case competition entry (facebook)
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1
Facebook Case Competition
Bradley KirbyPooja Chandramouleeswaran
Yifei ZhangAndrew GrilloRyan Volatile
2
Executive Summary
Facebook should charge top developers for access to APIs in order to increase market value by 20% in the next 5 years.
Charge for APIs
Facebook is a necessity to developers.
Facebook has market dominance.
Facebook has pricing power.
Cumulative market value increase of $15.8 billion, 30% by 2017.
In the long run, increase of $87.5 billion, 68% by 2024.
Developers Facebook Pricing
3
3rd Party Application
s
PlatformAPI
Source: Team Analysis
An API acts as an interface between two applications
API
Developers
Impact
Pricing power
APIs are a free way that developers use to build using the Facebook platform.
4
Facebook’s APIs allow 3rd party apps access to its data and functionality.
API
Developers
Impact
Pricing power
Avoid account creation
Source: Team Analysis
Promote on Facebook
Create personal content
3 examples
5
Source: Facebook, BusinessInsider
Facebook APIs significantly increase user engagement for the developers.
API
Developers
Impact
Pricing power
See appendix for more developer success stories.
For each story published in Facebook, developers see roughly 3 clicks to their
sites.
Developers using Facebook see a 30%-200% increase
in registration on their sites.
6
API
Developers
Impact
Source: Facebook, BusinessInsider
100% increase in quarterly gross
ticket sales
4 mil increase in membership, growing
revenue 433%
Pricing power
Developers that use Facebook have seen a steep growth in users and revenue.
90% increase in membership from 1.8
million to 3.2 million users
60% increase in users since Open Graph
integration
Success Cases
7
API
Developers
Impact
Pricing power
Source: Wall Street Journal, Yahoo Finance, ORBIS
Facebook is the market dominator with over 1 billion global users, 9 million apps and 42 million pages.
If Facebook were a nation, it would rank 3rd largest in population.
$141 Billion in Value
9 Million Apps
1.01 Billion Active Users
China
Indi
a
Face
book U.S
.
Indo
nesia
1.34 1.241.01
0.31 0.24
Nation’s Population
Po
pu
lati
on
(in
bil
-li
on
s)
8
Facebook outcompetes the leading competitor in attracting users and prolonging engagement.
100
1000
Monthly Active Users (thousands)
Source: Facebook’s Q3 report, Google press release
API
Developers
Impact
Pricing power
People spend significantly more time per user on Facebook than
Google+
3 minutes 405 minutes
Google+ Facebook
Time Spent per User per Month
9
Facebook’s market dominance leads to a large opportunity for revenue growth.
API
Developers
Impact
Pricing power
Source: Team Analysis
Charging below the optimal price will limit developer
pushback
Quantity of MAUs
Pri
ce P
er
MA
U
Untapped Revenue
P*=$ 0.35
Q*= 4.8 Million
The supply/demand equilibrium (Monthly Active Users) shows area for
improvement.
Facebook users
Demand for app users
Fair Market Price
10
•Cheaper monthly rate with multiple apps Discounts
Price
Apps > 1 mil users•Average annual revenue > 50 mil
•Charge only after success
$28,847/month • $0.35/user • 6% of average developer value
Developers
Fair: only charging the most successful apps
Finance: low % of developer revenues
Catalyst: more app development
Source: Team Analysis
API
Developers
Impact
Pricing power
With a well defined pricing model, Facebook can maintain healthy new app creation while generating additional revenue from the most popular apps.
11
2013 2014 2015 2016 2017 $52.0
$54.0
$56.0
$58.0
$60.0
$62.0
$64.0
$66.0
$68.0
$70.0
0%
5%
10%
15%
20%
25%
30%
35%market value (best)
market value (normal)
market value (worst)
% increase (normal)
% increase (best)
% increase (worst)
Charging for Facebook APIs increases market values by $15.8 billion over the upcoming 5 years.
Facebook APIs can increase cumulative market value by 20%- 42% by 2017
$ bi
llion
s
% m
arket value increase
5- Yr. Cumulative Market Values
Source: Team Analysis
API
Developers
Impact
Pricing power
12
Growth in market value continues to generate $87.5 billion in market value over next 10 years.
