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1 Strategic Analysis of the Internationalization of the Social Network Facebook sous la direction de Xavier Pavie

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3 Strategic Analysis of the Internationalization of the Social Network Facebook

4 The Institute for Service Innovation and Strategy ESSEC Business School, founded in 1907, is one of the world s top management schools. ESSEC upholds a tradition of academic excellence and continues to foster a spirit of openness in the fields of economics, social sciences and innovation. ISIS, The Institute for Service Innovation & Strategy, is a research center within ESSEC Business School. Created in January 2004, ISIS aims to generate, stimulate and promote innovation in the 21 st century knowledge and service economies, with a view to contributing to responsible growth and organizational competitiveness. The activities of the Institute are based on researching the mechanisms of innovation, drawing from company best practices, assisting in organizational and managerial change, and developing measurement instruments for performance and for the creational capabilities of teams. ISIS leads an international network of economic and university partners with a common goal of cultivating a knowledge base and building a structured expertise. Through continual interactions with economic leaders, a community is created around the reflection, diffusion and exchange of experiences on the challenges and the methods of innovation in the service economy. The Matins de l Innovation conference series, as well as other events, enable this community to collaborate on the challenges and the methods of innovation in the service economy. essec-serviceinnovation.com The Innovation & Society association aims to encourage and study the innovator s social responsibility, in both a physical and moral sense. To achieve this aim, the association brings together researchers, teachers, economic leaders, public affairs representatives, and members of civil society to collectively consider the different constituents of innovation; the mechanisms and the stimulation of innovation; the evaluation of the economic, social and societal consequences of innovation; and to research and educate for innovation through events and working groups. The association ensures complete respect of each individual s personal principles and the diversity of opinions. innovationandsociety.com

5 Strategic Analysis of the Internationalization of the Social Network Facebook

6 Under the direction of Xavier Pavie An expert in operational, strategic marketing and innovation with around 15 years of experience in major multinational industrial groups, Xavier Pavie is now a researcher and lecturer in innovation and strategic management at ESSEC Business School. He is the Executive Director of the Institute for Service Innovation & Strategy. He teaches and is also responsible for different undergraduate, graduate programs and executive education programs. This publication is from the Cases and Applied Research series.

7 CONTENTS FACEBOOK: ONCE AGAIN AND FOREVER? Facebook and the First Stages of its Internationalization How it started and spread Business model Success and limits of the internationalization of Facebook The Internationalization of Facebook in Europe Facebook s influence in Europe Internationalization process of Facebook in Europe The Internationalization of Facebook in Asia The development of Facebook in Asia The Internationalization of Facebook in Latin America The development of Facebook in Latin America Facebook and the Other Networks Professional networks Community social networks The Facebook of Tomorrow The future of Facebook What About the Question of Responsibility for Facebook? Confidentiality policy Facebook and Risk Facebook: an exhibitionist media? How would Facebook survive if it had to take a step backwards? THE KEYWORDS OF FACEBOOK S FUTURE: INNOVATION AND RESPONSIBILITY... 51

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9 FACEBOOK: ONCE AGAIN AND FOREVER? Each day dozens of lectures, articles and books on the phenomenon Facebook are published around the world. They highlight its lightning success and its economic value as well as the youth of its inventor. So why should we join the already abundant literature on this subject? How can we avoid clichés while examining the case of this company? This publication is firstly distinguished by its origin: it is a compilation of students projects. Throughout an ESSEC Business School course in Globalization and Innovation in Services, the students had to reflect on the internationalization strategy of Facebook. What is the role of innovation as a vector of its internationalization? What obstacles did it come up against? What are the opportunities? The objective was to increase students awareness of globalization and innovation issues through the analysis of a service firm that appealed to them and with which they were familiar. Furthermore, it was also a question of opening their minds from that of a western perspective to one of an economically multipolar world. To put it in other words, the aim was to underline the fact that the globalization of services is strongly influenced by cultural divergence and much more so than manufactured goods. In this case specifically, its significance was to highlight that Facebook is not the world, that its western imperialism does not necessarily guarantee its global hegemony. From India to Japan, and from Brazil to Russia, Facebook is not the leader it seems to be (see the world s map of social networks below). Strategic Analysis of the Internationalization of the Social Network Facebook 9

