A mock case put together as a part of a team for the Consulting Skills and Frameworks Class at Kenan-Flagler. We were tasked with coming up with a way to increase Facebook's share value. Our recommendation was for Facebook to begin charging developers for access to their online APIs.

1. Facebook Case Competition
Bradley Kirby
Pooja Chandramouleeswaran
Yifei Zhang
Andrew Grillo
Ryan Volatile
1

2. Executive Summary
Charge for APIs
Facebook should charge top developers for access to APIs in order to increase
market value by 20% in the next 5 years.
Developers Facebook Pricing
Facebook is a necessity to Facebook has market Facebook has pricing
developers. dominance. power.
Cumulative market value increase of $15.8 billion, 30% by 2017.
In the long run, increase of $87.5 billion, 68% by 2024.
2

3. API
APIs are a free way that developers use to build using
Developers the Facebook platform.
Facebook
Pricing
power
3rd Party API Platform
Applications
Impact
An API acts as an interface between two applications
Source: Team Analysis
3

4. Facebook’s APIs allow 3rd party apps access to its data and
API
Developers functionality.
Facebook 3 examples
Pricing
power
Impact
Create personal
Promote on content
Facebook
Avoid account
creation
Source: Team Analysis
4

5. API
Facebook APIs significantly increase user engagement
Developers for the developers.
Facebook
Pricing
power
For each story published in
Impact
Facebook, developers see
roughly 3 clicks to their sites.
Developers using Facebook see
a 30%-200% increase in
registration on their sites.
See appendix for more developer success stories. Source: Facebook, BusinessInsider
5

6. API
Developers that use Facebook have seen a steep
Developers
growth in users and revenue.
Facebook
Pricing
power
90% increase
Impact
in membership from 1.8
million to 3.2 million users
Success
100% increase in Cases 4 mil increase in
quarterly gross membership, growing
ticket sales revenue 433%
60% increase in users
since Open Graph
integration
Source: Facebook, BusinessInsider
6

7. API
Facebook is the market dominator with over 1 billion
Developers global users, 9 million apps and 42 million pages.
Facebook
If Facebook were a nation, it would rank 3rd
1.01 Billion largest in population.
Pricing Active Users
power
Impact Nation’s Population
Population (in billions)
1.34 1.24
1.01
0.31 0.24
$141 Billion 9 Million
in Value Apps
Source: Wall Street Journal, Yahoo Finance, ORBIS
7

8. API
Facebook outcompetes the leading competitor in attracting
Developers users and prolonging engagement.
Facebook
Monthly Active Users (thousands)
Pricing
power
People spend
Impact
significantly more time
per user on Facebook
than Google+
1000
100
Time Spent per User
per Month
Google+ Facebook
3 minutes 405 minutes
Source: Facebook’s Q3 report, Google press release
8

9. Facebook’s market dominance leads to a large
API
Developers opportunity for revenue growth.
Facebook
The supply/demand equilibrium (Monthly
Pricing Charging below the Active Users) shows area for improvement.
power
optimal price will
Price Per MAU
Demand for app users
Impact
limit developer
pushback
Facebook users
Fair Market Price
P*=$ 0.35
Untapped
Revenue
Q*= 4.8 Million Quantity of MAUs
Source: Team Analysis
9

10. API
With a well defined pricing model, Facebook can
Developers maintain healthy new app creation while generating
Facebook
additional revenue from the most popular apps.
Pricing
power
Impact Apps > 1 mil users Fair: only charging the most
Developers • Average annual revenue > 50 mil successful apps
• Charge only after success
$28,847/month Finance: low % of developer
Price • $0.35/user revenues
• 6% of average developer value
• Cheaper monthly rate with Catalyst: more app
Discounts multiple apps development
Source: Team Analysis
10

11. API
Charging for Facebook APIs increases market values by
Developers $15.8 billion over the upcoming 5 years.
Facebook
5- Yr. Cumulative Market Values
$70.0 35%
market value (best)
Pricing $68.0 market value (normal)
power 30%
market value (worst)
Impact
$66.0
% increase (normal)
25%
$64.0 % increase (best)
% increase (worst)
$62.0 20%
% market value increase
$60.0 15%
$ billions
$58.0
10%
$56.0
5%
$54.0
$52.0 0%
2013 2014 2015 2016 2017
Facebook APIs can increase cumulative market value by 20%- 42% by 2017
Source: Team Analysis
11