Facebook APIs can bring in a cumulative market value increase of 56%- 73% by 2024
$ bi
llion
s
% m
arket value increase10- Yr. Cumulative Market Values
Source: Team Analysis
API
Developers
Impact
Pricing power
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 $52.0
$57.0
$62.0
$67.0
$72.0
$77.0
$82.0
$87.0
$92.0
0%
10%
20%
30%
40%
50%
60%
70%
80%market value (best case)
market value (normal case)
market value (worst case)
% increase (worst case)
% increase normal case
% increase best case
13
Risks are low comparative to the potential payoff.
RiskImpact and Speculation Mitigation
Chance Impact
Developer Attrition
Medium High Benefits of Facebook are well worth the below-market price
Negative Press High Low No impact in long run
Competitor Undercutting
Low Low Price below market Value, Alternatives give much lower value
New Platform Emerges
Low Medium Barriers to entry are extremely high
Facebook’s control of the social media market eliminate risks
API
Developers
Impact
Pricing power
Source: Team Analysis
14
Executive Summary
Facebook should charge top developers for access to APIs in order to increase market value by 20% in the next 5 years.
Charge for APIs
Facebook is a necessity to developers.
Facebook has market dominance.
Facebook has pricing power.
Cumulative market value increase of $15.8 billion, 30% by 2017.
In the long run, increase of $87.5 billion, 68% by 2024.
Developers Facebook Pricing
15
Financial assumptions
Pricing
Growth in apps
Revenues & margins
Market values
Financial Model
Additional Financial Evidence
Appendix Appendix
1P/E multiple forecast
Developers’ revenue & willingness to pay
% Growth
Cash & profit margins
Multiples
2
3
4
5
Additional Evidence
Benefits
Facebook app data
Facebook user data
Additional case studies
Obsolescence
Overview of Financial Model1. Price = (LTV of a new user) x (% of users resulting from API) x (% cut for FB)
2. NPV increase= [price x (#apps > 1M users)] * (cash margin*profit margin)
3. Increase in Market Cap = New revenue x PE ratio
Input Assumptions:P/E ratio: 14 (normal)LTV of new customer: $5/year*% of new users resulting from API: 20%% cut for FB: 30%# apps > 1M & growth rate: 350 & 15% growth/yearCash Margin: 100%Profit Margin: 98%
*Based on similar companies user LTV
Appendix
Source: Team Analysis
NPV additional cash
flows
Multiplemarket
perception
Current Market
Cap
Revenues*(% profit)*(% cash)(1+cost of capital)^time*
Historical & ForecastedP/E multiple
*iterated for 5-10 years
Market value is calculated with three components.
Appendix
Source: Team Analysis
18
Wdebt 0%Wequity 100%Cost of equity 0.36%
Rf 0.27%Beta 0.01RM 9.75%
WACC 0.36%
Weighted Average Cost of Capital = Wd * After Tax Cost of Debt + (1 – Wd) * Cost of EquityCost of Equity = Risk Free Rate (Rf) + Beta *(Return from Market (RM) – Rf )
Pricing methodology:
1. Necessity to increase by 20% (implicit, don't show) 2. Value to developers 3. Comparable pricing 4. Cost to fb-nuissance to users
MARKET VALUE (in $ present value)
23-Nov 51990000000Target in 2017 62388000000
Cumulative net gap 10398000000
1
2
3
Total Revenues ($)
cash margin 100%profit margin 98%
annual app growth rate 22%current # of apps 350
Financial assumptions include margin, # of apps, cost of capital, pricing, and current market value.
Appendix
Source: Team Analysis
19
1
2
3
FB necessisity Annual price in $Total revenue needed $742,714,285.71 Total 5 year payments 3,235
Annual payment cannot go below: $229,618.23
Comparables pricingfb ads $1,800,000.00
google ads $1,600,000.00 Twitter ads $43,200,000.00
average $15,533,333.33 % value 5%
Value to developers$lifetime customer value $5
total customers 1000000yearly growth 15%
2013 generated revenue $5,769,473.12 % total preferred payment margin 6.0%
Cost of fb-nuissance to users 20%
Annual Payment $346,168.39 Annual cost/ revenue generating user $0.35
Monthly Payment $28,847.37 Daily payment $961.58
Service is priced according to value to developers, as proportion of their yearly revenue from FB APIs.
