

Ask HN: Is Facebook benefiting from a ponzi scheme? a bubble? - hasenj

In PG's essay about "what happend to yahoo":<p>&#62; By 1998, Yahoo was the beneficiary of a de facto Ponzi scheme. Investors were excited about the Internet. 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.<p>Is Facebook in a similar situation today? They're not profitable, but investors are investing in them. They even acquire startups!!<p>As far as I can tell, all of Facebook's money comes from investments. They're getting bigger, but not because of any revenue they're actually making.<p>The founders got rich.<p>So economically, how does this work?<p>It seems to me like a bubble phenomenon:<p>Investment money =&#62; grow bigger =&#62; more investments.<p>The guys at the top of the pyramid benefit the most.<p>No actual revenue is being made.<p>I don't even know if they have a viable business model. I don't know the details of whether or not they're profitable yet, or how much they're making, but from what I'm reading around, they're either not profitable or the revenue they're actually making is very small. (Please do correct me).
======
sbaqai
Warren Buffett - Sun Valley 1999 (excerpt from Snowball):

 _"I would like to talk today about the stock market," he said. "I will be
talking about pricing stocks, but I will not be talking about predicting their
course of action next month or next year. Valuing is not the same as
predicting.

In the short run, the market is a voting machine. In the long run, it's a
weighing machine.

Weight counts eventually. But votes count in the short term. And it's a very
undemocratic way of voting. Unfortunately, they have no literacy tests in
terms of voting qualifications, as you've all learned."

"This is half of a page which comes from a list seventy pages long of all the
auto companies in the United States." He waved the complete list in the air.
"There were two thousand auto companies: the most important invention,
probably, of the first half of the twentieth century. It had an enormous
impact on people's lives. If you had seen at the time of the first cars how
this country would develop in connection with autos, you would have said,
'This is the place I must be.' But of the two thousand companies, as of a few
years ago, only three car companies survived. [21] And, at one time or
another, all three were selling for less than book value, which is the amount
of money that had been put into the companies and left there. So autos had an
enormous impact on America, but in the opposite direction on investors."

"Now the other great invention of the first half of the century was the
airplane. In this period from 1919 to 1939, there were about two hundred
companies. Imagine if you could have seen the future of the airline industry
back there at Kitty Hawk. You would have seen a world undreamed of. But assume
you had the insight, and you saw all of these people wishing to fly and to
visit their relatives or run away from their relatives or whatever you do in
an airplane, and you decided this was the place to be.

"As of a couple of years ago, there had been zero money made from the
aggregate of all stock investments in the airline industry in history.

"It's wonderful to promote new industries, because they are very promotable.
It's very hard to promote investment in a mundane product. It's much easier to
promote an esoteric product, even particularly one with losses, because
there's no quantitative guideline. But people will keep coming back to invest,
you know. It reminds me a little of that story of the oil prospector who died
and went to heaven. And St. Peter said, 'Well, I checked you out, and you meet
all of the qualifications. But there's one problem.' He said, 'We have some
tough zoning laws up here, and we keep all of the oil prospectors over in that
pen. And as you can see, it is absolutely chock-full. There is no room for
you.'

"And the prospector said, 'Do you mind if I just say four words?'

"St. Peter said, 'No harm in that.'

"So the prospector cupped his hands and yells out, 'Oil discovered in hell!'

"And of course, the lock comes off the cage and all of the oil prospectors
start heading right straight down.

"St. Peter said, 'That's a pretty slick trick. So,' he says, 'go on in, make
yourself at home. All the room in the world.'

"The prospector paused for a minute, then said, 'No, I think I'll go along
with the rest of the boys. There might be some truth to that rumor after all.'
_

------
ajays
I don't work for Facebook and have no inside knowledge, but here's what I
think.

It helps to step back and take a look at the big picture. Companies have a
certain number of advertising dollars. Companies that are really big in the
consumer space spend large chunks of their revenue on advertising: consumer
goods (soap, etc.), durables, autos, pharma, etc. This money is not going away
anytime soon.

Now, if you're an advertiser, you want to advertise where there are people.
This is why you see the MetLife blimp over big football games. The decals on
the NASCAR cars. The funny ads in the SuperBowl.

