancing on the razor’s edge. They would like to sell more, but should
they? Perhaps they should raise the price? With a critical mass it is wiser to increase the
price and the outcome is as lucrative. I do not see Facebook aiming at flash solutions since
in its graphic design Facebook has always been very conservative. Actually the graphic
interface is kept even too stagnant: changes are not made very quickly and they are kept
rather simple as it is feared that the users might otherwise not find the new applications.
Still, Facebook dares to test new solutions and applications on members...
You mean external apps? I see that as an important aspect to Google as well.
Respect for Google Wave for example – when the company realised it was not working,
they pulled the plug quickly. The problem for many global companies is the inability to
decide to give up on investments that do not work. Google’s philosophy is to take down
anything that does not work. This solution has a much better perspective than trying to
endlessly improve something that just will not work. By letting go of Wave, Google
basically released development resources – tens and tens of people became free to work on
new solutions. Since Google realised their Wave was not viable, they are considered as
serious competition to others.
In general, how do you see the future of social networks, what is the source of their
turnover?
46

47. I think a point of fulfilment will be reached and quality time will be found outside
social networks. Creating turnover is often a problem in the business world. For example,
when two mobile operators are competing, they often campaign in order to win over
customers. Statistically, around 5-10% of customers keep changing their preferences but in
the long run it is not useful.
The goal of social networks is to secure a steady growth, but this does not mean that
they should change their business model. I believe that one day social networks may exit
the advertising world. Whether they can achieve real sales, becomes clear over time. There
are people who start as great fans of social networks but grow weary over time and find it
all quite meaningless. I would rather see a better information filter that outlines the really
interesting updates. I want to see a portion of my friends who actually write something
worthy of my time.
What about Google?
I think we should appreciate the solutions that Google is working on rather than just
looking at what is available to the general public. The logic is this: when you are creating a
start-up, you cannot focus on solutions that can be realised today but on the solutions that
can be sold in five year’s time. This is why I think that Google has a lot more in the oven
than Facebook does. For example the Android phone software, which is essentially a
Google solution. The business model of Google products in only just emerging.
Could Google create its own social network? I think it is a matter of time and Google will
not give up. It is purely business – they have to figure out how to bring users back from
Facebook or create a whole new qualitative level to support the Google business model.
What will Facebook do about Google is unknown, but there is a lot to think about. On the
other hand, Facebook has a wide circle of users which means there is a lot of material to
base new growth upon.
The Google user base is different, they do not need Google as a network.
Of course. People are disloyal – if they find a better approach, they will go there. A
better example is what Google is doing today for their business clients. As a starting
47

48. business, all you need is a computer and Internet connection, everything else will be
provided by Google. This is no longer advertising business, but providing a service – a
whole different approach.
Appendix 2. Interview with Margo Veskimägi, TNS Emor, April
24, 2011
Who are the key competitors of Facebook?
Facebook is entertainment, thus the entire Internet is its competitor. Facebook
carries different meanings for different people: for some the main device is e-mail, for
some instant messaging, for some YouTube. This means that there is no particular
competitor – Facebook is a platform, an environment, where each person creates his or her
own media world.
In your opinion, what distinguishes Facebook from other social networks?
It is very difficult to say whether Facebook has been successful or not. In the short
term it has been extremely successful. However, since its history is exceptionally brief,
nothing can be said about its long-term success. At one point, people just move from one
social environment to another. Facebook has been witty, but more is needed for a long-term
business success.
What could Facebook currently develop?
Facebook growth in the Estonian media market has been only negative as Facebook
is not beneficial for the Estonian media and marketing market. The Estonian businesses
have made the wrong decisions as the apparent simplicity of Facebook has attached them to
48