Appendix
Source: Team Analysis
20
Name MAU Users Gain + Gain % Average yearly user % gain
1 TripAdvisor™ 49,200,000 1,500,000 3% 15% 2 CityVille 2 20,800,000 1,100,000 6% Average % growth of new app creation3 Birthdays 21,500,000 300,000 1% 29%
4 Candy Crush Saga 18,000,000 200,000 1% Average apps % gain/yr
5 Instagram 39,000,000 200,000 0.52% 22%
6 Dungeon Rampage 2,100,000 100,000 5%
7 Jetpack Joyride 2,100,000 100,000 5%
8 Subway Surfers 4,300,000 100,000 2%
9 Ruby Blast Adventures 18,800,000 100,000 0.53%
10 Keek 4,000,000 100,000 3%
11 Static Iframe Tab 18,200,000 100,000 0.55%
12
Static HTML Iframe Tab : Custom Icons 2,400,000 100,000 4%
13 Fruit Ninja Frenzy 3,900,000 100,000 3%
14 Static HTML... [Sixth Tab] 1,200,000 100,000 9%
15 Custom Tab 5,000,000 100,000 2%16 Diggle 1,700,000 100,000 6%
17 Static HTML... [Second Tab] 4,900,000 100,000 2%
18 Stick Run 5,100,000 100,000 2%19 21 questions 10,500,000 100,000 0.96%
20 Static IFRAME Tab : Note Icon 1,400,000 100,000 8%
Revenues Yr1 price $346,168.39
# Apps 402total revenues $139,086,202.26 Revenues Yr2
price $353,091.75 # Apps 491
total revenues $173,524,234.84 Revenues Yr3
price $358,388.13 # Apps 607
total revenues $217,713,844.09
Revenues Yr4price $363,047.18
# Apps 780total revenues $283,296,383.28 Revenues Yr5
price $366,677.65 # Apps 954
Yearly growth in APIs is 22%.
1
2
3
Appendix
Source: Team Analysis
21
$ m
illio
ns
2013 2014 2015 2016 2017 $-
$50.0
$100.0
$150.0
$200.0
$250.0
$300.0
$350.0
$400.0
$450.0
normal casebest caseworst case
Annual Revenues (present values) in $ mil Years 2013 2014 2015 2016 2017normal case $139.1 $173.5 $217.7 $283.3 $349.6 best case $168.3 $210.0 $263.4 $342.8 $423.1 worst case $112.7 $140.6 $176.3 $229.5 $283.2
Revenues increase exponentially to $423 mil by 2017. 5-Yr. Revenues
Appendix
Source: Team Analysis
22
Years 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024Market value (worst case) $53.3 $55.0 $57.0 $59.7 $62.9 $66.08 $69.05 $72.02 $74.97 $77.75 $80.08 $81.28 Market value (normal case) $53.9 $56.3 $59.2 $63.0 $67.8 $71.14 $74.34 $77.54 $80.71 $83.70 $86.21 $87.51 Market value (best case) $54.6 $57.2 $60.3 $64.5 $69.6 $73.03 $76.32 $79.60 $82.86 $85.93 $88.51 $89.83 % increase (worst case) 3% 6% 10% 15% 21% 27% 33% 39% 44% 50% 54% 56%% increase (normal case) 4% 8% 14% 21% 30% 37% 43% 49% 55% 61% 66% 68%% increase (best case) 5% 10% 16% 24% 34% 40% 47% 53% 59% 65% 70% 73%
Market values expected to increase by $81.3-90.0 bil by 2014.
