Sample
Outline the critical events in the commercialisation of Facebook against the stage gate timeline of commercialisation you have used in class
The impression gained from the movie ‘The Social Network’ was that it was not originally perceived in terms of a commercial venture, but rather as a combination of ideas, ability, revenge and other intangible and complex normative (human) elements.
However, once the potential had been recognized, there was an unclear period when it became a commercial prospect; but there were two asymmetric views or approaches from each of the founders. One – Zuckerberg – seemed to see a much larger vision early on, and even stated that being rich was not his ambition. The other – Savarin – seemed to want to pursue a standard line of commercialization which, in terms of an internet company, is implicit of attracting advertising in order to create revenues. It was, perhaps, interesting to note the different majors that each was pursuing in their studies, for example Business for Savarin and Computer Science for Zuckerberg.
Therefore, if we take the critical events in the commercialization (as opposed to the evolution) of Facebook, the first (gate 1) would be when Zuckerberg saw the potential for Facebook to be extremely popular with students at Harvard (which interestingly grew out of his anger at being ‘dumped’ by his girlfriend), and the absolute success of his experiment in having the females on campus compared with each other (Facemark). Indeed, one argument that can be made is that this process of commercialization was evident when he appeared to deliberately string the Winklevoss brothers along rather than honor his commitment to build their site. Again, it is somewhat difficult to pinpoint exactly when gate 2, namely the development of a product definition and the recognition of such factors as a revenue strategy and business plan came into effect. Fundamentally, Zuckerberg led the strategy, and some of the ‘stage 2’ points became apparent quite early on, for example when he asked Savarin for a $1,000 investment for a 30 per cent stake, and with the dogged insistence by Zuckerberg that being ‘cool’ was the brand of the company, and was something more important than, for example, advertising revenues.
The third stage, gate 3, came at two key points, namely when the decisions to expand to other universities and then schools, was made, and secondly at the second meeting with Parker when the vision was greatly broadened to encompass new countries, and the period between these two milestones when new employees and another shareholder were recruited. The fourth ‘gate’ is rather difficult to pinpoint because there was no identifiable moment when profit potential was recognized. In this sense, during the initial meetings with Parker, Zuckerberg agreed with all that Parker said, not in terms of surprise, but rather in terms of having found someone who understood his vision. Therefore, the potentials for profit and sustainability were recognized in early stages, we can speculate, by Zuckerberg.
The fifth ‘gate,’ which includes implementation, updating and evaluation, can perhaps be seen as coming during the first period in California, where the visions became actualities when equity financing was found and the company could move quickly onwards.
No, there was no overtly clear market analysis in the creation of Facebook in terms of formally discussing it. The vision, as is often the case with new innovations, came from within the mind of Zuckerberg, who ‘knew’ that it would work. One analogy that can be made is with stock market investing. Everyone should have access to the same information and, on that basis, everyone should reach the same investment decisions about the markets. What differentiates the successful (and rich) investors from the rest lies in an ability to see what others don’t and pursue the relevant investments. This is what Zuckerberg did.
On the other hand, Savarin did – once he had a better understanding of the vision in Zuckerberg’s head – try to pursue a ‘normal’ and rational strategy, but it was not the rational that had been developed by Zuckerberg. Thus, their relationship became somewhat tense – they were trying to pursue two different things.
The question of whether they could have done it better is again rather difficult to answer and hinges on the different personalities of each, and on their relative abilities and visions. The answer must be yes if we evidence the progress that was made once Zuckerberg had effectively sidelined Savarin and taken a like-minded visionary (Parker) on board, but on the other hand it also hinges on whether Zuckerberg would have succeeded anyway, and was therefore a sort of ‘one-man band,’ and lastly, of course, it is a bit awkward to criticize the creation of an entity which may arguably be described as the world’s most successfully created company.
This is somewhat complex because innovation cannot be patented whereas patents can. It would have been a bit tenuous to have asked for a patent on such a concept, particularly since companies such as MySpace and Friendster already existed, as referred to in the movie. On the other hand, the area of intellectual property may have been infringed, particularly inasmuch as there was at least a verbal contract of employment between the Winklevoss brothers and Zuckerberg. The feeling from the informal hearings described in the movie suggests that there would have been a lot of precedents for suggesting that the Winklevoss brothers had no right to claim IP. However, they could have asked Zuckerberg to sign an agreement protecting their rights and/or at least a contract of employment (this normally entitles the employee to the copyright of any work produced by the employee).
They could also have had a stronger case if they could have agreed to move very early on with a lawsuit, ie before Facebook became such an obvious commercial success. This would have established the matter as a case of principle rather than of money, and given them a greater moral authority. On the whole, perhaps what was most favorable to them was the belief by Zuckerberg that publicity was extremely bad, thus even if he had won the case in court against the brothers, the damage to Facebook may have ‘cost’ much more.
Zuckerberg drew an analogy with chairs, and this could be seen as being rather weak in the sense that there is little connection between chairs, which are almost as old as mankind, and the internet. However, the principles may have some similarities. For example, if someone can create a new chair which enables a different posture which is commercially viable, there may be restrictive rights available. Therefore, it becomes a question of the extent to which Facebook was a new innovation (IP) by Zuckerman, or whether it was the theft of an idea which the Winklevoss brothers had.
