From Ryan Holiday, Forbes:
Long before GM pulled its $10M in advertising from Facebook, I lost my faith in the platform. As an online media buyer for American Apparel, I had cut the majority of my spend each month for the preceding 12 months. From the time that Facebook stopped serving banner ads through Microsoft to now, the spend I oversaw fell from nearly $1M per year to a few thousand dollars a month.
As I told Direct Marketing News in March 2012: “The return is not there. Unless you’re selling apps or lead generation, I think Facebook ads are underwhelming. I see bad things ahead for the Facebook IPO and perhaps, rising dissatisfaction among clients.”
This sentiment came from my personal experience—particularly with sketchy new offerings like the “Sponsored Story” platform which essentially charges popular fan pages a premium CPM to reach their own fans in the Facebook feed (translation: FB, who controls how much or little fans see your updates, is charging to “improve” your chances of being seen). But mostly, it came from entrepreneur Joseph Perla‘s eye opening essay “Facebook is a Ponzi Scheme” in January 2011. This prescient essay outlines all the current IPO-related criticism of Facebook and it did it way before anyone else.
Perla has allowed me to repost that article. Read it before you considering buying shares, and more importantly, before spending ad dollars. And Zuckerberg, if you’re reading, it’s time to build an ad platform that actually works for real advertisers.
Facebook is a Ponzi Scheme
Now that you know what a Ponzi scheme is, I will tell you how and why Facebook is like a Ponzi Scheme. The argument is similar to how Paul Graham describes that Yahoo was a ponzi scheme in 1998.
Facebook posts huge revenues. In fact, recent reports are that Facebook is very profitable. This boosts both their respect in the world and their valuation. However, these returns, while real, are unsustainable. They exist and are sustained in the same manner that Ponzi schemes are. Facebook is a Ponzi Scheme.
Have you ever bought a Facebook ad? I have. I have talked to many, many people who have. We have spent hundreds, many have spent thousands or even more, experimenting with Facebook ads. They are worthless. Nobody ever looks at them, and nobody ever clicks on them. I just talked to someone who was trying to promote a book. He found it cost him over $100 in ads to sell one book. Moreover, as you increase your ad spending, people get used to the ads and just ignore them. So, your already low click-through rate plummets even further.
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.
But, then, how is Facebook so profitable? Are they lying? No. They are growing. More and more people sign up to Facebook, and more and more businesses hear about how many people are on Facebook. It seems like a huge opportunity. TV shows and award-winning movies are made about Facebook.
Because of Facebook’s presumed success, many small, medium, and large businesses individually and in turn experiment with Facebook ads. They spend hundreds or thousands or more on Facebook ads. At the end of the first run, they see bad ROIs. They tweak the ads and spend more money and try again. Nothing. So they stop, understanding that Facebook ads are worthless. Almost everyone I’ve talked to who has actually bought Facebook ads knows this. But, not everyone has bought Facebook ads yet. There are still more and more new businesses finding out about Facebook ads. As they grow, even more businesses give their money to experiment in destined failure.
Eventually, though, and this might take a long time, but it is finite, everyone will have tried Facebook ads and know that they are useless. Eventually, after 10 million businesses have invested $1000 each, and Facebook has earned $10 billion in revenue in total, then they will have run out of new customers and their revenue will dry up. A useless product is never sustainable. I wish I could short Facebook.
Continue reading the rest of the story on Forbes Magazine