Facebook is a Ponzi Scheme
jperla.com
jperla.com
A better argument would be that Facebook's valuations are being driven by large amounts of investor money injected into the Zynga symbiote, who throws nine figures a year at Facebook to continue identifying new pieces of brain matter to feed to their mad cows. I don't think that is a great argument, both because Ponzi schemes are not the kind of racketeering one should be worried about if one is worried about there, and because I think that Zynga is probably sustainable. They may be the only business on Facebook whose advertising is sustainable... but that would, by itself, justify a gigantic valuation for Facebook. (Perhaps not any particular valuation.)
Definitely NOT a ponzi scheme... Many companies with amazing revenue (and PROFIT) come back to Facebook ads again and again.
As before the author offers only anecdotal reasoning. I appreciate that FB ads don't work out well for everyone, but not everyone advertising on FB is selling something that should make a profit, or using the FB ads intelligently.
Edit: And I was right as someone already linked in the comments. In fact, same author he just changed the date of his post (http://news.ycombinator.com/item?id=1293119). Blog spam?
Your logic makes sense, assuming in fact Zynga does have sustainable profits, which might be true (although I guestion whether simple web games are a defensible business, competition easily cuts it).
But, assuming that is true and you are right, does that still justify Facebook's valuation if it is entirely dependent on one company, Zynga? I would conclude that Zynga would be worth quite a lot, but that would make Facebook's position quite a bit weaker, do you agree?
Also, the feedback loop is that Facebook's valuation and success spurs people and investors to start companies and then advertise them on FB. This has been my experience talking to many (not all!) would-be entrepreneurs and investors in new york and the valley. I'm interested in learning about different experiences you may have had.
It's very hard for me to look at a company doing $740 million in revenue from the likes of Coke and Proctor & Gamble and say that it's not sustainable. I'll admit it's possible they are all just blowing their money away, but that seems less and less likely.
Err -- television ads also just serve to get in the way and annoy users, when they want to sit and relax and do something completely different from hunting-for-stuff-to-buy.
But last time I checked, most TV channels are still running ads, 50+ years on.
b.) There are plenty of websites out there which are profitable through advertising without the logic of "viewers came to the site to look for something". Maybe that's a better example. Again, you could argue that facebook adverts aren't identical to those found on most sites, but that doesn't change the fact that website advertising can (and often does) work.
However, that doesn't take away from the fact that it is factually wrong to say that adverts don't work on websites where the users aren't already looking for what the adverts are promoting.
The difference would be that you are "already watching TV", in the same sense that Google had you "already searching for something", but this same logic applies so long as the ad being placed is for something on Facebook, which many of them are.
Targeted ads work, just like google. But facebook is like a 24/7 annoying infomercial channel.
Having said that - I still think Facebook ads might work in the long run. While they are annoying, they are also highly targeted and will only get more targeted in the future.
Not necessarily - in the UK, ITV is free-to-air and entirely funded by advertising and sponsorship.
Even the BBC (tax payer funded) has a (separate) commercial arm to make and sell programming.
TV adverts are often entertaining, point me to products I didn't know about and they give you chance to go to the toilet or get a drink.
Also, very often they are relevant e.g. in Motor racing or shows about Houses.
I've yet to see and advert on Facebook that's useful or even just entertaining.
Nobody pays Facebook advertisers anything. They only pay Facebook. Its a pyramid scheme, but thats a horse of a different color.
All it is is a business model that the OP doesn't think will work, long-term. I thought the same thing about twitter once. But "a business model I wouldn't bet on" doesn't make as good of a blog title as 'ponzi scheme'.
Paul Graham takes the same line of reasoning in declaring that Yahoo is a "de facto ponzi scheme". http://www.paulgraham.com/yahoo.html .
Finally, and I didn't write this in the article (yet), but it's clear that it's acting much more like a literal ponzi scheme with the recent Goldman investment. Accel partners has mostly cashed out to new investors (http://techcrunch.com/2010/11/19/accel-facebook-chunks-of-st...), and I personally know of some major top investors who have cashed out of most of their stock in Facebook. They rode the wave and have sold on to new investors. Goldman is (literally) banking on the public investing later at an even higher valuation at the IPO they will be running themselves.
Facebook doesn't have this feedback loop.
I'm not necessarily agreeing with the author as much as I'm trying to point out the fallacy of believing every ad platform is effective. Your argument seems to be "if the ad is failing it must be the ad that's ineffective". But that logic only works if we're sure the platform itself is an effective ad delivery system.
