Obviously this guy doesn't understand what a ponzi scheme is. Perhaps if facebook took some of the money from new ad buys to purchase goods from slightly older ads so that they thought they were more successful a case could be made for it being a ponzi scheme -- this is in no way one.
If in fact they are selling a defective or useless product then they are in the lemon business -- a card dealership that sells crappy cars will stay in business until everyone realizes they suck.
Anyway, I've never purchased ads on facebook so this in no way relates to that; however, when you link to the definition of a word in your first sentence -- by god, use it correctly.
The analogy to a Ponzi scheme is actually pretty good: at a certain level a Ponzi scheme is any business that lives entirely off a positive and growing first derivative while heading faster and faster toward a certain death.
If eventually (though I'd personally find it extremely surprising) Facebook doesn't manage to find a sustainable and highly profitable business model, that description would have been accurate.
Except the author doesn't say "like a ponzi scheme" it's unsustainable -- they say it is a ponzi scheme. I know this is just semantics, but the whole premise of the article is flawed... facebook doesn't need each successive generation of advertisers to be bigger than the previous which is what causes ponzi schemes to implode.
Now if we're saying that they need their advertising revenues to grow so that they can maintain growth -- well that's the same dynamic of almost every company.
Actually I think he is saying that they need their advertising revenues to grow in order to maintain perceived momentum in advertisers' minds, in order to have revenue at all. So it's more drastic than what you describe, assuming of course that the OP is right and that retention of FB advertisers is null (which I'd love to see data about).
> Except the author doesn't say "like a ponzi scheme" it's unsustainable -- they say it is a ponzi scheme
Not the author, but I've addressed that elsewhere. Anyone who has used Facebook knows that Facebook doesn't solicit money from it's users or return money to it's user. This is hence clearly an analogy, no more than if I said Facebook was crap, a black hole, a dinosaur, or anything else.
> facebook doesn't need each successive generation of advertisers to be bigger than the previous which is what causes ponzi schemes to implode.
I believe the article is saying that Facebook needs each successive generation of users to be bigger than the previous, which is indeed what causes ponzi schemes to implode.
No, it's actually really horrible. In a Ponzi scheme you:
1. Fraudulently promise returns.
2. Payout imaginary returns with other people's money.
>at a certain level a Ponzi scheme is any business that lives entirely off a positive and growing first derivative while heading faster and faster toward a certain death.
This is really silly because you don't even specify what quantity you are taking a derivative of.
Ponzi schemes are a certain type of fraud. There are many kinds of fraud. Amazingly, the author never asserts any sort of fraud.
I think you and the author of the blog post are thinking:
"Ponzi schemes are bad and I don't like facebook so they are kinda similar."
Anything substantive you'd like to add, or would you like to concede that absurd contrarian claims usually just confuse and waste everyones time?
1. I actually do like Facebook, and am very impressed by what they are pulling off.
2. I learned about Ponzi schemes a while back in macro theory class, before they were mainstream and irremediably tainted by the vileness of Bernie Madoff. The story of Ponzi himself -- as I remember our macro professor telling it five years ago -- is pretty 'funny', or at least provided welcome distraction between two utility maximization derivations in econ class; he's supposed to have been a 16th century Venitian who ended up in the Venice lagoon once the bankers he was pulling his cash from realized what happened. I didn't think of it as a crime. All this to say that I never implied nor intended to imply that Facebook was committing any sort of fraud, immoral behavior or else.
3. What I mean by this derivative thing is quite simple -- imagine the movie Speed with a bomb that explodes, not when the speed goes under X mph, but when the bus's acceleration goes below X mph/h, forcing the bus to keep on accelerating, driving faster and faster and faster. Eventually you'll hit the physical speed limit of the bus, acceleration will converge to zero, and the bus will explode. That's a very silly metaphor for what I was trying to explain - being that, if indeed FB had to rely on an ever growing in-flow of first time ad buyers to keep the lights up, they are would be in as desperate a situation as was Mr Ponzi in 16th century Venice.
