Predictions holds true: "Facebook is a Ponzi Scheme"

http://www.forbes.com/sites/ryanholiday/2012/05/17/perlas-prediction-holds-true-facebook-is-a-ponzi-scheme/

by ljlolel • 14 years ago

82 82 14 years ago

johnrob• 14 years ago

There has to be a better term than Ponzi Scheme. The point being made is that (in theory) a bunch of customers will buy ads on facebook, see poor returns, and not renew their ads. In the early days, this pattern will look like impressive growth, and people will think that growth is for the long haul.

ljlolel4• 14 years ago

I think you're right. English doesn't have the right term (does another language?). Paul Graham used the same term in another essay.

Should we make one up right now?

tgrass• 14 years ago

It reminds me more of the tourist attraction that promises to show you a creek that runs uphill. The kids scream from the backseat to see it, dad caves and turns in and pays $5 for parking. Kid gets disappointed and as an adult vows to never waste his own children's time.

zackzackzack• 14 years ago

I wish "Positive feedback cycle fuelled by new advertisers' naivete" had a better acronym. PFCFBNAN doesn't have the ring I was hoping it would.

squidfood• 14 years ago

How about just "bubble"?

jerf3• 14 years ago

Petri dish growth.

Cells in a petri dish can exhibit a behavior where they grow quickly, consuming the sustenance where they are, and expanding outward in a rapidly growing ring, as the middle starves, until the landscape is consumed and everything starves. The XScreenSaver "GLCells" [1] is a simulation of this effect. By all the simple metrics like cell count or cell mass, everything looks great... until it's not.

A biology expert may be able to tweak this. If this phenomenon has a specific name, that would be even better, but I doubt I can google it up.

(Incidentally, I'm just offering this up as a term. I think the title is premature; it has not been proved that this is the case for Facebook. If we are going to speculate that they may in the future not be able to continue making money as they are today, they still have a lot of runway. I'm not itching to buy shares, but I wouldn't personally guarantee they won't be able to make money.)

[1] http://www.jwz.org/xscreensaver/screenshots/

toemetoch• 14 years ago

How about just "facebook" as the word that describes this affair? After all, that's how we ended up with "Ponzi" scheme.

vannevar2• 14 years ago

I'd have to agree. By that definition, most startups are Ponzi Schemes. If you grow faster than the GDP, you're most likely cannibalizing other businesses. Eventually you'll run out of competitors to cannibalize and your growth rate will flatten to approach the background growth. If your stock price is predicated on the unsustainable growth rate, it will collapse. But that's not a Ponzi Scheme. If Facebook took in revenues from new customers and used them to buy fake click-throughs for existing customers to inflate their ad rates, then THAT would be a Ponzi Scheme.

ljlolel4• 14 years ago

No, you misunderstand.

High growth is not a ponzi scheme. High growth with no value is. Going flat is fine, Google did that.

Losing a lot of traffic because people stop using your worthless site entirely is bad. Groupon will do that.

jerf3• 14 years ago

"If you grow faster than the GDP, you're most likely cannibalizing other businesses."

That sounds an awful lot like zero-sum thinking.

wmf• 14 years ago

I think something that only works once is a "gimmick".

georgehaake2• 14 years ago

Shit, everything that does not involve direct transactions on the web is a big Ponzi Scheme.

ljlolel4• 14 years ago

I specifically note that Google's ads are quite effective. They are not direct transactions.

georgehaake2• 14 years ago

Specifically noted...

jarcoal• 14 years ago

This is kind of ridiculous... someone has a positive ROI on FB. If no one does, then CPC/CPM prices will drop until they do.

ryanholiday7• 14 years ago

Have you seen the CPM's on Facebook? They have dropped. They're about as close to zero as they come...for a reason.

epoxyhockey• 14 years ago

I setup a FB CPM campaign over a year ago, at a very low CPM bid, and basically forgot about it because my ad never outbid other campaigns. Then in September of last year, it started spending the daily limit.