For an advertiser, the holy grail is to achieve laser-like targeting: to be
able to advertise to exactly the person who's most likely to buy his product.
80 years ago, the best option for advertisers was the radio. But it's a
broadcast medium; you have no idea who's listening. So you make some
intelligent guesses based on the program content and hope for the best. What's
the ROI on radio ads?

20 years ago the best was the TV: the content was varied, so you could make
better guesses. Want to appeal to the male 18-24 market? Advertise in football
games, NASCAR events, WWF "Rumbles".

Then came the Internet. An advertiser could make even better guesses about the
user; and more importantly, the advertiser could keep track of every
impression, every click and every action. This is good, but still not good
enough.

Broadly speaking: if you (advertiser) are willing to pay $X for a 10% chance
of reaching the right audience, then chances are you'd be willing to pay $10*X
for a 100% chance of reaching the right audience. Right?

And finally there's Facebook. The genius of FB is that the users have, on
their own accord, given FB detailed information about themselves. Thanks to
their social connections, they can't lie much either. I mean, it would be hard
for me to claim I'm a female and single when my girlfriend is a connection on
FB.

People keep thinking that FB will make money from the pageviews. IMHO, that is
not the case. Yes, they have a bazillion pageviews and minutes spent online;
they could make a billion or five per year easy with their pageviews.

The goldmine here is the "like" button. It will allow FB to spread its
influence far and wide; and more importantly, it will allow FB to influence
advertising on 3rd party sites. Instead of buying advertising on, say, CNN and
paying $2/CPM, an advertiser will be able to hyper-target a user and advertise
to that specific user on CNN (or wherever that user is). User + Content = More
Value for Advertiser. So while CNN may get $2/CPM for its pages currently, by
using the "FB Ad Network" they will be able to make more, and give a large cut
to FB too.

Anyways: that's where I think the value lies with FB. Sorry about the long
comment. :-)

~~~
hasenj
Thanks! That's a very well thought out argument :)

The idea that facebook knows alot about me is somewhat scary :/

The problem I see is, people don't come on facebook to find stuff, they come
to checkout what their friends are doing.

According to this link <http://www.jperla.com/blog/post/facebook-is-a-ponzi-
scheme>, the ad revenue is coming from people "experimenting" with FB Ads.
Soon they'll all realize that it doesn't work, and stop.

~~~
ajays
"The problem I see is, people don't come on facebook to find stuff, they come
to checkout what their friends are doing."

I think I addressed this in my comment. I don't think there's much value in
advertising on FB itself (which is what I meant when I wrote the "bazillions
of pageviews" sentence). You are right, people who are on FB don't care much
for the ads.

The real value is in FB becoming an ad provider (or filter), and supplying ads
to 3rd party sites. Because they know so much about you, and the quality of
what they know is so high, they will be able to command a huge premium for
using this information to pick the right ads for you.

------
webwright
"Not because of revenue they're actually making"?

HUH?! Estimates for 2010 are 1-2 BILLION in revenue for Facebook. Fueling this
revenue are companies like Zynga and Groupon - hardly bubbly companies...
These guys are making real/sustainable revenue. Facebook is smack dab in the
middle of social gaming and stands to be the AppStore of that world (WIN).
Their targeting marketing has proven to be a huge driver of companies like
Groupon (WIN).

There are probably a few bucks from VCs pouring into Facebook ads (like the
Yahoo story)... But calling Facebook out as a company that's entirely (or
mostly) propped up by investors rather than revenue? Totally disagree. If
Facebook stopped investing in innovation/growth and focused on monetization,
they'd be profitable instantly.

~~~
jonknee
You're right about revenue, but I'd contend that Zynga and Groupon are
incredibly bubbly companies.