It is interesting to call such ideas those of Zuckerberg IP infringements because it can be argued that such ideas underpin business as it is generally understood. It is difficult to see this point beyond the dispute between Zuckerberg and the Winklevoss brothers and, as discussed above (Question 3), whilst it may be argued that Zuckerberg may have been duplicitous in his dealings with the brothers, the extent to which they owned IP is contentious.
The funding of Facebook was somewhat unconventional inasmuch as it appeared to be incidental to the ideas of Zuckerberg. In other words, he asked his friend – Savarin – in an almost casual manner for the initial $1,000 and offered 30 per cent of the company in return. This is an interesting point and could be dwelt upon. On the one hand, by this time Zuckerberg had at least some notion that Facebook would be successful, but on the other hand so easily gave away such a large share of the company (something that he may have regretted later). Thus, this either vindicates the statements made by Zuckerberg that money was not his driving force, or that we misjudge him be crediting him with so much vision. On the whole, it would appear to give vindication to the former.
The second injection of money came when the proposed summer move to California became a firm proposition. In this case, Savarin again gave $18,000 and thus took his share to $19,000, which was the total amount that had been invested to that time.
The next (and most significant) amount of $500,000 came from a venture capital consortium in California, who effectively bought a stake of just over 6 per cent in the company. Ironically (perhaps), this funding coincided with Savarin feeling that he was being ‘dumped’ and freezing whatever funds remained from his investments.
Fundamentally, Savarin could have protected his interests by either properly understanding what he was being asked to sign or, if he had doubts, employing his own lawyer to represent and advise him when signing such an important document. He could also, at the beginning, when he invested $1,000, and (generously) received 30 per cent of the company in return, have had a proper legal document of incorporation established, with himself as a 30 per cent shareholder.
Obviously, each person came at the issue of the monetization of Facebook from different angles and with different experiences. Savarin was an undergraduate business major with no experience in the maximization of the potential of a company. Indeed, his fundamental grasp of the underlying importance of the concept was perhaps shown when he admitted to his girlfriend that he didn’t know how to change his status on Facebook (or perhaps it was just an excuse for staying ‘single’). In any case, he saw a much narrower vision than either Zuckerman or Parker in knowing intuitively that the stakes were not only much higher but that the cornerstone of their success was in being ‘cool.’ Provided this image in the mind of users and potential users could be maintained, the value of the company in terms of its growth would only continue to grow. Parker drew an interesting analogy when he told a story of someone he knew of who had quickly built a business and then sold it for $4 million. The business, a few years later, was worth $500 million and the person who had sold it, full of regret, had jumped off the Golden Gate Bridge.
On the other hand, we can perhaps just give Savarin something by noting that Parker and Zuckerberg were right because of the success of Facebook. If it had failed, or a rival had managed to overtake it, Savarin would have had the right strategy.
The growth strategy was relatively simplistic. Once the innovation had been shown to be phenomenally successful at Harvard, it was rolled out to similarly prestigious universities in the United States. Once this success had been assured, it was extended to other educational establishments, such as colleges and schools. The next move (inspired by Parker) was international and included schools in Europe and wider institutions across the world. Once this had established the brand as successful, the next moves were to broader populations. On one level, it could be seen as somewhat haphazard, but there was caution as well as careful planning demonstrated by Zuckerberg, and it was noteworthy that he recognized the importance of reliability in each stage of growth. This can be evidenced by his ‘lecture’ to Savarin when the latter froze the accounts about the extent to which it was an act of betrayal which could have undermined the company.
Stock dilution is a relatively easy concept. For a publicly traded company, it would mean the issue of new shares, with pre-emptive rights for current shareholders ensured. However, for the shares in a private company, the potential to gain equity can come in the form of effectively issuing new shares to investors, who thus gain ownership in a company. The more the ownership is sold, the greater the ‘dilution’ of the ownership of existing shareholders. On the one hand, this device can be extremely useful in retaining competitive advantages by not being burdened with loan debt repayments, or extending the risks associated with ever increasing leverage, but the dangers lie in ultimately losing control of the company. Thus, company expansion through the dilution of shares carries advantages as well as potential disadvantages.
There must be tensions between the notions of innovation and change on the one hand and patents, copyright and intellectual property rights on the other. This is because the greatest benefits accrue to consumers if innovation is quickly dissolved through markets so that a new field of competition is established without one company gaining monopoly rights to produce or utilize one product or idea. On the other hand, if invention and creativity is not rewarded, there would be no incentives to produce new products, ideas, or fundamental changes which drive progress. Indeed, nobody or at best very few people, would write books because there would be no reward.
For these reasons, laws and regulations must carefully balance the interests of creativity and invention with the diffusion of new ideas which are not fundamentally new. Therefore, the extent to which Zuckerberg has an ethical case to answer lies in the extent to which he ‘stole’ the idea from the Winklevoss brothers. This further, it can be argued, revolves around the extent to which the brothers owned the idea, and this is surely doubtful. The area where there is ethical doubt lies in the joining of his (Zuckerberg’s) idea with those of the Winklevoss brothers and whether their idea was unique, the extent to which it influenced the ultimate forms which Facebook took, and the extent to which Zuckerberg took ideas whilst he was effectively contracted to the brothers.
Fundamentally, these are tenuous and, if acceptable, lean too far towards the protection of ideas and IP, which is not good for consumers, or a progressive and innovative economy and society.