This author's theory is that Facebook is not an effective ad delivery system and your comment doesn't really offer evidence to disprove that.
http://www.readwriteweb.com/archives/facebooks_3rd_biggest_a...
* They could compete with Groupon (Or buy them). Groupon is an inherently social business, and Facebook can enjoy it. * They could compete with Skype and other VOIP service. Perhaps replacing telephony. Almost everyone has facebook, and you already have you friends inside, seems like a pretty direct step (After all, people come to facebook to communicate). * They could replace photo sharing websites (Flickr, Picasa...) if they just improved their photo's app (e.g. being able to view high resolution images). * They have the potential to become the internet ID for everyone, so that you could log in to almost any site with facebook.
I can probably come up with many more... I think the real question is whether Facebook can execute or not.
They will not replace Flickr. Anyone who cares anything about photo sharing or has slightest knowledge about sharing photography will not diminish the value of services like Flickr. First of all "just being able to view high resolution images" is not as easy as you think it is. Can Facebook truly scale providing support for it? Will people who share pictures on facebook even care for those things? Wouldn't you rather have ease of album creation over viewing exif data? Flickr and Facebook are different. I think Flickr cannot be replace.
They have the potential to become the internet ID but would you want to create a Facebook profile to have an ID? Many people would rather support things like OpenID. And would you want to login to sites using your Facebook ID, where the website could really scrape info about you?
They can compete with Skype just as GTalk is trying to or countless other messengers are trying to. But I am sure there are many who prefer Skype over these services in the offices and at home.
All the problems you have mentioned are engineering problems.
Same thing with Skype-like VOIP services. If you're offering free calls, sure you can get users. But the second you start charging, you're going to be competing with Skype et al on merit (and for the much smaller number of users who are willing to pay a non-zero amount for the service), and they have a big head start.
It sure doesn't look trivial to me. Facebook doesn't have a "natural advantage" versus other players in any of those fields. In fact, it seems like they'd be at a disadvantage, since those companies are specialized -- they can afford to put all their effort into being the best photo-sharing service, VoIP service, etc., in order to get people to open their wallets.
I'm not as bearish on Facebook as the author but I do think they have some significant challenges ahead. Translating users (even engaged users) into revenue is a challenge that lots of other companies have failed at, so their success is in no way certain.
I can't figure out how Facebook will monetize, long-term, just as I couldn't figure out in the 1990s how AOL would monetize, long-term. AOL has been a dying property for a long time, but it was the platform on which a lot of free riders formed lasting friendships that have turned into real-life, face-to-face friendships. I'm perfectly content to be a free rider on Facebook on the same terms. Monetizing Facebook is a problem for Facebook's investors--it is not my problem. When Facebook eventually dies, as it surely must unless it comes up with an appealing way to monetize, I will move on with hundreds of good friends to the next new Internet thing.
People go to Facebook to interact with their friends. It is fundamentally different from the ad platform that is Google. People go to Google to find something they need, possibly ready to buy, which a good percentage of the time can in fact be solved by someone's ad.
What ends up happening is that people repeatedly bring up the same strawmen, so I try to address the most relevant justifications and opposing viewpoints.
You're right, the fundamental difference between search ads and social ads can be a whole interesting blog post on its own.
Our startup has had a large amount of success with Facebook ads. Their segmentation makes it easy. In fact, Facebook ads are so successful it's becoming a danger. To some extent, we are reliant on them as a lead source and that's a really bad situation to be in.
But yeah, post a sensational title, reinforce that title 4 times in the first two paragraphs and then at the end say something like this:
>> Yet, their value and growth continues because they can use that money to grow their user-base more and assert profitability (in this sense it's not quite entirely a ponzi scheme, but there is no closer idea). It's possible that they do not even realize that they are like a Ponzi scheme.
What? It's not quite entirely a ponzi scheme?
There's a difference between an ad platform that doesn't fit your customer acquisition model and a ponzi scheme.
What you might not know is that demand generation spending is 10X demand fulfillment. You should definitely take that into account when assessing facebook.
Also, the reasons users like facebook is unrelated to their ad platform. I would say that alone makes it not a ponzi scheme.
While I am by no means an expert in the field, they need to remember what they are and focus on that. Far more promising a prospect is the revenue sharing they do with companies such as Zynga. This model exploits all that Facebook does well: high retention to the site, and a high return rate. They need to stop focusing on ads as a form of revenue and monetize their social aspect creatively.
In other words: not a Ponzi scheme, just an ad platform that is ineffective for some kinds of campaigns.
On my site the bounce rate from Facebook clicks is 25% lower than the site average, and the the average user visits 4 pages per visit.