Just to cool everyone's mind -- I really don't think this will happen. The team is least extremely smart to have gotten where they are, and I trust Facebook to eventually find as ridiculously profitable a business model as AdSense, with high probability. As a user I do hope it will respect my privacy, and as an entrepreneur I do hope it will allow some cool new distribution models.
There's some oddities in the WP timeline. Nov 1, 1920 goes to jail. Spends 3.5 years in jail. Released and then "almost immediately" indicted by the state. Challenges indictment, it goes to Supreme Court, settled on Mar 27, 1922. How could he spend 3.5 years in jail between those dates when there aren't 3.5 years between those dates?
The story claimed Venetian which implies Italian. He was actually born about 70 miles away, but that was still in Italy. And he swindled lots of people.
Yes, it's actually totally wrong. If you read carefully though, I'm not reporting Ponzi's story as it happened, but as I heard it for the first time from an econ professor, which may or may not have been pulling our legs.
I don't know if you are trolling or just extremely happy to be alive, with possible assistance from certain chemicals (not something I condemn in all cases). However, please try to be coherent.
>irremediably tainted by the vileness of Bernie Madoff.
Happy to be alive, no assistance. What don't you find coherent in my post?
>irremediably tainted by the vileness of Bernie Madoff.
My point here is that, while Ponzi schemes used to be a mostly overlooked white collar crime and a curiosity for the students of economics, they now have come to light in a very public manner and came to personify all the excesses of Wall Street pre-2008.
It's difficult to not interpret you as saying that Ponzi schemes are kind of charming, and Bernie Madoff gave them a bad rep.
Ponzi schemes are devastating and destroys economies. When Albania was first liberalized after Hoxha, half the population got frauded and the economy folded. The population threw over the government and it became a failed state.
Similar events unfolded in Russia and many other former Soviet states, after their economies opened up - although with less devastating consequences.
In Haiti, it's estimated that 60% of the GDP was swindled from the people in one of the poorest societies on earth.
In the Philippines, there have been a number of Ponzi schemes during the 00s.
There is nothing charming or clever about it, at all.
Got it, and yes you're right. Ponzi schemes are devastating, and I see how my post could be misinterpreted. My bad, really.
To clear things up regarding Facebook and the original link as well, I should explain that I have a really hard time believing what the original poster says about their ads. It might very well be that a lot of people fail to use them in a meaningful way because they haven't thought through what makes Facebook advertisement unique. I am certain that a sizeable fraction of the ad market can and will exploit them, and especially the infinitely granular targeting.
My experience as a user is a bit mixed (lots of crap and/or scam, and thankfully less and less social games silliness as I've downvoted it), but I've seem true gems too (job ads targeting my university + degree + class, pretty neat! -- or a nice ad campaign by Hulu in its early days that targeted a show I had just listed as one of my interests). All in all, the future of FB is pretty bright in my book.
Edit:
Also, I should point out that I do not think at all that Facebook's business has anything fraudulent, improper or immoral. My original post (second from the top) was just trying to explain why someone who held the post's author's views on FB ads could believe the company was fundamentally instable and depended on perpetual growth for survival. I personally don't agree with this view, and think they'll be just fine -- and apparently I'm not alone: http://techcrunch.com/2010/01/20/facebook-valued-at-14-billi...
Several things. You ramble on about an insane version of the origins of the term Ponzi scheme. I asked what quantity you were taking a quantity of, you explain that in fact you meant to allude to Speed. You could have said revenue or costumers buying adds (which you eventually do).
You imagine that Ponzi schemes are only of interest to econ students, but as the other poster said many people have been taken by the schemes and it is in no ones interest to have that happen.
Hi Dantheman, you are right. It's not a perfect analogy. There's not really any closer analogy, though. I state this later in the post, if you read through the whole thing (including saying "like a Ponzi scheme"):
"Yet, their value and growth continues because they
can use that money to grow their user-base more and assert
profitability (in this sense it's not quite entirely a ponzi scheme, but there is no closer idea). It's possible that they do not even realize that they are like a Ponzi scheme."
