"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. "
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.
TV doesn't run ads to the extreme right margin of whatever else on screen you happen to be watching. If it did, TV advertising wouldn't be worth any money, either.
a.) Not really relevant, the point is that TV shows that adverts can work even if they're not being shown somewhere where viewers are actively looking for something that might be advertised.
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.
Advertisements work when they get people's attention. Google advertisements get people's attention because they're relevant to what the user is looking for, TV advertisements get people's attention because they take up the whole screen and are often funny or dramatic in themselves, Groupon emails get people's attention because they're actionable coupons that users really want to get, and "GOLDENPALACE.COM" painted on the back of a streaker at a professional sporting event gets people's attention because, hey, a streaker! Facebook ads are virtually hidden in a margin on the edge of the screen where users are more or less trained to ignore things.
I completely agree that Facebooks adverts are very badly implemented.
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.
Sounds pretty similar to the network "Up next" ads that run along the bottom everytime a show cuts back from commercial or is about to end.
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.
Facebook doesn't pause what you're doing right now to show you five minutes of ads. If it did, Facebook advertising wouldn't be worth any money, either.
TV ads, if nothing else, enforce branding in people's minds. Like a funny Miller Lite commercial isn't trying to get an immediate purchase of Miller Lite, but just get the brand to stick in someone's mind the next time they are thinking of buying something. Facebook ads don't offer that same brand awareness (or at least it seems to take a lot more money to achieve the same awareness)
Probably because they're off to the right, easily ignored. If I had ads in my news feed I wouldn't exactly appreciate it, but it'd probably be more effective.
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.
It's not a pyramid scheme because the incentive to pay them money isn't tied to bringing in new customers.
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'.
It is not literally a ponzi scheme, as I state very directly in the article. The point is that it is bad in exactly the same way that false returns in ponzi schemes are and through similar mechanisms.
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.
One reason they were excited was Yahoo's revenue growth. So they invested in new Internet startups. The startups then used the money to buy ads on Yahoo to get traffic. Which caused yet more revenue growth for Yahoo, and further convinced investors the Internet was worth investing in.
It seems that the author is attempting to make a case against ads themselves. I'm not convinced there is anything in the post that is Facebook-specific, or couldn't be swapped out with 'Adwords' or 'radio ads' or even 'billboards.'
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 think you missed his point (though I can't really blame you because he has a peculiar writing style).
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.
*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.
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.
Well it isn't a "false" argument it's an argument you disagree with. But your circumstantial evidence (that you click on ads) is no more or less compelling than his circumstantial evidence ("that he doesn't"). The question boils down to which of you more accurately represents the public at large.
I explicitly state that Google's ad platform is good.
> 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.
A definition of Google ad platform that does not include DoubleClick, YouTube, Gmail or AdSense Content Ads does not seem to me like a very complete definition.
I think what you're trying to say is that CTR ads perform better in search environment.
Facebook promises big returns on ad spending, but delivers nothing. 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).
In other words: not a Ponzi scheme, just an ad platform that is ineffective for some kinds of campaigns.
As one of the sibling responses points out, it's not a Ponzi scheme.
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.
Yes. Most events would have 1-2 (out of maybe 50 or so that showed up) that were new and we'd ask them how they heard about it. Most was from word of mouth, a small amount from Facebook and I don't remember anyone saying it was because of a flyer.
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.
If you spend $25 to advertise on Facebook and get just one conversion (new event attendee in your case) that wouldn't really be effective advertising at all unless you would be making at least a $25 profit from that conversion (not including the advertising expense). I realize that in your case you aren't out to make a profit, but you can see how from a business standpoint advertising on Facebook makes no sense in this scenario for most products.
Goldman will soon be offering the public the ability to, basically, buy Facebook stock through an intermediary.
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.
In Michael Lewis's _The Big Short_, some of the people buying CDSs (unregulated "insurance") on mortgage backed securities that they didn't own did the trades with brokers that had never done it before, but figured it out.
All it takes is a willing accomplice with the right connections.
pre-IPO, means a company that is not publicly traded on the open markets.
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.
Both responses you got were more or less correct, sorry for the jargon. I'm a programmer by trade and passion so I figured most would suss it out, I'll have to watch how much time I spend around people that work in finance in future.
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)
Bring Goldman some cash and tell them that's what you want to do. Oh wait, they're long Facebook so they wouldn't want to create a derivative like that. Oh wait.
Author makes a false assumption that Facebook will never improve their ad platform.
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.
Actually the author's contention, true or not, is that Facebook will never be able to improve their platform because people don't go to Facebook looking for information they go there to interact with their friends. So Facebook ads will always be something that's "in the way" and more of an annoyance than a benefit.
While I don't think I would go as far as to call Facebook a "Ponzi scheme", I do agree that Facebook has been lackluster about monetizing their huge user base. The author is right in pointing out that people rarely go to Facebook to research or buy a product. Unlike Google or Amazon, Facebook is not about consumption, it's about reconnecting and taking a break.
