Facebook, Inc. History



Address:
1601 S. California Ave.
Palo Alto, CA 94304
U.S.A.

Telephone: (650) 543-4800
Fax: (650) 543-4801

Public Company
Incorporated: 2004
Employees: 3500 (as of May 2012)
Sales: $4.270 billion (2011)
Stock Exchanges: NASDAQ
Ticker Symbol: FB

Company Perspectives:

Facebook, Inc. is a United States based Internet corporation which has designed the social networking website Facebook, utilized by over 900,000,000 users worldwide. Founded principally by Mark Zuckerberg along with three others: Chris Huges, Eduardo Saverin, and Dustin Moskovitz. Facebook eventually filed for an initial public offering on February 1, 2012. Facebook Inc. began selling stock to the public and trading on the NASDAQ on May 18, 2012.

Company History:

Mark Zuckerberg wrote Facemash, which was the predecessor to Facebook, on October 28, 2003, while attending Harvard as a sophomore. Harvard at that time did not have a student "facebook" (a membership directory with photos and basic information), though individual fraternity houses were publishing their own paper facebook directories since the mid-1980s. During the first four hours after launch, Facemash attracted 450 visitors and over 20,000 photo-views.

The site was shut down a few days later by the Harvard administration. Zuckerberg was accused by the administration with breaching security, violation of copyrights, and violating personal privacy. He faced expulsion, mainly because he had obtained private information from school systems to create content. Eventually, the charges were dropped.

Zuckerberg built on his original idea by creating an online community study tool for an art history class. He did this by uploading 500 artistic images to a Web site, with one image per page along with a section where fellow students could comment on them. When he opened the site up for use by his classmates, people started sharing their notes in a collaborative fashion in preparation for the final later in the semester.

Given the popularity of the art class project, Zuckerberg began writing code in early 2004 for a new website. On February 4, 2004, Zuckerberg launched thefacebook.com. Shortly after launching the site, three of his classmates at Harvard - Cameron Winklevoss, Divya Narendra, and Tyler Winklevoss, accused Zuckerberg of purposely deceiving them that he would assist them in building a social network named HarvardConnection.com. Instead they accused Zuckerberg that he was using their ideas to build a competing product. The three complained to the school newspaper, the Harvard Crimson, who started investigating. Eventually the three filed suit against Zuckerberg, ultimately settling the case out of court.

Membership to thefacebook.com was originally limited to Harvard students. Within a month, over one-half of the undergraduate population registered on the site. With the rapid growth programmers, designers, marketers and business advisors joined the company. Among them included: Eduardo Saverin (business aspects), Dustin Moskovitz (programmer), Andrew McCollum (graphic artist), and Chris Hughes joined Zuckerberg to help promote the Web site. By March 2004, Facebook expanded availability to Stanford, Columbia, and Yale. Shortly thereafter, other Ivy League schools such as Boston University, New York University, MIT were allowed as part of the network. Eventually most universities in the United States and Canada saw their students using theFacebook.com.

With the rapid acceptance and obvious business opportunity ahead, Facebook was incorporated in mid-2004. Sean Parker, who had been informally advising Zuckerberg, became the company's first president. In June 2004, Facebook moved its headquarters and operations to Palo Alto, California to take advantage of the expertise and money residing Silicon Valley. Facebook had its first investment in June 2004 from Paul Thiel, a co-founder of PayPal. Zuckerberg managed to retain significant ownership levels through multiple rounds of funding, owning upwards of 28% of the company at the time of IPO. The employees own roughly 30% of the company, while the other founders retained about 18% of the company. The remaining percentage of the company is owned mainly by investors.

Management

Today, key management personnel consists of Sheryl Sandberg (COO), Chris Cox (VP of Product), and Mark Zuckerberg (Chairman and CEO). As of May 2012, Facebook has over 3,500 employees, and offices in 19 countries.

Revenue

Most of Facebook's revenue comes from advertising and revenue sharing with companies such as Zynga which offer online games to Facebook users.

Revenues (estimated, in millions US$)
Year Revenue Growth
2006 $52 —
2007 $150 188%
2008 $280 87%
2009 $775 177%
2010 $2,000 158%
2011 $4,270 114%

A major criticism of Facebook’s business model is the lower click-through rate (CTR) for advertisements than most major Web sites. In fact, according to BusinessWeek.com, banner advertisements on Facebook have generally has only 20% of the clicks when compared to those on the internet as a whole. As an example for comparison, Google searchers click on the first advertisement for search results on average 8% of the time ( this equates to 8,000 clicks for every 100,000 searches). In comparison, Facebook's users click on advertisements an average of 0.04% of the time (40 clicks for every 100,000 pages). According to BizReport.com, Facebook's has a low CTR because Facebook users tend to ignore ads as they are spending time communicating with friends. Facebook users tend to be younger, which as a segment click on ads at much lower rates.

One bright spot is on Facebook pages for brands and products. Some companies have reported CTR as high as 6.49% for Wall posts. Also, a study found that 40% of video ads on Facebook are viewed entirely, while the industry average was 25% for in-banner video ads on other sites.

Initial Public Offering

In February 2012, Facebook filed their S1 document with the Securities and Exchange Commission (SEC). The company planned a $5 billion initial public offering (IPO), making it one of the largest in tech history and the biggest in Internet history. Facebook valued its stock at $38 a share, pricing the company at $104 billion, the largest valuation to date for a newly public company. The IPO raised $16 billion, making it the third largest in U.S. history. The shares began to be traded on May 18, and though the stock struggled to stay above the IPO price for most of the day, it set a new record for trading volume of an IPO, 460 million shares. The first day of trading was marred by numerous technical glitches that prevented orders from going through. Only the aforementioned technical glitches and artificial support from underwriters prevented the stock price from falling below the IPO price on the first day of trading.

Later, it was revealed that Facebook's lead underwriters, Morgan Stanley (MS), JP Morgan (JPM), and Goldman Sachs (GS) all cut their earnings forecasts for the company in the middle of the IPO roadshow. The stock continued its freefall in subsequent days, closing at 34.03 on May 21 and 31.00 on May 22. A 'circuit breaker' was used in an attempt to slow down the decline in the stock price. Securities and Exchange Commission Chairman Mary Schapiro and Financial Industry Regulatory Authority (FINRA) Chairman Rick Ketchum called for a review of the circumstances surrounding its troubled initial public offering.

Facebooks' IPO is now under investigation and has been compared to pump and dump schemes. In the meantime, a class-action lawsuit is in the works due to the trading glitches, which led to botched orders. Apparently, the glitches prevented a number of investors from selling the stock during the first day of trading while the stock price was falling - forcing them to incur bigger losses when their trades finally went through.

Additional lawsuits have been filed due to allegations that an underwriter for Morgan Stanley selectively revealed adjusted earnings estimates to preferred clients. The remaining underwriters (MS, JPM, GS) and Facebook's CEO and board are also facing litigation. It is believed that adjustments to earnings estimates were communicated to the underwriters by a Facebook financial officer, who in turn used the information to cash out on their positions while leaving the general public with overpriced shares.

By the end of May 2012 the stock lost over a third of its starting value dropping to $25.50, which led to the Wall Street Journal calling the IPO a "fiasco." Fortunately for Facebook investors, Facebook rebounded to $32 a share by mid-June 2012.

Further Reading:

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