I initially thought that FB was fudging the black box to extract more money out of advertisers before the IPO to make itself look better on paper. But, now I'm more convinced that the market for FB advertising has dried up a bit, confirming your comment.

Locke1689• 14 years ago

Now, it is possible that some extremely niche businesses have found limited utility from ads (for example, BustedTees and social games may be the lucky few)

Woah, wait, stop. It was jarring that the author glanced over this. You can't dismiss the exceptional just because it's exceptional. You can dismiss the exceptional when you understand why it's exceptional and can make an argument for why it is irrelevant.

In other words, why are social games and Busted Tees successful? There's really not a lot of obvious crossover in what they're selling. One possible explanation is that they're "impulse" purchases which mesh well with a social environment. Social games mesh because Facebook connects you to people and once you're connected you would like to do something with them. T-Shirts seem to be a similar sort of social sharing, à la Pinterest. This seems to imply a lesson: if you wish to market on Facebook you should probably be marketing with Facebook. GM probably didn't have success because what they were doing was really orthogonal to the Facebook experience.

One thing that people tend to forget is that most ads are really bad. Just because naive advertisement doesn't work on Facebook doesn't mean all advertisement doesn't work on Facebook. I wouldn't count Facebook out so quickly -- they just need to pivot their advertisements to make them more lucrative for all involved.

ljlolel4• 14 years ago

The point is that these are small markets (funny shirts) compared to stuff that actually makes lots of money (cars).

Funny shirts do not a $100 billion company make.

mikeryan3• 14 years ago

If I had to guess I'd say a very large portion of Google Ad Words revenue is made up of Funny Shirts. Or San Francisco Dog Walkers or Faucet Sales in Portland.

You're digging yourself into a hole with this position. Very successful advertising businesses are built on small niche advertisers. (valpak anyone?)

The question for Facebook is whether there's enough of these successful advertisers to make a 100B business.

evilbit• 14 years ago

no, man, you don't understand: this is the genius of economy 3.0, where we all make money by sitting on our ass playing xbox 360 and selling farmville ads for funny, made-in-china t-shirts.

hdctambien• 14 years ago

Does GM get better ROI on its TV commercials that I skip with my DVR than it could with Facebook ads that just sit there on my screen glaring at me?

ryanholiday7• 14 years ago

I agree with Perla and have found the same to be true in my experience. I would agree with him implication though, that the reason those ads work is because they themselves have sketchy business models. Think about what you see a lot of on FB: paid higher education, ebook/seminar stuff, gimmicks, apps, t-shirts. In other words: high margin crap. It works because they can play the hot potato game, passing the loss on to the buyer (just as FB did to them). GM didn't have success and neither did American Apparel or most other brands because they make and sell real things with real business models.

chintan• 14 years ago

> Just because naive advertisement doesn't work on Facebook doesn't mean all advertisement doesn't work on Facebook.

We provide local services and Facebook Ads have worked WAAAY better than Google Ads. We have a simple "lead-gen" type model. They are cheaper, they give MIND boggling number of impressions. Early 2010, they were really cheap.. then costs started going up. Still its cheaper than buying Adwords.

seanalltogether2• 14 years ago

I think you're on to something there. GM ads probably took you away from Facebook and away from your social sphere, if they had instead kept the user inside facebook and continued the ability to interact with your friends, they may have created a lucrative opportunity for themselves.

bryceneal• 14 years ago

Well I guess this means that all major television networks are ponzi schemes, seeing as how their major revenue source is advertising. The bottom line is that eyeballs are worth money. Facebook is made up of great content, even better than CSI or the Superbowl. Essentially - all your friends and family.

