Building the Great Facebook Empire

Image source: Pawel Kuczynski

Facebook is conquering the world.

Almost everyone with a smartphone knows about Facebook. If you are reading this, you probably use Facebook. Maybe your grandmother is an active user, and perhaps even your whole family use it daily.

Ok, except for my mum, but at least she uses WhatsApp, so that makes her part of the Facebook ecosystem.

Putting cold jokes aside, it’s not hard to see how our consumer behavior has slowly adapted to the social media world.

Facebook is slowly taking over our life.

We have time and again been sold the grand vision of “connecting the world to make a better place”. Indeed, this is a better way to sell emotional appeal to consumers. (Of course, Mr CEO Mark personally has to have that dream too.)

Peel off that packaging and in fact, it just means “I have a great ambition for global domination” in business language. I’m not kidding.

Right now, the stars are aligned for Facebook in terms of growth, but we know they would never want to be the hare that lost to the tortoise. That kind of ending only occur for complacent folks who tend to have a legacy mindset. (Ahem, (cough x2), I’m looking at you Yahoo.)

And it’s latest Q2 report has confirmed this.

Source: https://www.facebook.com/zuck/posts/10102994513263211?pnref=story

As a public-listed company and a media darling, Facebook is one of the main symbols of Silicon Valley. It is worshiped by millions of startup founders worldwide who tries to emulate its success, as well as many of the tech talents who are attracted by their open work culture, “smart community”, Silicon Valley prestige and not forgetting, the compensation/perks that comes with being one of its employees.

As usual, Facebook shares were up by 5.4% after they broke the news. Typical Wall Street reaction.

However, this is a knee-jerk response at most, in order to ensure correct market pricing.

Because even big companies can go bad in history. Hence, trying to please Wall Street investors is not a surefire way to predict its success in the future.

Just look at Yahoo — it certainly looks great on paper many years ago, but its valuation has fallen sharply until it was eventually forced to sell before its valuation dropped any further.

Looking at financial data may work for the short-term, but long-term wise, you almost can’t make practical sense out of it.

Here are 2 reasons that briefly explains why:

  1. Short-term re-pricing does not account for long-term prospects, especially for technology companies. Those who did that for Yahoo, they will now realize that this method is grossly useless. (Of course, I don’t think those Wall Street bankers are that stupid either. It’s just that they would probably prefer to churn reports that are ‘good enough’ quickly rather than get it ‘perfectly done’ — a perfect case of agenda misalignment.)
  2. While most reports give us a glimpse of the company prospect in the near term, they are in essence a sales material that tries to sell investors something called HOPE - a better company in the making. If a company is performing above expectations, they will make sure everyone knows it. If they are not doing well, then they will try to make it sound less disastrous. E.g. Yahoo’s top management created the fallacy of a “potential turnaround story” with Marissa Mayer, but it’s product offerings were never really innovating to meet new customers’ demands.

Nobody knows just how good the company is except for a close group of people who knows the operations of Facebook well.

Ok, this is common sense.

Still, a lot of people seem to forget this basic logic. Or rather, investors want to feel in control even if they may not truly understand the underlying business dynamics.

Maybe you will start thinking — “Hey, what do a 25 year old kid know about tech? Even if he does know something, he’s definitely not better than me”

Feel free to fire your thoughts at me. I do not expect everyone to agree with my opinion anyway, but I do appreciate good feedback though.

Well, I may be wrong too - nobody is always right anyway.

Nothing lasts forever. Even Facebook may become obsolete one day.

Building businesses that last through decades or centuries has been one of the favored target for founders. (Though in recent years, the mindset has shifted such that the startup ecosystem came to view unicorn status as the “Super Platinum status” of success.)

The old model of ‘prized businesses’ built to last can be seen as in the case of General Electric (GE), Chrysler, IBM, HSBC and many others that rode along the waves of the industrial design revolution. These are ‘giant cockroaches” that have survived the onslaught of economic booms and busts.

Software is eating the world. ~ Marc Andreessen

However, the rise of technology in the millennial decade brought about rapid changes in the business environment never see before, and will forever change the way how businesses are run. One can be a fledgling media darling this moment and 1 year later, be declared bankrupt.

Things are simply changing too fast in the technology market.

In mature markets, some of the younger generations whom were once star users of Facebook had already started leaving it in search of ‘cooler’ and more ‘hippie’ stuffs such as Snapchat. And I presume they will leave Snapchat as well when they too get tired of it one day.

Next, the older generations that seek to stay in touch with the younger generations will slowly leave Facebook too in pursuit of stalking the hipster young which seemingly are increasingly getting hard to communicate with in the virtual world.