~~~
clistctrl
I'd agree that groupon (unless their CEO's statements are to be trusted) is
not entirely sustainable, but i don't think they are going to disappear
completely. Additionally I don't think social gaming is going to go away
either. It might look completely different as browsers, and users evolve, but
its going to be here for a while. There is always going to be a social
platform, and right now its facebook.

~~~
jonknee
Pets and toys never went out of style either, but that didn't stop bubbly
companies specializing in each from blowing up. I think Zynga is better
positioned, but they are a very shady company and that makes me pause. It
feels like a pump with VC and dump to IPO like the dot com era gave us.

------
alttab
Revenue is being made by the company that is selling the ads. The issue is if
the CTR's aren't high enough or the ROI on the media isn't coming through to
the advertising businesses, they will pull out and go elsewhere.

This is great because all it costs to sell the media is the sales guy salary,
any commission he makes off the media sale, and if you're good any in-house
media guys that create the banners/ads etc. The more traffic you bring, the
more "inventory" you can sell.

Selling advertising and media is very profitable. Most internet companies make
their money through advertising if their product is free. Only companies that
sell actual things like EBay or Amazon make legitimate sales of real goods.

The trick is to keep the faith in your advertising platform. Yahoo, Google,
Facebook ... companies advertise with them because they know eyes go there.
What the product is determines the audience it brings, which will determine
who your advertising clients are.

The more qualified the audience is, the more impactful the advertising is,
especially if they know enough about you to target the correct ad (most
advertising-revenue based companies will collect some form of data about their
users for this - this is nothing new).

The loophole in the OP's logic is that people invest in the internet due to
revenue growth of Yahoo. If Yahoo was the reason the investment was made, and
all that money went back into Yahoo - yes there could be a false feedback
loop. But as long as the advertising that is sold on Yahoo is somehow
benefitting the advertising company, there is a sustainable model.

Only if they sell a bunch of advertising that later turns out to be useless
will you have a pot of hot water to climb out of.

Edit: Impaction is definitely not a word.

------
socialmediaking
As a social media marketer, I can tell you that facebook is by far the best
place to advertise when you want to go after a specific demographic. You can
use the ads to target very very specific niches that are otherwise
unreachable.

With Google, people are coming to you, they know what they are searching for
and your ads are designed to appeal to that. The problem with search targeted
ads though, is that you can't target people who don't know your product
exists.

Facebook's CPC(cost-per-click) and CPM(cost-per-thousand impressions) are way
lower as well, especially for demographics that google AdWords would charge
you through he nose for. And as a benefit to good marketers, the Facebook
advertising platform rewards you with lower costs the more successful your ads
are.

You can create ads based on the interests you enter into your profile, city,
age, sex, birthday, etc. A lot of companies are starting to take notice of the
power of these ads, which is causing the advertising prices to rise (it's a
bidding system), which in turn will increase FB's profit.

Facebook isn't going to go away anytime soon, people will always need a way to
map out their connections, and Facebook is the de facto online identity for
most people. I don't see Facebook being dethroned anytime soon, maybe
disrupted a bit, by the likes of twitter or foursquare, but the core services
of FB are something that will always be in demand.

------
Tycho
Well in the case of a Ponzi scheme everyone _thinks_ there's profits being
reaped. It's possible that investors just think that _one day_ Facebook will
figure out how to make money from their massive install-base, and then the
cash will flow like crazy. Or alternatively, their costs for hosting and
bandwidth will fall massively over time (the central combo is pictures + text
messages), increasing profit margins.

I could imagine Facebook doing a lot. For instance some sort of premium dating
service whereby they match you with other people who like the same things
(they have all the data already), and then you see their pic, and then if you
both accept you view each others' pages to learn more about the person and
build trust (also Facebook can censor/randomize real names and addresses at
this stage to make it more safe), then you add each other as friends, and from
there possibly start dating. They key thing is that people are comfortable
with Facebook, but most people are probably UNcomfortable with online dating.
What they need is it to be seamlessly merged into their life, so that there's
no 'putting yourself out there,' no stigma, and minimum possibility of a poor
match.

Or what about setting up a rival to Paypal. Anyone else trying that needs to
start from scratch, Facebook already has the users, and to some extent the
trust. Plus they don't need to rely on email and deal with all the scams that
PayPal had to fend off.

At the moment FB are a bit suspicious in terms of profit but there's still
lots of potential for the future.

------
bconway
I think you're making the right argument about the wrong company. Facebook is
making millions/billions in legitimate ad and other revenue. Twitter is making
money only in investments.

------
paolomaffei
Facebook? What about Youtube then?
[http://www.internetevolution.com/author.asp?section_id=715&#...</a><p>Reality
is Yahoo wasn't going to make revenue after time, FB and YT probably will.

~~~
hasenj
True, Youtube is also questionable. BUT, Youtube got bought by Google, and
Google does generate massive revenue, so it's a different story.

~~~
sp4rki
I'm sorry but Youtube questionable? Youtube is the next logical step for
advertisement from TV. Also they're close to being profitable, and if Google
TV actually gets some market it will propel Youtube into profitability.