12. API Growth in market value continues to generate $87.5
Developers
billion in market value over next 10 years.
Facebook
10- Yr. Cumulative Market Values
$92.0 80%
market value (best case)
market value (normal case)
Pricing $87.0 70%
power market value (worst case)
Impact % increase (worst case)
$82.0 60%
% increase normal case
% increase best case
$77.0 50%
% market value increase
$72.0 40%
$ billions
$67.0 30%
$62.0 20%
$57.0 10%
$52.0 0%
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Facebook APIs can bring in a cumulative market value increase of 56%- 73% by 2024
Source: Team Analysis
12

13. API
Risks are low comparative to the potential payoff.
Developers
Impact and
Facebook Risk Speculation Mitigation
Pricing
Chance Impact
power
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 Low Low Price below market
Undercutting Value, Alternatives give
much lower value
New Platform Low Medium Barriers to entry are
Emerges extremely high
Facebook’s control of the social media market eliminate risks
Source: Team Analysis
13

14. Executive Summary
Charge for APIs
Facebook should charge top developers for access to APIs in order to increase
market value by 20% in the next 5 years.
Developers Facebook Pricing
Facebook is a necessity to Facebook has market Facebook has pricing
developers. dominance. power.
Cumulative market value increase of $15.8 billion, 30% by 2017.
In the long run, increase of $87.5 billion, 68% by 2024.
14

15. Appendix
Appendix
Financial Additional Financial
Additional Evidence
Model Evidence
Financial
P/E multiple forecast
assumptions 1 Benefits
Developers’ revenue &
Pricing willingness to pay 2 Facebook app data
Growth in % Growth
apps 3 Facebook user data
Revenues &
margins Cash & profit margins 4 Additional case studies
Market
values
Multiples 5 Obsolescence
15

16. Appendix
Overview of Financial Model
1. 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/year
Cash Margin: 100%
Profit Margin: 98%
*Based on similar companies user LTV
Source: Team Analysis

17. Appendix
Market value is calculated with three components.
Current
NPV Multiple
Market additional cash market
Cap flows perception
Revenues*(% profit)*(% cash)
(1+cost of capital)^time*
*iterated for 5-10 years
Historical & Forecasted
P/E multiple
Source: Team Analysis

18. Appendix Financial assumptions include margin, # of apps, cost of
capital, pricing, and current market value.
Total Revenues ($)
cash margin 100% 1
profit margin 98%
annual app growth rate 22%
current # of apps 350
Weighted Average Cost of Capital = Wd * After Tax Cost of Debt + (1 – Wd) * Cost of Equity 2
Cost of Equity = Risk Free Rate (Rf) + Beta *(Return from Market (RM) – Rf )
Wdebt 0%
Wequity 100%
Cost of equity 0.36%
Rf 0.27%
Beta 0.01
RM 9.75%
WACC 0.36%
Pricing methodology:
1. Necessity to increase by 20% (implicit, don't
MARKET VALUE (in $ present value) 3
show)
2. Value to developers 23-Nov 51990000000
3. Comparable pricing Target in 2017 62388000000
4. Cost to fb-nuissance to users Cumulative net gap 10398000000
Source: Team Analysis
18

19. Appendix
Service is priced according to value to developers, as
proportion of their yearly revenue from FB APIs.
FB necessisity Annual price in $
Total revenue needed $742,714,285.71
1 Total 5 year payments 3,235
Annual payment cannot go below: $229,618.23
Comparables pricing
fb 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
2 total customers 1000000
yearly 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
3 Annual cost/ revenue generating user $0.35
Monthly Payment $28,847.37
Daily payment $961.58
Source: Team Analysis
19