10 Strategic Analysis of the Internationalization of the Social Network Facebook Weekly students presentations gave rise to this short synthesis that we have intentionally changed as little as possible. This inevitably has consequences in terms of style, argument and design, as the synthesis of an article written by forty-hands is not an easy task. However, we humbly hope that this common piece of work will contribute to the development of the theory of the role of innovation in the context of the globalization of services, and to the understanding of the particular issue of the international expansion of the social network Facebook. This synthesis breaks down into seven chapters. The first one focuses on the initial development of Facebook and the beginning of its globalization. Several different continents are successively analyzed: Europe, Asia and Latin America. The fifth chapter deals more specifically with the other types of social networks which compete with Facebook. These networks are based on professional networking or specific themes such as art, sports, etc. The next chapter raises some questions about The Facebook of tomorrow. The logic is to 10

11 imagine the path of development the social network could follow if it wished to continually expand, and particularly the types of innovations it should implement. Finally, before the conclusion, there is an exploration of the question of Facebook s responsibility: this last chapter is of fundamental importance in view of the growing power that Facebook wields with its database and the influential role it can play in the case of political debate or conflict... We would like to warmly thank all of the students in the course who committed themselves to this endeavor: - Sendhil BALAKRISHNAN - Diane BOUSTANI - Antje BUDZANOWSKI - Mathieu CHADAIL - Baptiste CRÉTEUR - Amaury DE MÉNONVILLE - Mathias JEANNIN - Rayan KESROUANI - Ken L HÉRITIER - Luc-Antoine LENOIR - Naomi NICOLAS KAUFMAN - Maïlys PAULETTO - Rahim RAWJI - Fanny SAULAY - Noémie TACK - Estelle YAFI - Thierry ZABLITH Strategic Analysis of the Internationalization of the Social Network Facebook 11

12 1. Facebook and the First Stages of its Internationalization Strategic Analysis of the Internationalization of the Social Network Facebook How it started and spread When Marc Zuckerberg first created the site in 2004, it was only intended for use by Harvard students and it was subsequently extended to students in other Ivy League universities. To ensure that the users were students of these Universities, the website required them to check-in with their address. At that time, the limited access to the website was seen as one of its advantages. Yet, in 2006, the site opened worldwide to every person with an account. Innovation and internationalization went hand in hand. Losing its exclusivity feature, the site had to develop new features to retain appeal. The social aspect of the website was thus enhanced with Mini Feeds and News Feed which give information about the news of one s friends as well as with the feature that enabled the sharing of web pages, videos and links. However, the greatest innovation at the time of its internationalization was of a different nature: the creation of a simplified interface for the creation of applications and its open access to software developers. Due to this, Facebook benefited from the free upgrade in the attractiveness of the site and also of traffic to the site. These applications also allowed developers to become known and, some of them made a fortune this way. More than just a simple web site, Facebook thus became a veritable ecosystem, both from a user and an economic point of view. The development of features by Facebook and applications 12

13 by other companies strongly contributed to the increase in the number of users and in the average time they spent on the platform. In terms of games alone Facebook has 290 million players who spend a total of 4,406 virtual years playing every month. Games and entertainment were closely linked to the development of the platform between 2006 and 2008; yet the site became too complex and started to lose focus. In response to this, Facebook isolated the threads while securing the system. Today, Facebook offers a personalized Web experience. While Google stands out as a gateway for internet searches, Facebook stands out as a gateway for sharing and providing information - a social gateway. The buttons Like and Share connect the users to the information. In particular, it allows the site to sell targeted advertisements, which generate a large amount of income similar to Google, which relies on Adwords for its income to ensure that the actual access to the site is free The success of Facebook lies in its adaptation and improvement which led to a growing level of incremental innovation aimed at meeting the desires of the users. According to certain analysts, the extremely rational personality of Zuckerberg, whose understanding of others is on a par with his contempt for them, has strongly influenced his success. Incidentally, the portrayal of his character in the movie The Social Network echoes this character analysis. Strategic Analysis of the Internationalization of the Social Network Facebook 13

14 Strategic Analysis of the Internationalization of the Social Network Facebook Business model Facebook did not endeavor to become profitable from the very beginning of its development. The developer was in disagreement with the financial director on this issue which led to the financial director being sidelined. It is only since a critical mass of users was reached from the site generating sufficient traffic that the user flow was transformed into profit through several channels: mainly advertising but also through the sale of data communicated on the website by the users. This late launch of money-making activities did not prevent Facebook from reaching profitability less than six years after its creation. The increasing importance of Facebook in the everyday life of its users is widely covered by the media; this strengthens the attractiveness of the site and, consequently, the traffic. When used to make money, the generation of user traffic offers opportunities to finance the development of new features and innovations, thereby reinforcing the attractiveness of the site. Success and limits of the internationalization of Facebook Facebook allows you to be friends with the whole world. Both extremely remote contacts and intimately close relations can thus be added to the friends of a user without any distinction. In this protected universe, it is easy to measure one s popularity, to manage one s contacts, to communicate, to exchange. Facebook is a service that has been standardized and developed to suit a generation rather than for a country or a cul- 14