~~~
hasenj
Questionable, meaning it's interesting to question their business model.

The answer might seem obvious to you, but it's interesting to question non-
the-less.

I for one, am not so sure their business model is sustainable.

My point was, it's a different question.

~~~
sp4rki
Youtube's business model being questionable means that you think that it
dubious at best and and the authority of the claim of its profitability is
disputable. Eric Schmidt already said Youtube is very close to profitability,
and should actually become a big revenue stream for Google in the coming
years.

You need to have in mind that Youtube gets 2 billion views _per day_ , and has
advertisements directly on the content they serve. That's huge! I'd say that
it's even bigger than Facebook's current advertisement model by a mile, even
though Facebook obviously has a much higher number of views per day.

As the years roll by hardware, bandwidth, and manpower requirements for
Youtube will invariably go down exponentially. If Youtube is close to being
profitable now, in two years not only will it's revenue stream grow, but it's
expenses will be diminishing also. Youtube was probably one of the smartest
acquisitions on Google's portfolio, and it will no doubt be a source of
revenue for them.

In any case, Youtube's profitability and sustainability might not be written
on stone yet, but they have been far from being 'questionable' a long time
ago.

------
edanm
People invest based on what they think the company will earn in the future.
That's how investment works - you're betting that, given some money now,
they'll make you more money later.

Considering the huge role Facebook has taken in the Internet, I'd say betting
on them is a great idea.

~~~
olefoo
The question is, is Facebooks huge role on the internet a sustained
groundswell or a passing fad? Will Facebook be as big a deal 10 years from
now, or will we all be using personal gossip AI's to keep track of our friends
instead?

------
keithbaumwald
Same question from a different angle in a blog post from back in August -
<http://www.jperla.com/blog/post/facebook-is-a-ponzi-scheme>

~~~
hasenj
Very interesting perspective, thanks!

If the only source of revenue is really as he says just people experimenting
with FB Ads, realizing it doesn't working, then leaving, then it _is_ indeed
like a Ponzi scheme.

------
ttunguz
The difference between the online ad bubble in 2000 and the one you suggest
today is the transition of offline ad spending and offline consumer spending
online.

1\. 4% of total commerce is now ecommerce, according to the US Dept of
Commerce. Ecommerce penetration in certain categories like travel exceeds 20%.
2\. 11% of all ad dollars are now online ($26B on $210B) according to SNL
Kagan. 3\. $13.7B of local online spending is by regional or smaller
businesses, according to Borrell. The average local business has $1200 per
month in marketing spend, which is finally beginning to move online.

In short, consumer dollars and non-venture backed businesses need/want to be
advertising online and Facebook is great solution: They offer access to the
2nd largest audience on the web and presumably mobile.

You could argue that Zynga and other venture backed gaming companies are
driving short term revenues, but this advertising base is profitable,
generating revenues from consumers who pay for virtual goods.

The flows of money governing this boom are consumers and enterprises, not a
litany of unprofitable venture backed startups.

------
nolite
They're hella profitable

<http://techcrunch.com/2010/03/03/facebook-revenue-2010/>

~~~
pierrefar
Be careful: That article talks only about revenue, not profits.

~~~
DevX101
Give me a plausible scenario where a company with no physical inventory to
sell is making $1.5 Billion in revenue and un-profitable.

~~~
blantonl
I'm pulling these numbers out of thin air, but consider it plausible.

Let's say 2200 employees with an average expense of 100K/year (salary and
benefits) = 200 million dollars right there in costs. Factor in property
(building, furniture etc) and other standard business operation costs.

Then when you get to the engineering side of the house - the data centers,
servers, bandwidth, etc.

It is easily plausible for facebook to be un-profitable.

~~~
broofa
@blantoni: You can find Facebook data center cost data here:
[http://www.datacenterknowledge.com/archives/2010/09/16/faceb...](http://www.datacenterknowledge.com/archives/2010/09/16/facebook-50-million-
a-year-on-data-centers/)

You'd have to 10X those costs (to $500M/yr), plus assume a 250% overhead
(another $500M) on top of your $200M salary and benefits figure for Facebook
to be in the red.

Calling that plausible would seem a bit of a stretch.

~~~
blantonl
Did you actually read that article? That is _lease_ cost for their data
centers (in 2009 no less). That's basically just paying the rent on their data
centers.

