30/11/2014

PestAnalysisonFacebook

PestAnalysisonFacebook
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pestanalysisforfacebook
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facebookInc.(Facebookorthecompany)isasocialnetworkplatformwhich
enablesuserstoshareideas,opinions,picturesandactivities.
PoliticalFactor

Usersandgovernmentshavebeenexpressingprivacyconcernswhichcould
harmthecompanysstrategytouseuserinformationtodelivereffective

advertisement.Whiletheclassactionlawsuitfiledagainstthecompanycould
potentiallyimplydamagesofmorethan$15billionifsuccessful,theclaimants
couldstifleFacebooksabilitytocollectdataaboutitsusersandhinderitsability

togrowadvertisingrevenues.Similarconcernswereexpressedinother

countriesaswell.Forinstance,Germandataprotectionofficialalsowarned
FacebookinvestorsduringitsIPOthatthesocialnetworksoperational

performanceisbasedonpracticesthatbreachEuropeanprivacyrules.
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PestAnalysisonFacebook

Inadditiontothelegalaspects,Facebooksuserscontinuetoregardtheplatform
asa privatespacewhichcouldlimitthecompanysprospects.Inasurvey
conducted,forinstance,morethan50%ofrespondentssaidtheyfeltnotsafeat
allusingFacebooktomakepurchases.Excessiveadvertisingorprivacyfears

couldleadtoamassexodusofusers,whichthreatensthegrowthprospects.
EconomicFactor

Facebookhasovertheyearsrecordedstronggrowthratescomparedtoits
peers.ThecompanysrevenuesinFY2011grewby88%comparedtoFY2010.

TherevenuesgrewataCAGRof119%during2009 11.Googlesrevenues
increasedby30%inFY2011anditsrevenuesgrewataCAGRof27%during
200911.Therevenuegrowthrateshighlightthecompanysinherentabilityto
drivegrowth,Facebookbeingthemarketleaderwithstrongpotentialina
relativelyunderpenetratedmarketofsocialnetworkadvertising.
Facebookalsoenjoyslowexpensebasewhichhasenabledittodrivehigher
marginscomparedtoitspeers.InFY2011,thecompanysoperatingmargins

were47.4%andnetprofitmarginswereat18%.C omparatively,Googles
operatingmarginsduringFY2011were30.9%andnetprofitmarginwas25.6%.

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PestAnalysisonFacebook

Highmarginscomparedtopeersindicatebetteralignedcoststructureat
Facebook.Thecompanywillbewellpositionedtosustainlowadvertisingrates
duetoitslowexpensebasewhichwillprovidecompetitiveadvantage.Thisisof
particularimportanceamidthedoubtsofeffectivenessofsocialmediaads.The
companywillbeabletocompetebettergivenitslowprice.
Facebookalsoenjoysstrongcashflows. Thecompanysoperatingcashflow
margininFY2011was41.7%whichishigherthan38.4%inGoogleduringthe
sameyear.HighoperatingcashflowmarginatFacebookreinforcestheearnings
qualityasitindicatesthatthecompanyisabletoeffectivelyconvertsalesinto
cash.Furthermore,thecompanyconverted12.6%ofitssalesintofreecashflow.
Theratiooffreecashflowtosalesisameasureofhowmuchofacompanys
revenueistransformedintocash.Thecompanyshighcashflowgeneration

capabilityindicatesthatthecompanyenjoyshighfinancialflexibility.Facebook
facesseveralchallengesintermsofmonetizingitsreachanddriverevenues.
Thecompanysfreecashflowpositionenablesittoinvestinexpansion

inorganically.Facebookwillbeabletofunditsexpansionplansatfeasiblerates.
SocialFactor
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PestAnalysisonFacebook

FacebookforayedintomobileapplicationmarketwiththelaunchofAppCenter
andtherebytookthefirststepintomonetizingthemobileuserbase.AppCenter
isanewplaceforpeopletofindsocialapps.TheAppCentergivesdevelopers
anadditionalwaytogrowtheirappsandFacebookprovidestheinsightsthat
facilitateappstobesuccessful.TheAppCentercanbeaccessedontheweb
andintheiOSandAndroidFacebookapps.TheAppCenterdoesnotsellthese
mobileappsbutratherdirectsuserstoappsonAndroidandiOSstores.
Facebookdoesnotearnrevenuesastheoperatingsystemownersaretheonly
playersthatcansellapps.However,Facebookwillpromotesocialappsthatuse
FacebookloginwhichisarequirementtobelistedontheAppCenter.
Consequently,Facebookhasmoreusersutilizingitsnetworkevenifitisjusta
loginfeature.ThisfurtherenablesFacebooktocollectmoredataonitsusers
whichinturnenablesthecompanytofurtheritscoretargetedmarketing

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PestAnalysisonFacebook

proposition.Inaddition,Facebookalsointendstosellnonplatformspecificapps,
orHTML5apps.Facebookisestimatedtotake30%feeforappsales.Through
AppCenter,thecompanyintendstoforayintothedomainsofardominatedby
operatingsystemowners.Facebookisencouragingdeveloperstobuildappsfor
theplatformagnosticstandardofHTML5insteadofforproprietaryoperating
systems.Sofar,mobileplatformproprietorshadaccesstouserdataandearned
therelatedadvertisingrevenues.ButthroughHTML5appsFacebookcandirect
theuseractivitydatatoitself.WiththeAppCenter,Facebookisexpectedtobea
forerunnerincreatingamobilesocialexperience,apotentialmarketthatis
largelyuntapped.
TechnologicalFactor
Facebooksadsareyettobeprovedforeffectivenessduetotheinherent

businessmodelthatthecompanyadopts.Googleiswellpoisedtocapturethe
onlineadmarketwhichFacebooksignificantlylacksin.Facebookrelieson
displayadswhichareknowntogenerallyhurttheuserexperience,andarenot
asefficientatproducingrevenues.Forinstance,accordingtotheestimates,
Facebookmakesabout1/10thofGooglesrevenueseventhoughtheyhavetwo
timesthepageviews.Furtheres timatesindicatethatGooglessearchrevenues
perpageviewsareat100 200timesthatofFacebooks.
Furthermoretheestimatesindicatethattheaverageclickthroughrate(CTR),a
wayofmeasuringthesuccessofanonlineadvertisingcampaignforaparticular
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PestAnalysisonFacebook

website,ofanadontheGoogleDisplayNetworkis0.4%whichisestimatedto
beabout10timesashighasthetypicalFacebookad.Thecomparisonsuggests
thatGooglecurrentlyoffersadvertisersmorevalueintermsofbothoptionsand
results,incomparisontoFacebook.ThisisbecauseGooglecapturesaudience
withpurchaseintent.Googleearnsthroughadsdisplayedwhenpeoplesearch
forsomethingtobuyorhire,andalsoitdoesnotneedtodrivethedemandbut
ratherfocusesmoreonchannelizingtheexistingdemand.Ontheotherhand,
Facebookhaspositioneditselfasaplatformforsocializingwithfriends.This
aspectreducestheeffectivenessofadvertisinginFacebook.Thequestionable

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PestAnalysisonFacebook

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PestAnalysisonFacebook

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