15 ture in particular; however it faces some limits. The freedom of expression and opinions are not perceived in the same way in all countries and all cultures; moreover, important legislation differences in certain countries could slow down its development. The concern with data-sharing compels some users to unsubscribe. This developing trend of unsubscription remains marginal however. Finally, Facebook is compelled to innovate to maintain its competitive advantage and prevent users from becoming bored. Numerous major sites have lost their appeal and influence over time; this could happen if Facebook stopped giving users what they are looking for. Up to now, following the evolutions of the web and being actively involved has been enough for Facebook to become a major actor of the Internet. However nothing is a given in a perpetually changing environment. 2. The Internationalization of Facebook in Europe Facebook s influence in Europe In Europe, Facebook boasts more than 140 million users: its market penetration stands at approximately 21 % of the population 2. However, the penetration of Facebook is heterogeneous across different countries. While Facebook seems to have become a must-have in countries such as the United Kingdom Strategic Analysis of the Internationalization of the Social Network Facebook 2 Rate based on the the whole population and not on the number of internet-users. 15

16 (27,8 million users), Turkey (22,9), France (19,4) and Italy (17,1) which are the world s top-ten in terms of the number of users local, niche social networks remain very active, in particular in Eastern European countries. Thus, Facebook has tough competition to face in order to capture more Internet users. This is particularly the case in Poland, Hungary, the Netherlands or Russia, where local social networks are more popular. Strategic Analysis of the Internationalization of the Social Network Facebook Internationalization process of Facebook in Europe Due to a delay in the translation of the user interface the Facebook site was only available in English during the year 2007, so Facebook recruited de facto first users within Englishspeaking countries. There was a dramatic uptake in Scandinavian countries and in the United Kingdom in particular. The year 2007 also corresponded to strong growth for all social networks, which were relatively novel at that time. Between January and July 2007 the number of unique visitors on the various networks in Europe exploded (+ 24% for MySpace, + 62% for Bebo, + 423% for Facebook). Facebook seems to have succeeded in successfully taking advantage of this global trend, in particular by offering a key set of services and features which were only available on a number of isolated sites at this time. At the end of 2007, the rate of penetration of early adopters (the United Kingdom and Scandinavia) was situated between 5 and 8% of the total population, which was still relatively low in itself, but the growth rates were very high 16

17 In February 2008, a first translation of the interface Facebook was proposed in Spanish, then one month later in German. This development symbolized the entrance of Facebook to a new stage of its internationalization process; the site could compete on equal terms with the local sites 3. The English language had indeed signified a barrier for many Europeans. In October 2008, Facebook announced the creation of its European headquarters in Dublin which was intended to centralize technical support, commercial and sales operations. This announcement shows the determination of Facebook to control its international development, and it is also a real symbol as Google and ebay, among others, are also based in Dublin. Facebook s European development characteristics The first characteristic of the development of Facebook was the translation of the interface. The translation is made possible through the cooperation of Internet users who propose translations which are then subject to a public vote. The most popular translation is selected. This collaborative construction of the site is an advantage for Facebook: it creates a proximity to local cultures by involving local users, who thus become more engaged and loyal to the site. Today, the site is available in 76 languages. The second characteristic of the international development of Facebook stands in acquisitions, which constitute an offensive development strategy. This strategy represents the optimal Strategic Analysis of the Internationalization of the Social Network Facebook 3 Rate based on the whole population and not on the number of internet users. 17

18 means to develop and improve the features of the site and to respond rapidly to competition, while ensuring low R&D costs. It is also an opportunity to capitalize on brains and talents. One of the most striking examples is the acquisition of Friend- Feed for 50 million dollars in August 2009; the goal was to compete with Twitter and to position Facebook on the micro blogging market, and which established a working relationship between Facebook and the founders of Gmail and Google Maps (founders of FriendFeed). Strategic Analysis of the Internationalization of the Social Network Facebook The third characteristic of Facebook s development is its protection, which is a more defensive strategy. An example of this is the repurchase of the patents of Friendster last August for 40 million dollars, which enabled Facebook to ensure its legitimacy in the face of other networks, thus protecting its intellectual property and limiting the developmental opportunities of its competitors. Finally, Facebook benefited from local regulations which slowed down the competition this arose from circumstance and opportunity rather than strategic planning. This was the case in Germany in particular where the laws on the protection of private property are much stricter than those promulgated by the European Union. The local social network, StudiVZ, was penalized in its development and its creativity because of laws which did not apply to Facebook because of the safe harbour agreements. Thus, in Germany, Facebook arrived too late on a peculiar market which is quite sensitive to the respect of private life. The market was already conquered by VZ Network 18