And I'm targeting software developers. A group more likely to be ad-resistant than many other groups.
You have to know how to optimize a Facebook campaign in-order to be able to make an effective one. Facebook's problem is that they make it easy to run an ad campaign, but not easy to run a good campaign.
It's rather limiting to think Facebook as an advertiser like Google. The real potential of Facebook is way beyond this. Facebook is not just connecting people to their friends. It is a middleman - a platform that connects customers to vendors, fans to artists, and gamers to game developers, and there could be much more than these. Think iOS as a platform that connects mobile users and app developers and how it has worked out - and would have worked out even it was a standalone company. Maybe someone will develop an Amway-style direct selling platform on Facebook. Maybe someone could develop a CRM and compete with salesforce.com for SMB. Or maybe a Priceline clone with social features would emerge. And good thing is Facebook does not need to do all these. It just need to inspire a developer community around it and evolve its platform to support new possibilities.
It's gold rush again, and like last time - it wasn't the gold miners that get rich; it was the people who sold the miners and other gold rush followers the tools and supplies they needed.
If you don't like a company, don't invest in it, and don't use it's products. But it's not your duty to scare other people away, especially not by reading tea leaves.
First, any ad buy is a gamble. Perhaps investing $100 in ads on Facebook can result in $1000 in sales. But the payoff here has everything to do with your own business, and nothing to do with the Facebook platform. Literally: mind your own business.
Second, I am interested in the thoughts of long term Facebook/Twitter/etc employees. These are people with actual knowledge of the roadmap, revenue, and vibe inside a company. Everyone I personally know at Facebook is extremely happy and bullish about their career there. Ask a friend that works there if it is a Ponzi scheme and watch his reaction.
I am interested in constructive advice about how you are building a successful startup.
I an not interested in these hit pieces from casual observers. I think the small portion of bloggers, commenters, etc. that try to knock Facebook down are having sour grapes. Are you really more confident in your own business acumen than Zuckerberg's? Is your business model perfect, with bubble free growth unto eternity?
But ultimately, there's nothing constructive here. What am I supposed to take away from this article?
The PG Yahoo article is a totally different beast. He was inside the machine and is offering his intimate business knowledge. This article is useless. Yet HN eats it up for some reason...
Disclaimer - I am not at all affiliated with Facebook but I was at the YC at FB event last week and it was fun.
He makes a case that they are not like Google's ad platform and then goes on to only account for a small subset of Google's ad platform (the part that is on Google.com search). Facebook ads are really much closer to Google's ad platform on (for instance) gmail.com or any non-google website, but he ignores these.
Most of his post could have replaced "Facebook" with "Billboard" or "radio ad" and be written in 1920.
As an aside, I have clicked on Facebook ads. Mopeds are listed as one of my interests, and two months ago there was an ad from Honda for the new Elite 110cc. I had no idea that they brought the Elite back. Targeted Facebook ads actually informed me of that.
It goes without much saying that the vast majority of ads are never clicked on or even noticed. But that's the case with Facebook, adwords, billboards, and so on.
I didn't read that at all. I got the clear impression that his case was based on Facebook Ads being ineffective as compared to ads on other platforms.
The way I read it he has two basic points.
1. Facebook ads are different than Google ads (or other web site ads) because you go to Facebook to interact with friends while you go to the rest of the web to find information. So ads can fulfill the user's purpose on Google by providing information but they're just getting in the way of the user's purpose on Facebook.
2. Facebook's growth hides the fact that the ads don't work. Because from a revenue standpoint its hard to distinguish return customers from new customers and only return customers signal a successful platform. So people see Facebook successfully selling ads and assume the platform works when in fact its being driven by a stream of new customers who try it and fail.
This is a false argument. If I interact with friends I talk about stuff I am interested about. There you have your connection with ad. Even just mentioning someone's look or hair color could immediately trigger an ad for something related to it and commercially interesting.
> People go to Facebook to interact with their friends. It is fundamentally different from the ad platform that is Google. People go to Google to find something they need, possibly ready to buy, which a good percentage of the time can in fact be solved by someone's ad. Facebook ads, on the other hand, annoy users. They yield no real value, and thus no profits.
I think what you're trying to say is that CTR ads perform better in search environment.
But it's certainly a completely useless advertising medium, from my limited experience with them for a few months. We spent hundreds of dollars of advertising on an iPhone app, and I don't think even moved the needle once.