Moreover, I recognize that Facebook isn't necessarily doing this on purpose (whereas in a real ponzi scheme a competent accountant has to scheme willfully).
Nevertheless, I hope you agree that the positive feedback, the bubble effects, and the deceptive illusion of growth all have analogs to Facebook (if you assume the premise, of course).
I think you are right that I should have used "like a" Ponzi scheme throughout the post, but the writing and the point would have lost a lot of its effect in explaining that. The metaphor is better than the simile.
My main motivation was to make people think about the reality of Facebooks revenue. It may be less solid than social proof makes it seem.
I think you are right that I should have used "like a" Ponzi scheme throughout the post, but the writing and the point would have lost a lot of its effect in explaining that.
Yes, describing things in an overheated, sensationalistic way has a more powerful effect than describing them in an accurate way. Congratulations on figuring that out.
By the way, referring to a business as a Ponzi scheme is prima facie defamatory. I don't think you have much to worry about, since I doubt Facebook will bother to sue you on the basis of a blog post, but you might write differently if you were more conscious of the fact that you're accusing someone of a crime.
I think it's pretty clear to anyone who merely reads the title and has some understanding of what Facebook is that the author isn't saying Facebook is literally a ponzi scheme, any more so than I would if I said 'Lotus Notes is a dinosaur'.
Everyone who uses Facebook knows it doesn't solicit, or give, money to/from its audience. There is zero question that Facebook is literally a ponzi scheme any more than it is literally a piece of shit.
The amount of comments here who say that the analogy is libel and which attack the author on this without responding to the points made saddens me.
I doubt Facebook, even if they didn't like the article, would wish to draw attention to the analogy contained therein.
I use Facebook, and I did in fact assume from the headline that the author was going to argue that it is a Ponzi scheme. It didn't seem like one to me, but one reason I read articles on HN is to be informed or persuaded of things I didn't initially believe.
By the way, I never called the author's accusation libelous. I called it defamatory, which it clearly is.
Me> Everyone who uses Facebook knows it doesn't solicit, or give, money to/from its audience. There is zero question that Facebook is literally a ponzi scheme any more than it is literally a piece of shit.
Me again> So you know FB doesn't solicit funds or provide them?
You> Facebook does, in fact, solicit funds -- from advertisers...
You're not listening to me. So I won't listen to you.
I assume you're implying that I missed the words "to/from its audience" in your comment. But when I read the headline "Facebook is a Ponzi scheme," why would I assume the author was claiming that the audience, rather than advertisers, were the victims of the Ponzi scheme?
What's more, I wrote that Facebook solicits funds "from advertisers, and from users who want to send virtual gifts to their friends." You chose to leave that last part out.
You don't understand Facebook's revenue at all, which is why you think that. App developers spend hundreds of millions per year promoting games. They aren't making the big money from businesses that lose a couple grand and then find out it's unprofitable. They're making their money from Zynga.
That's sustainable. Facebook is probably going to make their own payment platform mandatory for apps, and they rake 30%. They could quite easily grow to a couple billion in revenue if nobody new ever advertised there again.
Also, local advertising does much better there than most stuff. Better than on Google in some instances.
Local is a very interesting avenue for revenue growth. I'm very curious to see how location will play out on Facebook, especially with regards to Foursquare.
If you think FB ads suck and provide no return, fine, say so. I mostly agree. But you shouldn't go around accusing people of criminal activity on the grounds that you couldn't come up with a better analogy and your post wouldn't be as effective.
I think the author at least has a point, but I totally disagree with his use of the word 'ponzi' here. It looks like yet another cheap attempt to make something look horribly bad by just tacking on a term that is hated/disliked widely.
If in fact they are selling a defective or useless product then they are in the lemon business -- a card dealership that sells crappy cars will stay in business until everyone realizes they suck.
Anyway, I've never purchased ads on facebook so this in no way relates to that; however, when you link to the definition of a word in your first sentence -- by god, use it correctly.