After all, Facebook is successful because of its network effect, and what makes it rise to greatness could very well be the cause of its demise.

The rise of the next messaging app unicorn is one that caters to the emotional needs of the consumers.

I am sure Facebook knows this as well, that is why they are baiting for the longer term while they are still the market leader.

For many large corporations, trying to retain the title of market leader indirectly implies going into the waters of venture capital. That is akin to getting the holy grail when they seemed to have lost the “innovation spirit”.

They are utilizing it as a medium to understand changes in market trend and to work with newer players. Better yet, get them under their umbrella.

The insurance industry was one of the least disrupted sector, and insurance giants never were in the ‘accelerator program’ business.

Yet, now these guys want to be part of it.

If not, then these corporations probably see venture capital as a vehicle for diversification.

Among the list of notable corporate VCs are big names like:

  1. Salesforce ventures
  2. Siemens ventures
  3. Google ventures (now under Alphabet)
  4. Intel capital
  5. Johnson & Johnson innovation
  6. Rakuten venture
  7. GREE ventures
  8. Singtel Innov8
  9. and the list goes on…

(Okay, I have to admit, some of the famous VCs in the world have help spearheaded technology innovation, but well… that’s just some of them. Still, that does not change the fact that the primary business model of VCs is to make money.)

Rather than setting up a new “Facebook Ventures” with the aim to diversify investments or simply hedging against competitions as what many other MNCs do, Facebook simply adopted a different strategy.

It still do acquisitions, but what makes it different from the venture arm of other corporations is that every single acquisition they make has to be related to the central vision and improve the overall Facebook ecosystem.

This is Facebook, not Oracle. They do not acquire a product so its sales team have more to up-sell to their customers.

Facebook strategy is to bet its judgement in being able to predict and/or direct the future wave of technology and position it at the core, rather than wait and ride the next wave.

Building the new ‘Roman Empire of the millennium’

If there ever is one to describe, Facebook is the equivalent of the modern Roman empire under the rule of Caesar Mark Zuckerberg. It seeks to conquer new grounds and crush competitors.

Rome was not built in one day, and it probably would seem to be a dark horse in ancient history. Little would have thought it would rise to such a big power dominating the European world.

Compared to the other Mediterranean powers in their heydays, Rome was just a tiny little city in Italy, not exactly powerful. The Minoans and Phoenicians were the ‘Sea Kings” and “Sea Lords”, the Macedonians had Alexander the Great, and the Greeks collectively stood up against the might of the Persians.

And in history books, Rome was sacked multiple times.

If Facebook were the equivalent of the Roman Empire, then MySpace/Friendster could be the Greeks that eventually got swallowed up whole. Yet, the might of the Roman Empire consisted of not just the Greeks, but Egyptians (remember the Cleopatra-Octavian-Mark Antony story?), North Africa (after sacking Carthage) as well as Gallic territories.

Facebook will continue to expand and swallow up more territories in its global conquest, as long as they feed the strategic vision.

Let’s recall some of the initiatives and acquisitions that Facebook has done so far: (note: this is not the full list of their acquisitions)

  1. Instagram (acquired in 2012)
  2. Face.com (acquired in 2012)
  3. WhatsApp (acquired in 2014)
  4. LiveRails (acquired in 2014)
  5. Oculus VR (acquired in 2014)
  6. Pebbles (acquired by Oculus VR in 2015)
  7. Facebook for Work
  8. Facebook Live
  9. Aquila (& more internet-beaming drones)
  10. Artificial Intelligence (A.I.)
Source: Mark Zuckerberg’s post

If you have noticed by now, the 3 biggest acquisitions that Facebook made were WhatsApp, Instagram and Oculus VR.

All in the billion dollar range.

Many analysts and tech commentators have come to believe that Facebook’s M&A strategy are simply based upon:

  1. User growth
  2. Buy out the competitors or plan to kill it. (Twitter/SnapChat/Google+)
  3. Talent acquisition

In fact (for point 2), here’s what really happened when Facebook set out to destroy Google.

Carthago delenda est. Carthage must be destroyed!

These guys are not wrong about what they think about Facebook, but seems to me there is a missing piece of the puzzle somewhere.

So let me supplement that.

Facebook is super focused on user growth, and adding WhatsApp to its arsenal is like going on steroids.

Instagram could potentially make a dent in Facebook’s photo-sharing model but other than immense amount of users, it certainly does not seem to have any niche technology that is non-existent elsewhere.