19 and Facebook could not develop because of the prejudice of users against facebook that it was not safe. Finally, the translation of the interface and the attractive features of the site diverted the users from VZ Networks to Facebook. Concentration of the competitors in Europe The competitive environment for Facebook in Europe is heterogeneous: there are countries where Facebook is still involved in a fierce contest with its local competitors, with only a marginal advantage (Germany, Spain), and other countries where, even if Facebook recruited some members, a local social network still remains dominant (the Netherlands); finally there are countries where Facebook seems to have totally failed its internationalization strategy (Russia). In Spain, Tuenti 4 (8 million members), the country s local social network, lost its advantage to Facebook in terms of the number of users (11.4 million). Nevertheless, Spanish people seem quite attached to their local social network, particularly young people. If we examine what accounted for the success of Tuenti in the past we can hypothesize the reasons for this success: profiles on Tuenti are safer and contain better information because it can only be joined on invitation. Furthermore, a person s private life is better respected on this website because the profile page of a user of Tuenti cannot be found by Googling the user. It is also interesting to note that Tuenti is open to international expansion, in particular to Latin America where it could capitalize on the know-how acquired in Strategic Analysis of the Internationalization of the Social Network Facebook 4 A future alongside Facebook, Financial Times. 19

20 Strategic Analysis of the Internationalization of the Social Network Facebook Spain and of its investor Téléphonica. In Germany, Facebook (15 million members) experienced difficulty establishing itself, because of the loyalty of the Germans to their national network, VZ Netzwerke (including Germany, Austria and Switzerland, around 16 million members). VZ networks gather users on three platforms today: StudiVZ became popular among students; SchülerVZ, among younger students in high school; MeinVZ for young workers. Nevertheless, because their ability to innovate is constrained by the strict legislation and are thus perceived as being more and more old-fashioned compared to Facebook, VZ networks are being outpaced by other networks. Moreover, even if its development is still in the early stages, the threat Facebook posed to private life limited the penetration of the website. Today, despite the boycott incentives coming from the government, internet users seem to have accepted the risks. Another factor is also the fact that VZ networks are targeted at German speakers, and thus limit the possibility for worldwide friendships in comparison to Facebook. In the Netherlands, the local social network Hyves (10.6 million members) remains strong compared to Facebook (2.9 millions). The site is strongly integrated into the everyday life of the Dutch people, particularly with the feature of an on-line payment system which allows users to book evenings in partner bars Finally, in Russia, Facebook (2 million users) seems to be a failure compared to two local competitors: Vkontakte (75 million users) and Odnoklassniki (45 million users). This defeat could 20

21 be explained by the fact that Facebook entered the Russian market late, via the translation of its interface in Russian, but also by the specific use of this type of social network by the Russians, which does not correspond to what Facebook offers. Indeed, Internet users like to view movies translated into Russian which are available via streaming on the other social networks (Vkontakte). The failure of Facebook would thus come from a missing innovative service (streaming). The recruitment of new members seems unlikely to happen, given the fact that Russians are already widely connected and registered on local networks and that they are not used to connecting to people from all over the world. Conclusion The growing number of Facebook users in Europe is striking, with an average growth rate of + 84% between January 2008 and January 2010, from 24 million to more than 140 million users. The penetration of Facebook is nevertheless heterogeneous, and therefore has to be analyzed country by country. The reasons that account for this situation are diverse. In countries where Facebook was a success, the timing seems to have played an important role. Indeed, Facebook was the first network to offer a platform of services that were already available on other independent sites, and was the most advanced social network of its time. It benefited from the first entrants on the market, in addition to the offer of a new and rich network. In countries where Facebook has eventually taken the lead in spite of strong resistance from the local social Strategic Analysis of the Internationalization of the Social Network Facebook 21

