After Facebook overtook MySpace as the big-name social network, there was a lot of chatter in the social media world about who would eventually dethrone Facebook. So when Twitter, Instagram, and all the other newcomers came along, how did Facebook keep its head above water? Since the company’s inception in 2004, Facebook has acquired more than 90 companies, ranging from tiny two-person start-ups to well-established businesses. The best known of these are the image-sharing platform Instagram (acquired for US$1 B in 2012) and the WhatsApp messaging service (acquired for US$19 B in 2014). For Q121, Facebook reported 2.85 billion monthly active users (MAU) and $26.17 B in revenue. When Facebook first launched, there was little individual use to the tool. The value emerged as the network grew – The more friends a user had on Facebook, the more value the user could get out of it. At first, this value was mostly limited to reading friends’ answers to the questionnaire that Facebook gave new users, browsing their Walls, and sending “Pokes.” But Facebook layered more and more value on top of this simple social register over time, and because it controlled all the data, the company gained control of a deep moat built on network effects. The first big feature Facebook added to its platform was Photos, which instantly became a powerful growth mechanism because of its tagging functionality. That’s why they bought Divvyshot and made it easy for users to upload photos to Facebook. Every time a user uploaded a new photo and tagged their friends, those people were notified about it. Similarly, Facebook also bought Hot Potato for its ability to let users “check in” to locations. Successive features that Facebook added, from Groups to Messenger, created similar kinds of viral value for Facebook’s users. And that’s why they bought Beluga, a mobile messaging app company that developed group messaging, which is now a huge part of Facebook’s mobile endeavors. Today, this dedication to data has led Facebook to acquire other properties — most importantly Instagram — that use the Facebook social graph in order to build out users’ network of friends and followers.
Facebook also ventures into new sectors that it thinks could add to its revenue stream. The above chart shows that about 73% of its acquisitions were in new sectors. It makes money through advertisements and has used its profits to spread its tendrils to expand in the AdTech ecosystem. Two major purchases, Atlas in 2013 and LiveRail in 2014, helped Facebook buy its way deeper into the industry. Another purchase in 2014, Oculus for $2 billion was part of its bet that virtual reality will become a big part of how people interact with tech. According to Mark Zuckerberg, the goal was to develop immersive VR gaming and then expand to include all sorts of virtual experiences, including social networking.
Facebook acquires companies not just for their data or technologies, but also for their teams. It has also changed its focus over time, consolidating its core product, then developing its mobile offerings, eliminating competition, and, most recently, expanding its portfolio to include companies outside of the traditional social networking space with the potential for future integration in ways yet to be seen. But buying a company doesn’t ensure its top brass will follow. So how does Facebook convince the best and brightest to join its growing empire?
Mark Zuckerberg offered a primer on the strategies he and his company employ when they see an attractive target during testimony in 2017 in a lawsuit with ZeniMax Media, throwing light on the nuance of acquisition.
Building long-term relationships
A key Facebook approach is building a long-term relationship with the target. “I’ve been building relationships, at least in Instagram and the WhatsApp cases, for years with the founders and the people that are involved in these companies, which made [it] so that when it became time or when we thought it was the right time to move, we felt like we had a good amount of context and had good relationships so that we could move quickly”, Zuckerberg said at the trial.
A CEO with a vision for the future is one of the best intangible assets that a company can have. What could be better than two companies having the same vision? Zuckerberg says – “If this [the deal] is going to happen, it’s not going to be because we offer a lot of money, although we’re going to have to offer a fair price for the company that is more than what they felt like they could do on their own. But they also need to feel like this was actually going to help their mission, right?”
Needless to say, it was important to Facebook’s success that the target is excited about the alignment in vision, how they intend to work together and how rational it seems as compared to either of them working separately.
Staying ahead of the competition
Another strategy Facebook employs to stay ahead of its rivals is moving quickly and getting the deal done.” When you’re making deals and it is a competitive situation, you often don’t have a lot of time,” he said.”Some of the bigger acquisitions that we have done, like Instagram and WhatsApp, which were each more than a billion dollars, we had to move quickly because other companies — whether it was Google or, you know, Twitter or Apple, or whatever the companies were — were also trying to talk to these companies and buy them,” Zuckerberg said.
Being able to move quickly not only increases Facebook’s chances of bagging the deal but also eliminates the need to drag the progress and end up paying more.
Facebook’s acquisition strategy can probably be best summed up by a statement by Zuckerberg himself – “We have not once bought a company for the company. We buy companies to get excellent people… In order to have a really entrepreneurial culture one of the key things is to make sure we’re recruiting the best people. One of the ways to do this is to focus on acquiring great companies with great founders.
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