It also goes without saying that ads are not their only revenue source. They take a sizable chunk of Facebook credit purchases, and have shown that they are dedicated to expanding their platform. I don't think that Mr. Holiday is looking at the big picture.

vosper• 14 years ago

A major difference between Facebook ads and TV ads is that Facebook doesn't completely interrupt your content viewing for several minutes at a time in order to show you an ad - they're easy enough for your brain to filter right out.

nextparadigms• 14 years ago

Facebook is a ponzi scheme, but for a different reason. Look at the sky high valuation. Facebook is not worth $100 billion, not even close. The only reason the valuation got so high is because Facebook's "future valuation" has been "sold" to us ever since they got to a $20 billion valuation or so. So some investors bought Facebook shares, then made a big deal about it to others, and then the others bought at higher valuation, and so on. Even now, they keep doing this.

mikeryan3• 14 years ago

Facebook should have earnings of around $1B this year. A $100B valuation (100P/E) is high (very high) but within the realm of possibility.

I'd expect their market cap to settle between 30-45B within around 6 months (unless they launch some revolutionary ad or product stream - but wouldn't they do that pre-IPO?)

shangrila• 14 years ago

A P/E ratio of 30-45 would still indicate the market believes in a very high potential for growth. That just doesn't seem reasonable. Their potential user base is already nearly fully saturated (the SEC filings show no growth at all in some markets), and people already seem to spend as much time as they possibly could online using FB. What could FB do to grow revenues that much besides sell more of their users' data or cram every page with more ads, both of which would risk driving away users?

seanalltogether2• 14 years ago

Perhaps the problem with Facebook is relying on click throughs as a measurement of success for ads. If Facebook is more of a consumption site, then the ads should be more tailored for eyeball count rather then click count.

tferris• 14 years ago

> Facebook ads. They are worthless.

tnash2• 14 years ago

This is why I firmly believe that the "Give stuff away for free + advertising = $$$" model will fail. People need to sell products, for money. That's what I'm going to do with my startup. Consumers will be customers, not the product.

Tossrock• 14 years ago

It seems like there are three fundamental business models for tech startups right now, the first and most profitable being to impose oneself as the middleman in a real money transaction, the second and less profitable one being reselling AWS services with some frosting, and the last being the word "...ads?" scrawled on a cocktail napkin.

Seems like most tend to go for the last one.

mindcrime• 14 years ago

It seems like there are three fundamental business models for tech startups right now

Don't forget the other one:

4. Sell a product to businesses that have money to spend.

taligent3• 14 years ago

One of the most successful and enduring businesses of the last 100 years has been television. A large chunk of which uses such a model. So the idea it will fail is a little misguided.

tatsuke954• 14 years ago

That model is still hanging on because old people still watch television. Meanwhile, young folks are downloading shows or recording them with a PVR so they can skip commercials. The best shows on television are on premium cable, subscription based, with no commercials. Netflix, Hulu, Youtube are great alternatives.

How are radio and newspaper ads doing? Just because the television advertising model hasn't crumbled yet doesn't mean it's invincible.

tnash2• 14 years ago

You're correct. I may have embellished a little. I should have said "fail for most" instead of "fail". Google, for instance, makes money off of advertising, as it says in the article. It would be dumb of me to suggest that the model doesn't work at all. I apologize.

duopixel• 14 years ago

Facebook is sitting on top of a tons of personal data that is incredibly valuable to marketers. They currently don't share this information, but if the "Ponzi Scheme" were to start crumbling all they have to do is give more access to data.

Suppose your spouse's birthday is coming up, Amazon targets you with a "<name>'s birthday is coming up, here is something she/he likes". As simple as that.

antr• 14 years ago

Does it have value? Yes.

Is Facebook worth $100bn? No.

There is a difference between value and price, and startups/VCs love to play with both terms to make their economic case.

fusiongyro• 14 years ago

There's competing forces. Monetizing the private data means more privacy invasion, which drives users away and reduces adoption. But for marketers to give it a second chance, they have to know that more private data is being used. They can't keep it secret from the users and make it widely known amongst marketers at the same time.

