WingNews logo WingNews GitHub [2]
top | item 1853053

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

40 points| hasenj | 15 years ago | reply

In PG's essay about "what happend to yahoo":

> 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.

Is Facebook in a similar situation today? They're not profitable, but investors are investing in them. They even acquire startups!!

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.

The founders got rich.

So economically, how does this work?

It seems to me like a bubble phenomenon:

Investment money => grow bigger => more investments.

The guys at the top of the pyramid benefit the most.

No actual revenue is being made.

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).

57 comments

order
[+] sbaqai|15 years ago|reply
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|15 years ago|reply
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|15 years ago|reply
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.

[+] djhworld|15 years ago|reply
Many supermarkets and shop offer their customers a loyalty scheme where they can accrue points through purchases and spend them either in store or on special deals the shop offers.

The catch? The shop collects data on your habits. They already know your name, address, date of birth so they can determine whether you're single/part of a family/old/young. But the real value is matching up that profile of your life with your shopping habits, every transaction you make is tracked and collated to form an evolving picture of your relationship with the shop you're shopping at. This allows the retailer to target their advertisements to your needs accordingly and even gives a customer profile for people in the area so the shop can tailor the layout of the store to suit meet the needs of their demographic.

In my personal opinion Facebook is the step up from the loyalty card. In exchange for 'free use' of the site, you're giving away crucial details about your life that can be packaged up and sold on to businesses. Data mining is essentially what facebook does, it's just they surround it with a wrapper that people find beneficial to their lives.

[+] AmitinLA|15 years ago|reply
This is a logical, well-thought out argument that I largely agree with. The one thing I wonder is if, as brand advertising is increasingly transferred to the internet and those dollars are spent on sites like Facebook, we see overall spending drop and an increase in spender (and consumer) surplus to the detriment of the middlemen. The analogous example is Craigslist -- a site that destroyed millions (billions?) of advertising revenue and that will likely never be recovered but was overall a net gain for consumers and advertisers both in a way that is hard to quantify.
[+] earl|15 years ago|reply
Also -- the exact numbers I've seen might be proprietary, but here's part of the value prop of online quantitative advertising: if you take ad spend and divide by minutes spent in a bunch of areas such as {TV, magazine, newspaper, online}, online is an extreme outlier -- far lower than all the others. That indicates that most likely there will be at least a further doubling or tripling of online advertising spend. Add in trends you see like people ditching cable (just in the bare beginning, but itunes / apple tv, netflix, roku, googletv, et al are beginning to be a real competitor for people who aren't super techy) and it's not unreasonable to assume increasing movement of tens of billions of dollars of brand ad spend online. And fb will be a primary beneficiary of all this because of their ability to do very precise demographic targeting -- want to show your ads to eg self-identified unmarried asian women who like tennis, who are between 24 and 35 years old, and who have a kid in the house? fb can make that segment for you with high confidence.
[+] webwright|15 years ago|reply
"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|15 years ago|reply
You're right about revenue, but I'd contend that Zynga and Groupon are incredibly bubbly companies.
[+] alttab|15 years ago|reply
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|15 years ago|reply
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|15 years ago|reply
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|15 years ago|reply
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.
[+] edanm|15 years ago|reply
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|15 years ago|reply
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?
[+] ttunguz|15 years ago|reply
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.

[+] chadp|15 years ago|reply
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?
[+] alex_c|15 years ago|reply
Not a comment on FB's specific situation, but that's a bit like saying "I'll sell widgets at a loss and make up for it in volume, I can't possibly lose".
[+] mx12|15 years ago|reply
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.

[+] ashconnor|15 years ago|reply
500 million users and many use it on a daily basis and spend more time on the site than most others.
[+] chailatte|15 years ago|reply
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|15 years ago|reply 

  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?
[+] shareme|15 years ago|reply
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..