I remember in university we could reserve a small budget (25-50$ to advertise our events for software students (SOEN/CS) and spend it on Facebook because of the amazing targeting. We could ask that the ads only be send to people from our school who had their majors put in and hadn't yet graduated. That's perfect targeting and it actually worked pretty well. Better than papering the university walls with flyers that's for sure; no one ever read those.
Do you have any sense that people saw and acted on your ads?
Though one thing I don't remember asking was whether "Facebook" meant Facebook ads or the other strategy for promotion on Facebook: create an event, invite everyone and tell all those people to invite everyone else.
Honestly it may be interesting news to hackers, but that's a lot of bandwidth that could be spent talking about startups. Just sayin'.
by acting as an intermediary, as in the example given, or by actually selling goods or services that Facebook users want to buy?
As it stands right now, sure, Facebook ads suck. They're all the way to the right, and they're tiny and unremarkable.
But right now FB is focused on growing their platform. Why wouldn't they be? It's not like they're beholden to any public shareholders. Once that changes, and those shareholders begin to pressure them, FB will turn their attention to ads. How could any sane business owner ignore that?
EDIT: Deleted my sub-response to Tom b/c it wasn't phrased well. I'm not interested in the author's contention, because whatever point he's making assumes that FB won't improve their ads. He even says:
"Mark Zuckerberg might have a fit of brilliance and then announce a revolutionary ad platform that somehow actually works on social networks. My guess is not."
FB is a company with 1000 bright engineers and a strong data team. I'd be shocked if they didn't know how poorly their ads are performing, and I'd also be shocked if they weren't working on a better ad platform right now. Dismissing a company with FB's user base, funding, and engineering team with a ridiculous quote like above isn't a compelling argument.
I'm not sure it would be altogether brilliant for Facebook to improve their advertising to be action-oriented as opposed to passive. People use Facebook for events and will soon use it more for Q&A and eventually "what ___ should I buy?". I think it would be common sense at that point to have ads targeted to a user's planned action, just as in the past ads have been targeted to very specific demographics.
I've heard this argument but have yet to see any substantial evidence.
They have already started getting their code onto other people sites with the Like button and all the share buttons; the next logical step is a Facebook ad platform like Ad Sense that can target specific demographics. This will make lots of money.
There are plenty of people who drop $1k on Google ads and end up with nothing to show for it too. Just because it doesn't work for some people doesn't mean it doesn't work for others.
Um, I don't know that I'd refer to to social games as an "extremely niche business". Also, social commerce/group buying sites have received incredible ROI from advertising on Facebook.
Soon Facebook will know more names and email addresses than gmail and unlike Google it has no problems selling them to advertisers.
The Facebook Credits virtual currency stuff also has huge potential but I just don't think Facebook has found their "AdSense" yet.
iPhone is a platform for mobile applications.
Facebook is a platform for social applications.
Why would the latter not be marketable?
Do not make a mistake in thinking the same model or whatever you define as a social network will function the same in the future.
Facebook will do everything it can to preserve large cash stable and market leverage so it can morph its business into whatever it deems necessary or market demands of it, again and again.
Also, the author does not know what a Ponzi scheme is. Facebook Ads might be unsustainable, but it's not a bona-fide confidence trick of any sort, just like the VC dot.bomb burst at the turn of the century wasn't a confidence trick.
"Those little ads? Nobody clicks on those!"
He immediately understood that I meant Facebook and after chuckling he actually paused thoughtfully.
Fingers-crossed, but I think his current fund is too conservative for that sort of thing.
The author would like to make a similar investment, but make it a short, basically sell, bet that the value of the stock will go down, through an intermediary.
All it takes is a willing accomplice with the right connections.
securitize (i assume) means to make their stock, or some portion of facebook liquid enough for buy/sell on a market. If there aren't people out there willing to buy or sell facebook that last part won't work.
Shorting something (in financial terms) is to bet against the product. For example, in normal publically traded stocks, you could pay someone to borrow their stocks of a company, sell the stocks off, wait a period of time (duration dependent on deal with original owner), expecting the stocks to loose value, then you rebuy the stocks, hopefully at a lower value. You make the difference between what the stocks started at, and what the ended at, minus the fee for borrowing the stocks.
Shorting stocks is tricky, really only works well over short timelines, and has unlimited downside (unlimited loss potential). For example, if you attempted to short google stock, and then the stock went to some astronomical value, you have to shell out the money to re-buy those google stock to give back to the original owner.
Some minor details:
I want to bet that Facebook is worth way less than people think it is, as in the other responses.
The idea I had in mind doesn't require any liquid ownership in Facebook, but rather that people would bet against me. (Derivative/future, not equity)
Which I think they're silly enough to do.