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.
Why is this down voted? It seems a thoughtful comment that brings interesting ideas to the discussion. This is not the only case, other good comments are below 0 in this thread.
"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)."
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.
The author is making the false assumption that no one is successful with Facebook ads, no one is. I know many people who have been extremely successful with Facebook ad campaigns for pennies on the dollar.
This is definitely way off base. He's taking a sampling of people who don't know how to optimize ads on Facebook and suggesting that they perform poorly for everyone. There's a reason that his ads were unprofitable: someone else is making money (profiting) and able to bid higher because they can monetize the same market segment he was targeting more effectively.
Do you know that people are making money off Facebook ads for a fact?
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.
AdSense ads could arguably be put in this same boat (when I'm reading a blog am I looking for products?), and yet they provide more click-throughs. Why? Because they look like natural links on the page to many people. Perhaps Facebook needs to make its ads less obviously ads like Google does.
I'm not sure how much this adds to the conversation, since I think it's a pretty common experience, but I honestly can't recall a single thing advertised in facebook. I don't have AdBlock running, I've just developed a complete blind-spot for the right margin of facebook. I don't see how this could be very effective long-term. Conversely, I have clicked on ads in Bing, Google, and Reddit.
Big brands like P&G have begun buying lots of Facebook ads, and they seem quite satisfied with the results of their campaigns (at least satisfied enough to ask for more...).
So...anecdotal evidence that the ads run by the OP and his friends aren't good on Facebook. I guess that's better than nothing for a company which isn't publicly listed, but my estimation of Facebook's value didn't change much based on this data.
"Mark Zuckerberg might have a fit of brilliance and then announce a revolutionary ad platform that somehow actually works on social networks."
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.
Facebook may have not yet found its cash cow, but it has a huge potential. A few ideas from the top of my head:
* 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.
You are simply listing all the internet services and arriving to the conclusion that people will use it because they already have a facebook account.
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.
They could certainly do many of those things, but how would they monetize them? It's easy to compete with another service if yours is free and their costs money (which is why many casual users I know use Facebook and don't have a Flickr account), but if Facebook charged for improved photo-sharing features, as it seems like it would need to if that was how it was going to support itself, then it might be a more difficult value proposition.
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.
When I saw the article title I thought maybe it referred to how Facebook is slowly tricking you to turn over all your friends contact names and emails and then you convince them to turn over theirs, etc.
Soon Facebook will know more names and email addresses than gmail and unlike Google it has no problems selling them to advertisers.
The ad model is truly dying, and I agree that facebook's current revenue model is a placeholder, but facebook has so much cash that they can buy a real business when one comes along. Perhaps that is the idea...
The core feedback loop that would make that analogy mostly coherent doesn't exist. Facebook ads do not convince people to buy Facebook ads.
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.)
Groupon and its ilk also do VERY well on Facebook. If you buy that they can maintain the margins that they currently have, I'd wager they can contribute quite a bit to Facebook's bottom line.
Definitely NOT a ponzi scheme... Many companies with amazing revenue (and PROFIT) come back to Facebook ads again and again.
I'm certain I've the this same exact claim posted here on HN before, from another blogger I assume, I'm a bit surprised to see it 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?
Hey patio11, thanks for the thoughtful analysis of my article.
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.
"(eMarketer estimates Facebook took in) $740 million coming from major marketers like Coke, P&G or Match.com...
Interestingly, Google itself was the fifth-biggest advertiser for the same period, as it was looking to market its Chrome web browser. "
http://adage.com/digital/article?article_id=148236
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.
Right, I think the article misses one of the purposes of advertising. Coke doesn't target ads at people googling "soft drink". Facebook seems like as good a place as any for the kinds of subliminal advertising that Coke does.
this is the most BS post ever... I know many people that made a fortune with facebook ads... Maybe his friends lost money with facebook ads but that does not mean it is a ponzi scheme or anything evil... learn to optimize and split test your ads to reduce your cost then come back with something smarter to say ...
The technical terms you're looking for are demand generation vs demand fulfillment. The former is that pepsi ad where you suddenly feel thirsty, and the latter is the coupon in your spam snail mail. Facebook is the former and Google is the latter.
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.
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[ 2.7 ms ] story [ 218 ms ] threadErr -- 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.
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.
In other words: not a Ponzi scheme, just an ad platform that is ineffective for some kinds of campaigns.
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.
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.
The Facebook Credits virtual currency stuff also has huge potential but I just don't think Facebook has found their "AdSense" yet.
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.
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.
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.
I've heard this argument but have yet to see any substantial evidence.
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...
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.
* 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.
Soon Facebook will know more names and email addresses than gmail and unlike Google it has no problems selling them to advertisers.
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.
by acting as an intermediary, as in the example given, or by actually selling goods or services that Facebook users want to buy?
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.