49. a phenomenon that is not entirely dependent on them. If Facebook changes something, you
have to choose whether to accept it or leave. In comparison, your own website offers many
more options. Corporate success on Facebook has varied a lot, although it is very
convenient, it is still hype. But it is certainly not the first or the last hype. From the legal
viewpoint, there are many activities on Facebook one should not do: the violation of terms
appears to be a major problem. At the same time, nobody should be in charge of turning off
your webpage if there is something that Facebook does not like or if Facebook decides to
change.
What could be the development of Facebook as an advertising channel?
Where else should Facebook make money? Cherry, for example, is a marginal
business; Facebook would never deal with the micro-level domains. The model of
Facebook is based on pure advertising; either the content or advertising is paid for.
Everything else belongs outside of the system and I do not think that these can be the main
principles. For example, Cherry might not exist after 12 months. Perhaps one moment it is
understood that the business actually does not run smoothly. Companies return to the
starting point unwilling to give their margin away to another company.
What is the future of social networks that creates the essential profit in 2015?
Why are we talking about social network in the terms of future meaning that social
network is the place where the primary use of the Internet is heading? It goes exactly to the
place where it needs to go. I ask about the mobile use: what exactly is the mobile use? Is
iPad a mobile or a computer? I have to say there will be no revolution! All things are
related to very specific reasons: if people in Estonia do not have a reason for a change, then
the change does not take place. If there appear no prerequisites in Estonia, there will be no
changes. The world trend in Indonesia, New York, and Tallinn is exceptionally different,
there are universal questions and topics that are not understood at all or different areas
understand these questions differently. One is the content and the other is the need. After
all, the only thing that counts is how we use our 24 hours as they cannot be undone.
49

50. What happens to Google who lost part of its market to Facebook?
But what has Google lost anyway? Social networks have remained unsuccessful
despite the investments, but it is perhaps better when the whole market is not in the
possession of one leader. We can trouble our minds with the future of Google and
Facebook, but taking their increase streams into account, I do not believe that they have any
existential problems. Google may keep on trying or they could unite or either one could
eventually buy another in the future, but I do not see a problem at all. Such co-operations
are likely to end in a way that something new emerges, something different; after all, life
does not stand still. There is market for everything. But as it is elementary from the nature,
you cannot win in everything. It would be very surprising if anyone is the best in all things.
This is not a revolution taking place, this is pure evolution. It is a certain
technological development; it has taken place before, it will take place later and it does not
change people dramatically. Social media as a concept has existed in the past, but its
development has been slower. Those who speak about it and Facebook itself can make a
fortune with social media. Facebook has to be smart enough to take this value itself,
because the value can also disappear if something else should emerge on the market. But I
do not know what it could be and I do not want to predict if it will happen or not.
50

51. Appendix 3. An interview with Marko Saue, GOAL creative
director
Why didn’t Google manage to create Facebook?
That’s an interesting subject, but you are comparing two very different things.
Google was created for a certain purpose, Facebook it just grew, as seen in the movie.
Facebook is based on people’s curiosity and need to communicate. Google was started
elsewhere and the portfolio of Google is rather wide. Google has much more users with its
package than Facebook. Perhaps a social network has not been a priority for Google and
also not a region that would sell. But can’t you see a problem in comparing such different
things? You could compare Facebook to Orkut, like why is Facebook popular and Orkut
isn’t. In that case we could give more relevant answers.
The userbase and loyality of Google and Facebook is so different, therefore Google is
still probably trying to succed through social networks.
Why should they create such a network?
We think in our assignment that social networks are a subject which is developing
strongly since people have the ability to gain information about other people and also
use these connections to spread information. This is what Google is missing.
But what is the business purpose of Google? What and why does Google do?
You’re saying that social networks are developing, but it seems to me that the gold is
hidden where the main income of Google comes from. It is AdWords. Google’s main
income is advertising. Google is producing a lot of free products for a wide range of use. It
is possible to sell adverts to these regions because people use free products. This is the
business purpose of Google in my opinion. They started with the search engine which is
still the central and most important part of their industry, but money comes from
advertising.
51

52. As for Facebook, they started with the network and now Facebook earns its money with
advertising. People want to advertise in that environment as well as they do in Google’s
environment.
The search engine of Google is dominating at the moment, but it’s not perfect. There’s
a lot of information, too much information pollution and if there is a better search
engine created, Google may loose an important part of their market. Google’s
contacts are short-term, but the connections with Facebook are more long-term and
much profound. Their clientbase is enormous. What is the clientbase for Google’s
search engine, how many search feeds does Google have daily, what is the number?
I’m not sure, but i think that there are more people using Google’s search engine
than Facebook in the world.
Only because it’s the best search engine at the moment.
But what can be better than the search engine of Google?
Personal service
What does that mean?
There is too much information and nobody wishes to read 40 pages of links or adverts
that might not take you to the right place.
Google has complex algorithms for this that order the information. There are many
different factors in search results which lead to the right result. Google also uses people’s
feedback to order the results. For example, if someone opens a page and closes it right after
that, then that means the needed result wasn’t there and the page become less relevant for
the future. In that same way more popular pages that have a higher visitor count become
more relevant. Google has done hard work making the first three pages for result the right
ones for a person, it depens on how well people can ask. The most accurate and specific
question gives the most specific answer. I wouldn’t say that the problem is getting 200
pages for result, because usually the right result is in the first 3 or 5 links.
52