(Oh, maybe the filters are great, but Snapchat has rainbow pukes too. And the showdown between Instagram VS Snapchat Stories showdown makes for a great drama.)

So, while trying to grow its user base, what would Facebook evolve into?

And the golden question — HOW?


One thing is certain, Facebook will get even bigger, and they have shown us a brief outlook based on their 10 year road map released during the recent F8 conference.

Source: http://newsroom.fb.com/news/2016/04/f8-2016-day-1/

And they will achieve that in 3 ways:

  1. Open up new markets (via product offerings and new geographies)
  2. Create a stronger ecosystem by entrenching users as deep as possible such that it makes user feel uncomfortable and too much of a hassle should they try to leave the whole Facebook ecosystem. The “Kill or Clone” strategy falls under this point.
  3. Pursue the next up-and-coming tech trend and be the market leader

Whatever how things go, it will revolve around Facebook as the central platform by which everything will be connected.

This leads me to think of a classic quote:

ALL ROAD LEADS TO ROME.

Short Term

Assuring the mass market that it is still relevant and pleasing Wall Street (investors) is a priority. And more importantly it has proven that its bet on LiveRails is yielding results. That will boost investors confidence.

Most people are still going to dive in straight for the stock price as a measure of how the company is doing, even if they may not hold any Facebook stock. And predict its future performance based upon the current financials.

Of course, nobody is going to quit Facebook immediately even if Facebook’s stock price crashes 20% overnight.

Life still goes on, you and I will still wake up and open up Facebook app first thing in the morning. We had already survived 2012, what’s there to fear?

At this stage, there is pretty much nothing groundbreaking to hear. Most of Facebook’s effort will be invested in R&D for the mid-long term, be it AI, hardware or other projects.

Probably some new features will be rolled out by the product management team, but bet it’s not going to be too-out-of-the-world. Maybe modifications to the video feature, maybe better search, or perhaps a UI design improvement.


Medium Term

If growth in its core markets had matured, then the only way for growth is to open up new markets. That is one reason it is aggressively courting India, though Free Basics did not take off as intended.

Speaking of social networking giants with US origins, only LinkedIn has been successful in penetrating the China market so far. While Twitter has tried to pursue China users to use it for global marketing reach, it had not really been anyway successful in getting domestic approval.

Facebook, or rather Mark knows it will not be an easy task, and he is taking the slow bait approach. From speaking Mandarin at Tsinghua university to running in China’s smog-ridden streets, his efforts deserves an applaud though it definitely takes more than that for Facebook to enter China. It will be an arduous process.

Facebook co-founder and chief executive Mark Zuckerberg, front right, running past Tiananmen gate, the entrance to the Forbidden City, in Beijing, on Friday. Credit: Facebook, via Agence France-Presse — Getty Images

Maybe nothing significant will change in the next 3 years, but while WeChat may have trouble taking on international growth, Facebook will have been 100% ready to make inroads into China in the next 5–7 years. (subject to changes in the US-China political relations and other conditions)

Twitter: Facebook’s social network competitor

If Facebook had thoughts of acquiring Twitter previously, it had already lost the appetite. Instead, it is now more determined than ever to kill off Twitter and grab its users over.

The initial skirmish — Facebook Live will take on Twitter’s Periscope in the battle for live-streaming of events. Even if Facebook Live may not seem to be quite as ready yet, its sheer user size and deep integration into user views will eventually pull it through in the long run as long as serious hiccups do not occur frequently and dampen users confidence in it.

If any, Facebook’s plan to be known as a place to search for mentions of current news is proof of a collision theory — as companies grow bigger, the likelihood of a collision course coming increases. And it’s probably going to be a zero sum game. Convergence between their products and market segmentation is bound to happen in order to expand market share.

Facebook will fight with Google, and maybe even LinkedIn.

Most people probably could not imagine Uber competing with Deliveroo, but it’s happening now. OK, maybe this sounds like some dark conspiracy that you see in movies, but that’s the inevitable truth.

Will Jack Dorsey be able to turn things around and ensure that Twitter remains a powerful competitor?

I have no answer to that, but I guess the scene of Facebook killing Twitter is not going to happen anytime soon. Twitter’s death will most likely be caused by its internal lack of strategic alignment between business benefits and user experience rather than impaired by an external party.

You see, while Facebook and Twitter are both known for being social network giants, their strategic directions are quite different from the start.

Facebook aims to connect users and ensure that every action of each user feed into the ecosystem. It operates a pull-n-push model.

