Porter’s five forces analysis has become a pervasively adopted framework for industry analysis, which can be used to examine the competitive intensity and attractiveness of a market or a company. The social networking companies gradually come into the spotlight of the business world in recent years, which was especially featured by the significant event of Facebook’s IPO on May 18, 2012. In such circumstances, it will be extremely interesting to apply the five forces analysis to gauge this giant and even unfold some hints that why this star company has been struggling in the stock market since it went public.
Although it has been a tough time period for Mark Zuckerberg, the more transparency and disclosure of the company’s financial as well as operational information available for the capital market provide us much more useful resources to put Facebook under our microscope of five forces analysis. The Bargaining Power of Customers (Strong) With regard to customer aspect, it might be taken for granted that we are referring to billions of active users on this website.
But when we look further into this company and its product, the surprising truth is that the users and their personal information are actually the product rather than the customer, at least from the financial standpoint. Advertising composes 84% of the company’s total revenue, which was $1. 18 billion for the second quarter of 2012 according to its official financial reports. Then we found out that the advertisers are Facebook’s real customers, and what confronts this company is a fiercely competitive market.
Although Facebook declared that 70% of its advertising campaigns resulted in a return on ad spend of 3x or better, and 49% of campaigns showed 5x or better, Facebook adverting is still generally undervalued by the marketers given the factor of being the last ad viewed or clicked before a conversion outweighs all other criteria, and Facebook advertising usually comes into play earlier in the conversion funnel. In addition to the low cost to switch to other advertising media, there’s no wonder that the advertisers have gained relatively strong, if not dominant, bargain power with continuously debating the value of Facebook advertising.
The Bargaining Power of Suppliers(Medium) Compared to the customers’ bargain power, Facebook is standing at a regnant position with thousands of common-sense suppliers playing in its arena. It may be noticed that I use common-sense to categorize such kinds of suppliers providing hardware, software, and services Facebook need to run their business, like Zynga. On the other side, it might be interesting to scrutinize another set of suppliers in terms of Facebook’s product, that is, the users of the website.
Yes, those are the users who establish their social network and feed in their personal information, which make up of Facebook’s product and determine its success. In accordance with Facebook’s operational highlights of second quarter 2012, monthly active users on its website have notched 955 million as of June 30, 2012, which was an increase of 29% year-over-year. But taking the whole social networking market and even the internet into consideration, it will be difficult for Facebook to maintain such steady increase of its user base.
Actually, the increase pace has gradually slowed down in recent quarters, observed by multiple sources. Additionally, the users with more education and experience have been reluctant to share excessive personal information on the website to protect privacy and prevent from possible solicitation. After all, Facebook still serves as the mostly visited social networking website and is therefore in demand of diversified supplies, so we could regard the bargaining power of suppliers as medium level. The Threat of Established Rivals(Strong)
As discussed, the social networking companies are facing a fully competitive market. Besides Facebook, there are several other main players, including LinkedIn, Google, Yammer, Myspace, etc, as well as hundreds of small websites focusing on specific segment or providing general social networking services. For example, LinkedIn has built up a professional network into a can’t-miss destination with millions of member professional. The year-over-year revenue growth for LinkedIn was very remarkable at over 80% for the last two years, and it has continued to see strong revenue growth beating analyst estimates.
LinkedIn has shown an even more robust business model compared with Facebook. Rather than solely relaying on advertising income, LinkedIn also has considerable revenue from job postings and subscriptions, which help the company to grow its revenue at a notable rate and avoid stagnancy. In this sense, Facebook may have more struggles to improve its user experience and spur revenue growth especially compared with its competitors, and the threat of established rivals is absolutely strong. The Threat of New Entrants(Strong)
For new entrants to social networking market, the technical barriers are barely insignificant and Facebook’s most advantage might be its current huge user base. But such advantage is also easy to be mimicked by other Internet giants who already have stable visitor stickiness like Google. Google launched its social networking and identity service, Google+, in June 2011. As of September 2012, it already has a total of 400 million registered users of whom 100 million are active on a monthly basis.
Instead of presenting as a social player consisting of not just a single site, Google has been able to provide an overarching layer integrating many of its current online properties. Illustrated by Google’s story, the threat of new entrants to social networking market for Facebook is quite strong and even thrilling if we recall the ever-changing world of internet business. The Threat of Substitute Products(Weak) Finally, the threat of substitute products to social network website including Facebook is not obvious yet.
Facebook’s current user base still shows a strong stickiness and its continuous innovation also help it satisfy the user’s social networking needs well. But considering Facebook is essentially a social network that allows users to stay in touch with their friends, there are so many products or services could potentially address it. Especially if we observed the booming market of mobile networks, services like Buzzd, Twango and Dada may grow up to be a real threat in the near future. Overall, the threat of substitute products is medium based on the analysis above.
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