22 networks, it seems that internet users are remaining attached on to their local social networks to cater for their unique culture, as well as a certain connection (Netherlands) and a strong feeling of membership (Spain). Finally, Facebook seems to have failed in the East, at first by neglecting the language barrier, and then by offering services that were not well adapted to the wishes of the local population. Strategic Analysis of the Internationalization of the Social Network Facebook 3. The Internationalization of Facebook in Asia The development of Facebook in Asia Facebook has 59.6 million visitors in Asia today, which represents approximately 15% of all world users. Indonesia is fourth in number of Facebook users (following the United States, United Kingdom and Turkey). In this country, approximately 8% of the population and more than 63% of internet users are members of Facebook. Hong-Kong ranks first in terms of penetration rate in Asia with 40% of its population using the network. According to Comscore, in February 2010, one Internet user out of two visited a social network in Asia Pacific, connecting an average of 15 times a month, with an average connection time of two hours and a half. Similar to other sectors, the continent of Asia remains a highly fragmented market in terms of Facebook use. In order to understand the key success factors of Facebook on this continent, the differences between Asian countries and then the competitive advantages and the characteristics of Facebook s competitors will be analyzed. 22

23 First of all, Asia is characterized by a significant unexploited potential. The percentage of Asian accounts active every week in the total number of accounts active every week worldwide went from 5% at the beginning of 2009 to more than 15% in November, Besides, the rate of penetration in Asia is only 3% in comparison to 41% in North America. These two pieces of information reveal a strong potential, and the number of users is still limited by the percentage of the population having access to Internet. In general, Asia is characterized by a high rate of internet use amongst the population aged 18 to 25. In fact, they represent 44% of the users in Asia, 33% in America and even less in Europe. However, disparities in the Asian market are apparent and two categories of countries can be identified. In emerging countries, students represent the chief drivers of growth: they account for an average of over 40% of users. In the developed countries, the growth drivers are the adults/professionals who represent approximately 40% of users. Amongst the possible explanations, we can tentatively conclude that a population boom has created a more significant proportion of students in the emerging countries; and in the developed countries active adults use Web 2.0 more frequently. In some countries, the growth rates of Facebook s user numbers have been phenomenal. For the year 2009 in particular, user rates increased by over 4,700% in Taiwan, more than 2,000% in the Philippines, 1,537% in Indonesia and approximately 1,000% in Thailand. Indonesia is a small country for Facebook as far as the number of Internet users (10%) is concerned. However, this figure Strategic Analysis of the Internationalization of the Social Network Facebook 23

24 Strategic Analysis of the Internationalization of the Social Network Facebook takes on a new significance when the penetration of Facebook among those who have access to Web is considered. The Indonesians represent the world s top users: more than 91% of Internet-users have an account on Facebook. The prevalent use of Facebook by the year olds and numerous promiscuity scandals between celebrities led some imams to launch a fatwa against the Facebook site. However, facing the opposition of a considerable number of young people who considered this to be an infringement of the modernity of their country, the imams chose to tolerate the use of the site, while proposing Muslim Rules of Use. Similar to a lot of blogs or sites such as YouTube and Twitter, Facebook has been blocked by the Chinese government since July However, the social networks are rapidly growing: there are 210 million users of social networks in China (20 millions in France), a growth of 20% of the market between June 2009 and June 2010 with hundreds of new sites created. The most famous social network sites are 51.com (14 million unique visitors per week), Renren (9,5 million), Kaixim001.com (7 million). Moreover, the Chinese government is taking an active interest in social networks, which are considered a threat to national security. The government plays an important role because it supports local actors. In return, they have to open their system to the control and to the censorship of the State. Consequently, sensitive subjects such as Ouïgours and Tibet are systematically filtered by the State. Facebook has not succeeded in breaking into the Japanese market and remains a marginal player on the national market 24

25 of social networks. In spite of a presence on the market for more than two years, in October 2010, Facebook counted a mere 1.33 million users relative to more than 21 million for each of the market leaders (Gree and Mixi). Facebook actually arrived in fifth position after Twitter. The main reasons accounting for Facebook s difficulties in Japan are the fact that the local networks allow users to use nicknames while Facebook does not welcome this practice, and secondly, the fact that contrary to Facebook, Japanese sites actually indicate who visited the profile of a person (which provides the owner of the profile with a reassurance regarding the people that have had access to his information). In addition, Mixi allows users to leave messages more freely, while remaining anonymous (thanks to the nicknames). Finally, one can find a person on the Japanese community sites only by carrying out a specific search. It is a way of monitoring people s access to the profile of members. Orkut- Google s social network - and Facebook are leaders of the community sites in India. In June 2010, for the first time, Facebook dethroned Orkut who was the leader with 20,8 million unique visitors a week versus 19,9 million for its competitor. Contrary to the Japanese population, Indians consider Facebook to be a site that protects their private life better than its competitor Orkut. When Facebook entered the Indian market, there was no private space, everything was public. Moreover, according to the Indians, Facebook design offers a professional image while that of Orkut is perceived as amateurish. Finally, Facebook s number of partner sites in English is more Strategic Analysis of the Internationalization of the Social Network Facebook 25

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