20. Appendix
Yearly growth in APIs is 22%.
Name MAU Users Gain + Gain % Average yearly user % gain
1 TripAdvisor™
2 CityVille 2
49,200,000
20,800,000
1,500,000
1,100,000
3%
6%
2 15%
Average % growth of new app creation
3 Birthdays 21,500,000 300,000 1% 29%
Candy Crush
1 4Saga 18,000,000 200,000 1% Average apps % gain/yr
5 Instagram 39,000,000 200,000 0.52% 22%
Dungeon
6Rampage 2,100,000 100,000 5%
Jetpack
7Joyride
Subway
2,100,000 100,000 5% 3 Revenues Yr1
price $346,168.39
8Surfers 4,300,000 100,000 2% # Apps 402
Ruby Blast total revenues $139,086,202.26
9Adventures 18,800,000 100,000 0.53% Revenues Yr2
10 Keek 4,000,000 100,000 3%
price $353,091.75
Static Iframe
11Tab 18,200,000 100,000 0.55%
# Apps 491
Static HTML total revenues $173,524,234.84
Iframe Tab : Revenues Yr3
12Custom Icons 2,400,000 100,000 4% price $358,388.13
Fruit Ninja # Apps 607
13Frenzy 3,900,000 100,000 3% total revenues $217,713,844.09
Static HTML...
14[Sixth Tab] 1,200,000 100,000 9% Revenues Yr4
15 Custom Tab 5,000,000 100,000 2% price $363,047.18
16 Diggle 1,700,000 100,000 6%
# Apps 780
Static HTML...
17[Second Tab] 4,900,000 100,000 2%
total revenues $283,296,383.28
18 Stick Run 5,100,000 100,000 2% Revenues Yr5
19 21 questions 10,500,000 100,000 0.96% price $366,677.65
Static IFRAME # Apps 954
Tab : Note
20Icon 1,400,000 100,000 8%
Source: Team Analysis
20

21. Appendix Revenues increase exponentially to $423 mil by 2017.
$450.0 5-Yr. Revenues
$400.0
$350.0
$300.0
$250.0
normal case
$ millions
$200.0 best case
worst case
$150.0
$100.0
$50.0
$-
2013 2014 2015 2016 2017
Annual Revenues (present values) in $ mil
Years 2013 2014 2015 2016 2017
normal 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
Source: Team Analysis
21

22. Appendix
Market values expected to increase by $81.3-90.0 bil by
2014.
Years 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Market 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%
Source: Team Analysis
22

23. Appendix
Market values are calculated in 3 steps.
Normal Best Worst
Multiples 14 16 12
1
Market value Yr 1.
Revenue x margin $136,304,478 $164,928,419 $110,406,627
r rate 0.36% 0.36% 0.36%
2 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 2
Revenue 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 3
Revenue 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 4
Revenue 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
Source: Team Analysis
3 GRAND TOTAL 15760452354 21794454112 10942256920
% increase 30% 42% 21%
23

24. Appendix The P/E multiple has fallen from 100x to expected of 15x by
year end 2013.
Source: Team Analysis
24

25. Appendix
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%
Source: Team Analysis
25

26. Appendix
After continued market volatility, Facebook’s multiple is projected to
approach that of established technology companies.
Yahoo Finance P/E Ratios for other
tech companies
25
Extremely High
20 Current P/E ratios
for recent social
media IPOs
15
10
Facebook: LinkedIn:
5
135.49 694.13
0
Apple, Inc eBay Inc. Google Baidu, Inc. Good Normal Bad
(2017) (2017) (2017)
Due to a yearly decrease of *40%, Facebook multiple in 2017 will be 14
* See previous slide Source: Finance.yahoo.com, Team Analysis*

27. Appendix
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

28. Appendix The creation of Facebook apps has seen remarkable
growth in the past year.
Facebook App Growth
10000000
Number of apps created
8000000
The number of
6000000 Facebook apps
have increased
4000000 28.5% in the past
year alone.
2000000
0
2011 2012
Year
Source: Facebook
28

29. Appendix APIs can bring multi-dimensional benefits.
Social Plugins Personalization
Co-Branding &
Analytics
Advertising
Source: Facebook, BusinessInsider
29

30. Appendix
Most popular Facebook apps in October 2012, by monthly active users (in millions)
Static Iframe Tab 17.90
Static HTML: iframe tabs 18.60
FarmVille 18.60
Average MAUs of sample
Birthdays 19.70
=4,774,367
Pinterest 20.00
Diamond Dash 20.10
Yahoo! Social Bar 21.10
Samsung Mobile 21.40
Spotify 22.90
Bing 23.00
Microsoft Live 23.40
Zynga Slingo 23.80
Scribd 25.90
0.00 5.00 10.00 15.00 20.00 25.00 30.00
As of November 26, 2012 there were 345 Apps with 1 Million MAUs or more
Source: Statista, Appdata.com