Twitter aims to share information and ideas instantly and while it sounds similar to Facebook (on paper) in terms of tweet comments and updates, its real flaw lies in terms of a lack in engagement enthusiasm. Simply, it operates a push-n-pull model.

TL;DR: (Verdict) Facebook will take over Twitter when it is dying, but this is not the ripe moment yet.

The WhatsApp dilemma

By this stage, WhatsApp should have peaked out their growth rates and need to find a way to monetize it to justify the acquisition costs.

The issue here would be how to best monetize it and make it a sustainable business? Let’s start by looking into how apps typically make money.

Method 1: Subscription fee

Some believe by then, a very likely monetization strategy would be to start charging users a subscription fee.

The key idea is that “users will be so entrenched that they would not mind paying a dollar or two to use”.

After all, it is expected that with its obscene growth and tremendous user base, network effects alone will entice users to keep using the apps.

Yet, charging fees upfront can be a risky bet for Facebook even if it has a massive user base.

Unlike businesses, mass consumers like you and me have little incentive to continue with a specific messaging app except for the trouble of getting friends to jump ship together to another chat app.

But it’s still not that difficult though, given that we are now overwhelmed with a myriad of chat apps to choose from. Telegram will be more than glad to see new users coming aboard.

Doing this is akin to a show-hand situation — a very dangerous move indeed that could mean the death of WhatsApp.

Luckily, Facebook/WhatsApp’s press release has confirmed they will abandon subscription charging.

If not by subscription charging, then what other alternatives are there?

Method 2: Direct Spam Advertising

LINE corporation tried the advertising channel but the strategy backfired when users found the constant advertisement blasting too irritating. (At least their sticker characters proved to be a hit and brought in pretty good online and offline revenues.)

The figure in this chart holds the fact:

Source: http://www.slideshare.net/wearesocialsg/digital-in-2016/36-wearesocialsg_36ACTIVE_USERS_BY_SOCIAL

Direct advertisement seems viable but not good for the long-term. It simply drives user bonkers with too much of spam content.

Not to forget, Facebook business is also fueled by advertisements. It just does not make sense to have overlapping business models.

Method 3: Virtual Credits Power-Up

This concept is more commonly used in games and certain SaaS products operating via a freemium model.

The core idea is to offer a strong product that is free to hook users in, and once they become so addicted/reliant on it, they would be willing to charge credits for more powerful features.

However, trying to pull this trick off is not very viable for 2 reason:

First, it requires having a unique set of features that is not available in other chat platforms, and that is not easily “clonable” be others.

The second reason being that given the sheer size of existing and new entrants into this crowded market, almost every other competitor will be offering things free to attract growth.

Free is a term taken for granted.

Method 4: Associative Sales Driver

Ok, I admit this sounds like some alien jargon, but it is very simple. If a product does not drive revenue on its own, it has to support and drive sales of other products such that the overall synergy is equivalent or better than monetizing it as an individual product.

Analogy: Gamers will probably identify the associative sale driver as a healer/support unit that has weak offensive but overall, it increases the team’s combat power so that the offensive units gets even more powerful and kill enemy faster.

WhatsApp is going to be something like that.

And not to forget the forceful pluck-out of Facebook messenger into a separate app that should not come off as a separate event.

In fact, I strongly believe it is a re-alignment of strategic resources.

Facebook is a platform with games, groups and numerous external developers working on it, WhatsApp not so. In retrospect, WeChat had actually advanced further in terms of product offerings like mobile payment, integrated app services, social engagement and many other features.

Facebook will eventually follow/copy WeChat’s model in the future, and FB Messenger will transform into something like the “F-35 joint strike fighter” capable of handling a myriad of tasks, though it is not the best for dogfight missions. It’s capabilities is in integration and coordination. Possible uses range from e-commerce, marketplace store to reviews and AI extensions.

WhatsApp will then function as a “vacuum” that may not seem to be generating as much revenue on its own, but does a pretty good job at stifling and restricting potential competitors out to get users. The “good enough” strategy wins down the “slightly better” strategy.

Facebook for Business

Up till now, Facebook has focused on a B2C platform advertising model. And in due time, it will tackle the B2B segment as well.

As a vanguard campaign, “Facebook At Work” had been launched to take on Slack/Skype and any other similar messaging apps.

Analogy: If B2C market were burgers, than the B2B market will be pizzas that it want to eat next. I would like to see how this will turn out.

(I will be publishing a SlideShare on messaging apps in the upcoming series of TSI Research. More will be touched on this part.)

While it may not be able to dethrone rival Slack and other similar team productivity apps out there, it will still be able to get business users who already have legacy CRMs and ERPs that do not necessary integrate well with newer apps and communicate on a separate platform.