This would buy them a second round of Ponzi-esque usage. But in order for it to be sustainable the second round has to succeed: they have to find a way to get FB users to convert. And so far, it looks like targeting ads to smaller and smaller more precisely defined demographics doesn't help all that much. Without a new twist, this is a limp-along tactic, not a road to viability.

chris_wot• 14 years ago

This means they violate their existing privacy policy. Then folks start suing. Could be very costly.

jrs2352• 14 years ago

Facebook isn't like the yellow pages, your viewers aren't hot and ready to buy or looking actively shopping. Ads on Facebook (while target-able) should be used for brand building and recognition. Don't expect immediate sales or active clicking. Purchase and spend with this in mind and weigh it against your marketing goals and strategy.

ryanholiday7• 14 years ago

That's true EXCEPT the unit doesn't lend itself to that style of advertising. The biggest ad unit you can by on Facebook is 110x90 pixels. Try selling a car in that space well.

sabat2• 14 years ago

It's a shame that this is set in stone, and that Facebook cannot do anything to change or improve this.

vibrunazo• 14 years ago

Facebook allows you to choose to either pay for impressions or for clicks. If you choose to pay per click, then why exactly is it only for branding? If the user clicked your ad, then there's your intent. If he didn't, then you didn't pay anything anyway.

Why exactly is that everyone keep repeating that facebook ads are for branding, there's no intent, low CTR etc. When you opt to not pay when a user doesn't click anyway?

In the article he talks about an example of a person who payed $100 to sell a single book. But I just looked at Facebook, and it costs around $0.25 per click. That means that 400 people actually clicked on his ad and only 1 bought a book. That's not a low click-through-rate, that's a low people-interested-in-your-book-rate. How is that problem any different from Google?

jrs2352• 14 years ago

Touche. I'm not entirely familiar with the options. In this case if you go the CTR route, then you could still possibly use it for branding purposes but still have the click through try to funnel a person into a sale... makes me wonder if there is click fraud going on. Anyways if people don't click on ads, then you might be able to game the CTR route.

Cyranix• 14 years ago

Slightly off-topic, but is there a way to bet against Facebook? If one were to accept the premise that Facebook is Ponzi-like, would it be possible to make money off its assumedly forthcoming collapse (indirectly, as collateral of the collapse, not in a way that actively seeks to harm other parties)? I ask because it seems as though the only actionable intelligence from this line of reasoning is to stay away from Facebook, with no mention of a way that such knowledge can be turned to further advantage.

jackpirate• 14 years ago

The simple answer is either to short sell(http://www.investopedia.com/university/shortselling/shortsel...) stock or buy options (http://en.wikipedia.org/wiki/Option_(finance)). There's probably more complicated ways too.

jonknee2• 14 years ago

There is, you can short the stock. But that isn't allowed to start until a little ways after the IPO.

tatsuke954• 14 years ago

If you're confident that Facebook is going to tank off the hop (and brave) you could short some other tech stocks (GRPN, LNKD) in the hopes that the negative sentiment spills over.

dclowd9901• 14 years ago

I think what we're seeing here isn't an issue of Facebook's viability as an advertising platform. It has the eyes, and it has the in.

Consider this: I post a link on my friend's wall about a show coming up that I want to see playing locally. Why isn't Facebook right in there with a ticket deal for two? Is it invasive? Maybe a little, but if it's coming in with a deal, then it's more than likely a welcome invasion (as odd as that sounds). Hell, if the deals are good enough, you might even see people encouraged to spout off keywords to attract ad bots.

People are using the tech to connect to one another on a social level. Even Facebook doesn't understand this yet.

With our site NoSweaters.com, we went out hunting the web to see where people were asking the question, "What should I get my <person> for <occasion>?" It's a question being asked everywhere, and especially on Facebook. Why are they not right there with suggested items?

It seems like a staggering oversight. No, Facebook isn't Google, but it's got such amazing potential.

markerdmann• 14 years ago

I have to agree with Ford[1] on this one... Facebook ads offer a terrific ROI (in my experience). I'm very surprised by all of this negative press.

[1] http://www.freep.com/article/20120517/NEWS09/205170633/Faceb...

ryanholiday7• 14 years ago

What do you sell?

georgieporgie• 14 years ago

Forbes recycling recent news and extrapolating rather baseless conclusions.

