GETTING INTO E-COMMERCE AND STARTING A NEW ONLINE BUSINESS

As described in How to Establish a Successful OnlineBusiness or Blog in 5 Steps and throughout other books in the MoneyMaster Tutorials series, it is a terrific time to be an entrepreneur. The availability of cheap computer hardware, free or inexpensive software, and high-speed Internet access has created a powerful base from which to launch a new business and expand or transform existing ones.

How to Establish a Successful OnlineBusiness or Blog in 5 Steps provides a complete guide on how to start an online business. The following example of Mark Zuckerberg’s Facebook describes some of the steps involved in setting up a successful e-business.

FACEBOOK: MAKING A BUSINESS OUT OF FRIENDSHIP

Facebook founder and CEO Mark Zuckerberg has been named Time’s “Person of the Year” for 2010. Time said Zuckerberg was chosen “for connecting more than half a billion people and mapping the social relations among them; for creating a new system of exchanging information; and for changing how we all live our lives” (Time 2010).

The Opportunity

Facebook (facebook.com), the world’s most popular social networking site, opened in February 2004. Originally called “thefacebook,” the site was conceived by Mark Zuckerberg as an online directory where Harvard students could connect with each other. It became an instant hit within a month, subsequently expanding to Columbia, Stanford, and Yale. Zuckerberg was soon joined by fellow Harvard students Dustin Moskovitz and Chris Hughes for site development. The site was renamed “Facebook” in August 2005, and the domain facebook.com was purchased for $200,000.

The Solution

To saturate colleges nationwide, Facebook needed financing. In August 2004, Zuckerberg met Peter Thiel. Seeing Facebook’s potential, Thiel decided to invest $500,000 for a 10 percent stake in the company.

Soon after, Facebook opened an office in Palo Alto, California. By the end of the year, the site had 1 million users. Facebook’s second investment, $12.7 million for 13 percent corporate ownership, came in April 2005 from Accel Partners, a leading Silicon Valley venture capital firm.

Facebook continued to grow rapidly and by mid-2006, it hosted about 7 million user accounts (Vogesltein, 2007). The site raised another $27.5 million in April 2006 from a joint financing by Greylock Partners and Meritech Capital Partners, and its existing investors Accel Partners and Clarium Capital. In the same month, Facebook expanded its reach beyond the nation to students of selected companies, and in September 2006, it opened registration to everyone worldwide.

Facebook capitalizes on its ability to connect each user to a network of friends called a social graph. “People use Facebook to keep up with friends, upload and share an unlimited number of photos, share links and videos, and learn more about the people they meet” (see facebook.com/facebook#!/facebook?sk=info).

Facebook’s revenues primarily come from sponsorships and banner advertising. It also allows outsiders to build applications inside Facebook and keep all the advertising revenues they earn. According to Zuckerberg, “[Facebook’s] platform strategy isn’t about winning all the content or owning all the applications” (Needle 2007). This has led to all kinds of widgets or applications. The Internet industry believes this is a clever move—one that others, including Google, are trying to copy.

Facebook’s second master stroke involves its various on-site features. The “news feed” feature, for example, an event stream on user pages, keeps users updated about what their friends are doing (e.g., uploading photos and adding widgets). For many users, this feature is addictive.

The Results

Facebook’s total revenue in 2007 was estimated at $100 million, mostly from selling ad space with little profit. The ads are priced not just by cost per mile (CPM) (cost per 1,000 impressions), but also based on the success of “engagement.” However, by 2009,

owing to its explosive growth, revenues reached as much as $800 million (Oreskovic 2010).

Facebook offers more integrated advertising opportunities to marketers with high campaign budgets. Marketers can also target users with Virtual Gifts purchased from Facebook. Moreover, marketers can make use of the many ad networks dedicated to serving the inventory created by Facebook platform applications. Inventory is sold on CPM, CPC (cost per click), CPA (cost per action), and CPI (cost per impression) bases.

Currently, the Internet giants—Yahoo!, Microsoft, and Google—are offering to buy Facebook or a stake in it, for a price that would value the firm at billions. By 2010, more than two-thirds of Facebook users are outside of college, and the fastest growing demographic is those 35 years old and older. It has more than 200 million active users, of which more than 100 million log in at least once each day. More than 850 million photos and more than 10 million videos are uploaded to the site each month.

Facebook is at the crossroads of its future. It can either sell itself off, like MySpace and YouTube did, build something to stay independent, or give away a stake to a big company. Facebook has turned down acquisition offers ranging from $750 million to $1 billion for building “something special.” Some sources believe that an initial public offering (IPO) is imminent.

Facebook’s top priority now is developing its own ad platform, and industry experts believe Facebook wants to become a Web operating system (OS) in a few years. It appears that the company wants more than what Microsoft is willing to pay, as much as $15 billion. For now, Facebook’s investors seem to be content to let Zuckerberg chart his own course. Some industry observers question Facebook’s decision to stay independent. Others even fear it will bite the dust much like Friendster.

However, it is believed that Facebook could still wind up not taking in investment from either Microsoft or Google and take an IPO route because its business is well established. If Zuckerberg’s primary goal is freedom to build something big, then he should take an investment now from venture capitalists or go for an IPO.

A venture capitalist investment would free Facebook to experiment outside the glare of the stock market and maintain independence, build up infrastructure, and make some quality hires and acquisitions as necessary.

There are proponents who think Facebook needs to sell, arguing that social networking sites have the potential to become multibillion-dollar machines on their own. For now, as to what course Zuckerberg intends to take, observers can only speculate.

Sources: Compiled from Time (2010), Oreskovic (2010), Needle (2007), Vogelstein (2007), and facebook.com (accessed March 2011).

WHAT WE CAN LEARN . . .

The case of Facebook illustrates how a U.S. college student’s portal evolved into a full-fledged social commerce site in less than 3 years (Sethuraman and Rathore 2008). In the digital economy, ideas are more highly valued than innovative technology. Facebook is popular not because it introduced a breakthrough technology, but because it was able to give people what they wanted—a way to collaborate and share information (Forbes 2007).

Facebook is an example of a successful online business with a clear value proposition and focused differentiation. The case also outlines the dilemmas startups face as they experience growth potential (Sethuraman and Rathore 2008).

How to Establish a Successful Online Business or Blog in5 Steps addresses the fundamental requirements for initiating an online business. It provides a guide on how to turn a good idea into a successful electronic business and to execute a business plan with IT skills, management know-how, a good entrepreneurial attitude, and an understanding of the Internet culture.

You need to stick to the best practices and use the right tools to get the desired results. The choice of a web hosting service provider directly determines the degree of success in your eBusiness venture. My most secure, affordable and reliable web hosting service providers for online businesses remain OrangeWebsite.com and Namecheap.com.

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