Simply, it replaces the unpleasant looking company home page on the intranet that dishes out company news. Well, most people do not bother reading them anyway.

And it does have one big advantage — a lot of users are already familiar with using it, and that saves up product on-boarding and training time.

Getting enterprise users in is their first move, and if they are successful at that, I suspect that they will take on another big rival next.

(Update: Workplace by Facebook opens to sell enterprise social networking to the masses.)

Challenging LinkedIn for Business (Professional) network dominance

Recode.net reported that Facebook was one of the parties looking at buying LinkedIn - which they suspected was party D.

By implementing Facebook At Work, this marks a move not just targeting Slack, but also revamping the impression that Facebook could be utilized as a both business branding as well as a professional connection platform. It is a two-pronged approach.

And if that report by Recode was true, it is not hard to see why.

Any features that LinkedIn have at present, Facebook can clone it. Even sending a message to a Facebook profile is much easier than LinkedIn’s Inmail feature. Not to forget that Facebook has more users than LinkedIn.

The only competitive advantage of LinkedIn is their user data that Facebook lacks, but it does not mean they cannot start building the database now.

Unlike Microsoft or SalesForce, forking out more than $2B for just the user data could be costly for Facebook with a much lower synergy outcome.


Long term

Whether chat bots will gain long-term traction or not, Facebook will still involve itself anyway. Just like Bitcoin, the real gem in here is the A.I. technology behind it.

I would not touch on this much as I am uncertain about AI myself, but the idea powering AI is to enhance user’s convenience when using the platform, and the numerous possibilities that comes with the advancement of AI.

Infrastructure Innovations

Source: Facebook

The establishing of the hardware lab is a mark of Facebook’s entrant into a new space out of social network.

This is necessary if Facebook is to remain leader in the next 10–20 years for 1 simple reason.

For any groundbreaking revolution to take place, it almost requires an upgrade in the infrastructure- a leap in innovation that strikes up a new wave.

The industrial revolution shook up things and killed the clipper ships; Google undertook building a strong infrastructure in search indexing and killed Yahoo; Apple with the iOS and smartphone and then RIP Nokia.

Maybe AR/VR is the next big thing, so here comes Oculus.

I even envision the revival of SecondLife with Oculus, but this time with real human images in VR via the Facebook platform.

Aha! We now have connection established between people in the virtual world.

Possible ambitious side projects

Maybe there will come a time that spells the end of app stores, but that will affect Google more than Facebook.

And if there is another arena I feel Facebook should dip its toes in, that would be having a strong mapping technology that gives users an option of a visualized approach.


Final words

Facebook is at its peak and not backing away from competitors.

In short:

Facebook is gonna catch em’ all.

As a matter of fact, what could derail Facebook is neither Google, Microsoft, WeChat nor Twitter. Sure, they will be major obstacles, but the real danger comes from the very foundation that Facebook was established. In other words, competitors only serve as a catalyst.

It almost happens every time in history. Empires rise, empires fall; companies grow big, and few decades later loses its shine.

It’s greatest enemy is itself. The question is, will it manage to avert the disaster in the future?

Rome has grown since its humble beginnings that it is now overwhelmed by its own greatness. ~ Titus Livius (59 BC — 17 AD)

Additional Note:

No matter how much Facebook tries to position itself in developing countries on connecting the world, it is still walking on muddy waters known as “the great survival game”.

Think about it, would the population in these countries care more about Facebook and how many “Likes” or “Shares” they can get when their basic livelihood is unstable. Day in day out, all they are concerned is how to bring food and more income for their families, much less talk about the luxury to buy a smartphone and data plan.

Unless Facebook can solve these problems, it will be walking on thin ice.

Maybe once in a while, a viral video will be created, people will take note and suddenly feel pitiful for the poor, and raised some donation campaigns of sort, but that’s as far as it can go. Just a once in a blue moon thing.

So objectively speaking, Facebook is only connecting the middle-income tier of these societies who have managed to overcome the basic survival hurdle and can do much more.

But there’s a twist to the story —if the economic situations in Africa is similar to that of emerging parts of Southeast Asia, which means feature phones are still pretty common, Facebook will be the internet. Lower income families may have a reason to use it by taking advantage of the platform as a marketplace area. If it helps people to increase their income, using Facebook is a worthwhile investment.

The bigger net is of course, if Facebook is one of the first entrants into this space, even if they do not get as much traction as other countries, by sowing habits into the local population, Facebook will be the market leader.