53. Since our assignment applies more for Facebook, who are the main competitors for
Facebook?
The main competitors for Facebook are QQ, for instance, the biggest social network
of China. Odnoklassinski and Vkontakte in Russia with over a hundred million users. And
then there’s Orkut. That’s about it with bigger international competitors in my opinion. On
the map of social networks (http://armenion.com/?p=1339) where the most used social
networks are segmented by countries, can be seen that Brasil, for example, is dominated by
Orkut, then again QQ in China, Vkontakte in Russia. We can see the onward potential of
Facebook on the map and how far it can ever develope. Facebook is probably not even
going to enter the China’s market since the restrictions are so high. Google also wanted to
leave the China’s market because of the cencorship of results. Basicly, Google lost its
purpose in China due to the censoring giving unadequate results. Facebook and Youtube
are blocked or forbidden in certain countries. Basicly, Facebook is a medium where
everybody are friends with eachother and share everything which makes the information
spread between people and that’s the reason why some countries with dictatorship don’t
want to allow people to know how things really are. These countries have strong motors of
propaganda and therefore it is impossible for Facebook to enter certain countries. But at the
moment there isn’t a serious international rival for Facebook. We can’t say a product of a
different region could be a competitor of Facebook. I don’t see that Google is a competitor
of Facebook in the social network context. Since the numers of users for Orkut is so
different comparing to Facebook, even though Orkut is a part of Google and is practically
in the same region, the question at the moment is more about how far Facebook is going to
develop and what happens to it after a few years. Is it a network connecting the whole
world or not, but it is very difficult to overtake the market of Facebook, if not to say
impossible. People don’t want to let go an environment which is so accustomed and to
which they have contributed so much: they have contacts, photos and other information in
there. Of course it is possible to develop a solution with a new network where you can
smootly transfer your stuff from Facebook. In the same way, as transferring your settings
from an old computer to a new one, which is really easy. There will be a lot of different
53

54. networks along with Facebook which are using Facebook’s base of contacts, but not their
income.
What is the difference between Facebook and other social networks?
I’ve just recenlty signed to Facebook, in September 2009 I think. Previously I was
using Orkut and I really liked it because it was really clear and simple. You had your own
contacts and pictures there and if you wanted to see someone else’s then you searched that
person yourself. Facebook, on the other hand, came with the conception of a wall which is
an information flow where different companies, games and people share information. You
don’t have to read everything when browsing the flow, because the moment you are
looking you see the most important part of it: the stuff that is important to your friends,
what do they most like and comment on, is at the beggining and you can also look at the
live feed which shows the latest posts. As an Orkut user, Facebook’s wall seemed really
confusing and I couldn’t understand where my pictures or pictures of my friends were and
what was the wall supposed to be. At that time companies started to show interest to
Facebook and because of my work I also signed up and started to examine, but I wasn’t an
active user. There’s a big difference whether you have 400 friends in Orkut or 50 friends in
Facebook. The rooted value of Orkut seemed really important to me since I had posted a lot
of pictures and had a lot of comments by friends over the years. I didn’t want to let that go.
Now I haven’t used Orkut at all for year. I still have my account, but a lot of friends have
deleted their’s. As Orkut was trying to copy Facebook using the same wall and functions it
seemed more as a failure and the new layout of Orkut was really silly in my opinion. In a
certain point I switched Orkut back to the older version because I was used to it and I knew
exactly what was what. The new version seemed strange. Facebook was more alive and
interesting and it offered more opportunities, because you could see what was happening all
the time, not just the pictures people have uploaded. Orkut showed only the uploaded
pictures. Compared to Orkut, Facebook has enliven the communication between people for
sure. The base of contacts is growing really fast, I have about 800 friends right now who I
know all and have met with, I don’t accept strangers. Often you discover similar intrests
with old acquaitances. You discover that your high school classmate also rides a motorbike
54