
Predictions holds true: "Facebook is a Ponzi Scheme"  - ljlolel
http://www.forbes.com/sites/ryanholiday/2012/05/17/perlas-prediction-holds-true-facebook-is-a-ponzi-scheme/
======
Locke1689
_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.

~~~
ljlolel
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.

~~~
mikeryan
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.

~~~
jonknee
Because you go to Google when you want a dog walker or new faucet, you don't
go to Facebook.

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johnrob
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.

~~~
ljlolel
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?

~~~
zackzackzack
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.

~~~
guscost
Maybe just "bubble" instead?

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nextparadigms
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.

~~~
mikeryan
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
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?

~~~
taligent
Well firstly it is ridiculous to assume that their potential user base is
nearly fully saturated. There is massive opportunities if they can get China
and India onboard. And there is still plenty of growth as technology spreads
through the remaining parts of the world.

As for revenue they don't need to have more ads. They just need to continue to
provide different ways for advertisers to find the slice of Facebook users
they need. Facebook already is much, much better than Google and eventually
more and more advertisers will realise this.

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

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

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dclowd9901
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.

------
hansef
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.

------
markerdmann
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...](http://www.freep.com/article/20120517/NEWS09/205170633/Facebook-
sparks-divide-GM-Ford-advertising-strategies-diverge)

~~~
ryanholiday
What do you sell?

------
jrs235
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.

~~~
vibrunazo
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?

~~~
jrs235
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.

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jarcoal
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.

~~~
ryanholiday
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
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.

~~~
pork
It sure can't be explained by the fact that ad delivery systems are seldom
static and are continually being tweaked based on the latest research....oh
wait, it can, but you just go ahead and pick whatever is expedient with your
beliefs.

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tnash
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.

~~~
taligent
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.

~~~
tatsuke95
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.

------
programminggeek
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.

------
Cyranix
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.

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

~~~
tatsuke95
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.

~~~
tatsuke95
Today:

LNKD down 2%

GRPN down 5.5%

YELP down 6.5%

ZNGA down 7%

Too bad I myself am not brave and did nothing.

------
duopixel
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
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.

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sthomas1618
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
Agreed. Anecdotely, I click on Facebook ads all the time. I don't remember the
last time I've clicked on a Google ad.

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bryceneal
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
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.

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

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

~~~
georgehaake
Specifically noted...

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seanalltogether
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.

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pan69
Facebook is a brand awareness platform, not a lead generation or point of sale
utility.

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tferris
> Facebook ads. They are worthless.

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georgieporgie
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!

~~~
ryanholiday
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.

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rsanchez1
"I wish I could short Facebook."

I bet he is loving that Facebook went public.