HN needs a Forbes filter.

Edit: turns out the HackerNew Chrome extension allows domain filtering. Yay!

ryanholiday7• 14 years ago

I've known Joseph for a while--I wanted to make sure he got credit for being right about this over a YEAR ago. Meaning GM could have saved $10M if they'd read his blog.

pan69• 14 years ago

Facebook is a brand awareness platform, not a lead generation or point of sale utility.

SeanLuke• 14 years ago

I fail to see how this is a Ponzi Scheme.

In a Ponzi Scheme, early investors are paid returns based on the investments of later investors.

So who are the "investors" receiving returns? If we're talking about ad buyers, they're not being paid anything worthwhile regardless of when they invested, early or late. If we're talking about shareholders of Facebook, early shareholders aren't receiving returns based on later shareholders.

Perhaps describing Facebook as a bubble might be more apt. But it's pretty strange that this guy spent all this effort to define what a Ponzi Scheme is only to mis-describe something as a Ponzi Scheme.

gallerytungsten• 14 years ago

re: "So who are the "investors" receiving returns?"

The VCs and everyone else who got in before the IPO.

hansef• 14 years ago

The whole argument here is predicated on the idea that Facebook won't figure out ways to provide more value to and derive more value from its userbase, and that advertisers won't figure out how to adapt to social advertising as a medium more effectively. Big brand marketing is very much in a radio-to-television-style transition right now: just because the old bag of tricks doesn't work when glued onto a new channel doesn't mean that social will never provide value to media buyers. Facebook WANTS their advertisers to succeed, and you can bet there are a lot of very smart people thinking about this problem right now.

I think the far bigger threat to Facebook is in the "it stops being cool" market fragmentation possibility. As long as a huge percentage of people in the world are spending a chunk of their time on Facbook, I wouldn't bet against eventually finding a way to market to them effectively.

programminggeek• 14 years ago

Facebook is probably not as "effective" at large spends as traditional media buys are, but Facebook is an INCREDIBLY lucrative system for advertising and social interaction if dealt with in an intelligent way. I think the problem people are having is the impedence mismatch of treating pull based engagement to traditional push marketing.

Traditional advertising is about pushing people to buy a product like a car or soda. Pull based engagement is more about people seeking you out and your business interacting with them at a time and place of their choosing.

Facebook is a social network, not a shopping mall or yellow pages. Google is more of a yellow pages for most people. I bet GM would be more successful if their $10 million spend went to push local dealerships and created customer to dealer relationships via coupons or creating local car clubs for various brands/models.

Local businesses would be more successful on FB if they treated as a lead gen system to build up their own mailing lists to offer ongoing coupons, sales, information, etc. You know, creating a relationship with them.

The point is, all of this goes against traditional advertising and marketing ideas where you just had to blast out a bunch of ads to TV, Radio, Newspapers, or more recently Google. Buying ads on Facebook isn't about flipping $1 of advertising into $2 in sales. That works for a few niches. For everyone else, use the cheap lead acquisition cost to build a long term relationship. It's harder, but it's WAY more valuable.

sthomas1618• 14 years ago

I find myself clicking ads on only two sites: Reddit and Facebook (among the 20 or so sites I don't adblock). Facebook has been pretty good at personalizing ads towards me (although I had to hide the ads that went along the lines of "learn to code at so-so online uni"), but what gets me to click is the "This many friends liked this". Digital word-of-mouth really is effective. Maybe I'm some extraordinary exception... I would still think Facebook has an amazing potential make a profit. I mean, it sure helps that it has 900 million customers/products.

jinushaun• 14 years ago

Agreed. Anecdotely, I click on Facebook ads all the time. I don't remember the last time I've clicked on a Google ad.

rsanchez1• 14 years ago

"I wish I could short Facebook."

I bet he is loving that Facebook went public.

Predictions holds true: "Facebook is a Ponzi Scheme"

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