Appendix
Source: Team Analysis
23
Normal Best WorstMultiples 14 16 12
Market value Yr 1.Revenue x margin $136,304,478 $164,928,419 $110,406,627
r rate 0.36% 0.36% 0.36%NPV increase $135,809,047 $164,328,947 $110,005,328
Market value increase $1,901,326,655 $2,629,263,146 $1,320,063,935
Market value Yr 2Revenue x margin $170,053,750 $205,765,038 $137,743,538
r rate 0.36% 0.36% 0.36%NPV increase $168,819,794 $204,271,951 $136,744,033
Market value increase $2,363,477,120 $3,268,351,217 $1,640,928,400
Market value Yr 3Revenue x margin $213,359,567 $258,165,076 $172,821,249
r rate 0.36% 0.36% 0.36%NPV increase $211,041,493 $255,360,207 $170,943,610
Market value increase $2,954,580,906 $4,085,763,310 $2,051,323,315
Market value Yr 4Revenue x margin $277,630,456 $335,932,851 $224,880,669
r rate 0.36% 0.36% 0.36%NPV increase $273,615,951 $331,075,301 $221,628,920
Market value increase $3,830,623,313 $5,297,204,810.37 $2,659,547,043.22
Market value Yr 5. Revenue x margin $342,642,287 $414,597,167 $277,540,252
r rate 0.36% 0.36% 0.36%NPV increase $336,460,311 $407,116,977 $272,532,852
Market value increase $4,710,444,359 $6,513,871,627.73 $3,270,394,226.32
GRAND TOTAL 15760452354 21794454112 10942256920% increase 30% 42% 21%
Market values are calculated in 3 steps.
1
2
3
Appendix
Source: Team Analysis
24
The P/E multiple has fallen from 100x to expected of 15x by year end 2013.
Appendix
Source: Team Analysis
25
The 2013 % change in P/E multiple is expected at - 40.2%.Date Open High Low Close Volume Adj Close* Closing % change
Average daily change: -0.21%Average yearly change: -40.38%
Appendix
Source: Team Analysis
Apple, Inc eBay Inc. Google Baidu, Inc. Good (2017)
Normal (2017)
Bad (2017)
0
5
10
15
20
25
Yahoo Finance P/E Ratios for other tech companies
After continued market volatility, Facebook’s multiple is projected to approach that of established technology companies.
Extremely High Current P/E
ratios for recent social media
IPOs
Facebook:
135.49
LinkedIn:
694.13
Due to a yearly decrease of *40%, Facebook multiple in 2017 will be 14
Source: Finance.yahoo.com, Team Analysis*
Appendix
* See previous slide
Life Time Value of consumer internet companies is often >$20
Instagram: $28.57 ($1B valuation, 25M users)
Facebook: ~$56 ($56B valuation, 1B users)
Spotify: $150 ($3B valuation, 20M users)
Sources: WSJ, Forbes
Appendix
28
Source: Facebook
The creation of Facebook apps has seen remarkable growth in the past year.
2011 20120
100000020000003000000400000050000006000000700000080000009000000
10000000
Facebook App Growth
Year
Num
ber o
f app
s cre
ated The number of
Facebook apps have increased 28.5% in the past year alone.
Appendix
29
Source: Facebook, BusinessInsider
Social Plugins Personalization
Analytics Co-Branding & Advertising
APIs can bring multi-dimensional benefits.Appendix
Most popular Facebook apps in October 2012, by monthly active users (in millions)
Scribd
Zynga Slingo
Microsoft Live
Bing
Spotify
Samsung Mobile
Yahoo! Social Bar
Diamond Dash
Birthdays
FarmVille
Static HTML: iframe tabs
Static Iframe Tab
0.00 5.00 10.00 15.00 20.00 25.00 30.00
25.90
23.80
23.40
23.00
22.90
21.40
21.10
20.10
20.00
19.70
18.60
18.60
17.90
As of November 26, 2012 there were 345 Apps with 1 Million MAUs or more
Source: Statista, Appdata.com
Average MAUs of sample=4,774,367
Appendix
Number of monthly active Facebook users from 2008 to 2012, worldwide (in millions)
Number of users in millions
197.00242.00
305.00360.00
431.00482.00
550.00608.00
680.00739.00
800.00845.00
901.00955.00
1,007.00
100.00
0.00
200.00
400.00
600.00
800.00
1,000.00
1,200.00
Aug'08 Mar'09 Jun'09 Sep'09 Dec'09 Mar'10 Jun'10 Sep'10 Dec'10 Mar'11 Jun'11 Sep'11 Dec'11 Mar'12 Jun'12 Oct'12
Source: Statista
Appendix
Number of mobile monthly active Facebook users March 2009 to October 2012, worldwide (in millions)
Number of users in millions
Mar2009 Jun2009 Sep2009 Dec2009 Mar2010 Jun2010 Sep2010 Dec2010 Mar2011 Jun2011 Sep2011 Dec2011 Mar2012 Jun2012 Oct2012
0.00
100.00
200.00
300.00
400.00
500.00
600.00
700.00
35.00 50.0075.00
101.00129.00
155.00
196.00
245.00
288.00325.00
376.00
432.00
488.00
543.00
604.00
Source: Statista
Appendix
33
2009 2010 2011 2012
0.35
0.608
0.845
1.01Number of Facebook Users in Billions
Facebook has seen remarkable growth in users.Appendix
Source: Yahoo! Finance
34
Facebook’s growth is expected over the next 10 years.