That doesn't include a 200 million dollar data center project to be built in
Pineville, OR. And that does not include infrastructure, bandwidth, software,
hardware maintenance etc.

Let's face it, Facebook does not sell a product. Their only current viable
revenue model is through advertising.

~~~
ceejayoz
> That doesn't include a 200 million dollar data center project to be built in
> Pineville, OR.

Which will, in the long run, be dramatically cheaper than leasing space -
which has all the same costs, plus a middleman to pay, minus the efficiencies
of an entirely custom setup.

------
seltzered
jperla made a blog post about this a few months ago:
<http://www.jperla.com/blog/post/facebook-is-a-ponzi-scheme>

His assertion's that it isn't investment making it a ponzi scheme, it's their
customers who purchase advertising on facebook and see minimal returns.

------
supershazwi
Maybe this is a good article to read. The author's opinions on why earning
revenue first is better.

<http://andyswan.com/blog/2010/06/03/revenues-first/>

Just another point of view =P

------
chadp
facebook has 500 million users and is likely on their way to one billion. is
it possible for them NOT to be hugely profitable with 1 BILLION users?

~~~
mx12
The only problem is that you are assuming continual growth. While they are the
cool place to be now, as soon as the become the uncool place to be, then they
will be screwed.

If I was facebook, I would be very afraid of this happening. I understand
facebook has some patents on the news feed an other minor aspects of facebook,
but their basic feature set is somewhat small, but reproducible.

I think that any social platform faces the problem, that people will jump ship
to what ever they think is cooler. Look at Myspace, that was hugely popular
and suddenly it become the uncool place to be and then everyone and their
moms, jumped ship to facebook. History is bound to repeat itself.

~~~
chadp
yes possible that people will jump ship for the next coolest thing. will
everyones moms, dads and grandparents really want to "recreate" their social
network and learn a new platform though?

facebook is unique as they are the biggest game in the world with people's
real names and real social connections.

~~~
chailatte
As the consumers become more tech-savvy (old dogs can learn new tricks) and
technologies become easier to use, it will be easier for them to switch
service. All it takes is the influential people to move (think celebrities,
popular friend, active family member, etc) for the others to follow.

~~~
chadp
Yes of course it is possible and will get easier to transfer services.
Question is will the 500MM users do it en-masse? FB would have to screw up
pretty big for that to happen in the next 3-5 years, in which time, it MAY be
possible to build an enormous multi-billion dollar (or even deca-billion $$)
per year profit stream.

------
chailatte
There is an online advertising bubble (10+ years) that will be self correcting
soon. The reasons are:

\- Down economy. When ordinary people are going further and further into debt,
they will differentiate products on price and not brand. They will cut back on
all things save the necessities.

\- Consumer startups are dying/getting smaller. Techcrunch recently mentioned
venture funding drying up in consumer space, instead the money is flowing more
towards enterprise. Therefore, those startups won't have massive budget to
advertise online anymore.

\- Big corporations will be scaling back on paid advertising. They can use
free platforms like facebook pages and twitter to do the new product rollouts
and announcements, which is becoming more of the norm.

~~~
np3000

      Techcrunch recently mentioned venture funding drying up in consumer space, instead the money is flowing more towards enterprise. Therefore, those startups won't have massive budget to advertise online anymore.
    

Can you point to the article please?

~~~
chailatte
Venture Capital Sputters in the Third Quarter; Consumer Down, Business
Services and Software Up <http://tcrn.ch/aAjwmj>

~~~
np3000
Thanks. As the article states, it might be cyclical. It doesn't give the
details on the business services sector, apart from Marc Andreessen's
anecdotes.

------
shareme
The problem with the your premise..

You may bot be asking the right question..

It snot as a whole is facebook making a profit??

The right question is have advertisers found out where the ads on FB work the
best and is that revenue growing?

The ads are working the best in games such as Zynga's as the ad can better
targeted to engage viewer...

Has FB made a profit yet form advertisers using in-game ads, etc on fb's
game/app platforms?

We do not know yet as they are still a private company with no breakouts in
revenue to answer that question.

And comparing Zynga to Fb only gives a micro picture not a whole one..

But, it only works if FB can keep its users and community bases(users,
developers, advertisers) there on the FB platform. If we see a sudden decrease
as in Digg than it is a ponzi scheme..