31. Appendix
Number of monthly active Facebook users from 2008 to 2012, worldwide (in millions)
Number of users in millions
1,200.00
1,007.00
1,000.00 955.00
901.00
845.00
800.00
800.00 739.00
680.00
608.00
600.00 550.00
482.00
431.00
400.00 360.00
305.00
242.00
197.00
200.00
100.00
0.00
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

32. Appendix
Number of mobile monthly active Facebook users March 2009 to October 2012, worldwide (in millions)
Number of users in millions
700.00
604.00
600.00
543.00
488.00
500.00
432.00
400.00 376.00
325.00
288.00
300.00
245.00
196.00
200.00
155.00
129.00
101.00
100.00 75.00
50.00
35.00
0.00
Mar2009 Jun2009 Sep2009 Dec2009 Mar2010 Jun2010 Sep2010 Dec2010 Mar2011 Jun2011 Sep2011 Dec2011 Mar2012 Jun2012 Oct2012
Source: Statista

33. Appendix
Facebook has seen remarkable growth in users.
Number of Facebook Users in Billions
1.01
0.845
0.608
0.35
2009 2010 2011 2012
Source: Yahoo! Finance
33

34. Appendix
Facebook’s growth is expected over the next 10 years.
Source: Wall Street Journal
34

35. Appendix
Facebook is a market dominator, carrying 61% of market
share.
Market Share
LinkedIn
13%
Other
22%
Twitter
4%
Facebook
61%
See appendix for more developer success stories. Source: IBIS World
35

36. Appendix
Fab, an e-commerce website, has integrated with
Facebook to increase their number of users.
Objective Implementation Results
• To integrate the • Fab.com launched • referral traffic
Like and Share their Open Graph from Facebook
Links social implementation to has
plugins on their make it easier for doubled and mem
product to people to share bership has grown
encourage people their purchases from 1.8 million
to discuss and favorite to more than 3.2
products with products on their million users.
friends. timelines.
Source: Facebook
36

37. Appendix
Pinterest, a virtual pinboard, has integrated with
Facebook to increase their number of users.
Objective Implementation Results
• To attract new • Pinterest built • Since launching
users and re- Open Graph their Open Graph
engage existing stories to prompt integration, the
users through the people to add the number of
Open Graph. app to their Facebook users
timelines. visiting Pinterest
every day has
increased by more
than 60%.
Source: Facebook
37

38. Appendix
Flipboard, a smartphone social magazine, integrated with
Facebook to increase retention rates.
Objective Implementation Results
• Increase • Flipboard • Retention was
distribution by integrated the 50% higher for
helping users News users who signed
discover the Feed, Walls, Pages into Facebook
content their , and Photo compared to users
friends are Albums as who did not sign
sharing. sections within in through
Flipboard social Facebook.
magazine.
Source: Facebook
38

39. Appendix
Myspace charges top developers on an unfair and
unattractive developer platform.
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
Developers pay $50,000-$100,000 a week to be one of four “featured” apps.
This revenue model disincentives small developers to use Myspace
Sources: Myspace.com, www.businessinsider.com/, socialtimes.com, Team Financials
39

40. Appendix
Myspace, a direct competitor, takes advantage of
Facebook’s free APIs.
Source: MySpace.com
40

41. Appendix
Facebook should take risks and learn from the failures
of their predecessors.
Forbes: Push For Ad Dollars Derailed Forbes: 2 Ways Google, Facebook – And
MySpace, Co-Founder Chris DeWolfe Says You – Can Keep From Becoming Obsolete
"Create a culture of risk taking," DeWolfe 1. Get Curious About What’s not working
says. "People get so excited about seeing -Don’t get defensive
their ideas coming to fruition.” -Don’t defer blame
And that might be MySpace's ultimate 2. Listen to the Weirdos
lesson: sometimes the biggest risk is trying -They usually have the best ideas
not to take one at all. -Great ideas don’t always make sense at
first
-Chris Dewolfe, Myspace Co-founder -Erica Andersen, Forbes Contributer
Sources: http://www.forbes.com/sites/erikaandersen/2012/07/16/2-ways-google-facebook-and-you-can-keep-from-becoming-obsolete/,
Business Source Complete
Source: MySpace.com
41

42. Appendix
Old technology loses little value during the introduction
phase, but increases in obsolescence as new technology
enters adoption phase.
Source: Technology Life-Cycles
42