Appendix
Source: Wall Street Journal
35
Source: IBIS World
Facebook is a market dominator, carrying 61% of market share.
See appendix for more developer success stories.
LinkedIn14%
Facebook61%
Twitter4%
Other22%
Market Share
Appendix
36
Fab, an e-commerce website, has integrated with Facebook to increase their number of users.
Objective
• To integrate the Like and Share Links social plugins on their product to encourage people to discuss products with friends.
Implementation
• Fab.com launched their Open Graph implementation to make it easier for people to share their purchases and favorite products on their timelines.
Results
• referral traffic from Facebook has doubled and membership has grown from 1.8 million to more than 3.2 million users.
Source: Facebook
Appendix
37
Pinterest, a virtual pinboard, has integrated with Facebook to increase their number of users.
Objective
• To attract new users and re-engage existing users through the Open Graph.
Implementation
• Pinterest built Open Graph stories to prompt people to add the app to their timelines.
Results
• Since launching their Open Graph integration, the number of Facebook users visiting Pinterest every day has increased by more than 60%.
Appendix
Source: Facebook
38
Flipboard, a smartphone social magazine, integrated with Facebook to increase retention rates.
Objective
• Increase distribution by helping users discover the content their friends are sharing.
Implementation
• Flipboard integrated the News Feed, Walls, Pages, and Photo Albums as sections within Flipboard social magazine.
Results
• Retention was 50% higher for users who signed into Facebook compared to users who did not sign in through Facebook.
Appendix
Source: Facebook
39
Myspace charges top developers on an unfair and unattractive developer platform.
Developers pay $50,000-$100,000 a week to be one of four “featured” apps. This revenue model disincentives small developers to use Myspace
Facebook’s Revenue Model Advantages
• Charges only established developers
• Weekly prices are 15 to 30% less (average of $14,924/week)
• MAU volume much greater
• First Mover advantage
Sources: Myspace.com, www.businessinsider.com/, socialtimes.com, Team Financials
Appendix
40
Myspace, a direct competitor, takes advantage of Facebook’s free APIs.
Appendix
Source: MySpace.com
41
Facebook should take risks and learn from the failures of their predecessors.
"Create a culture of risk taking," DeWolfe says. "People get so excited about seeing
their ideas coming to fruition.”
And that might be MySpace's ultimate lesson: sometimes the biggest risk is trying
not to take one at all.
-Chris Dewolfe, Myspace Co-founder
Forbes: Push For Ad Dollars Derailed MySpace, Co-Founder Chris DeWolfe Says
1. Get Curious About What’s not working-Don’t get defensive-Don’t defer blame
2. Listen to the Weirdos-They usually have the best ideas-Great ideas don’t always make sense at first
-Erica Andersen, Forbes Contributer
Forbes: 2 Ways Google, Facebook – And You – Can Keep From Becoming Obsolete
Sources: http://www.forbes.com/sites/erikaandersen/2012/07/16/2-ways-google-facebook-and-you-can-keep-from-becoming-obsolete/, Business Source Complete
Appendix
Source: MySpace.com
42
Old technology loses little value during the introduction phase, but increases in obsolescence as new technology enters adoption phase.
Source: Technology Life-Cycles
Appendix
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