Tuesday, January 18, 2011

Don't Let Zuckerberg Madoff You (Whether Accidentally Or On Purpose)

The argument is similar to how Paul Graham describes that Yahoo was a pyramid 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.

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...

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...

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...

It's possible that they do not even realize that they are like a Ponzi scheme.

That's right, they may not even realize that their ad platform is completely useless because they always get new clients signing up and giving up their offering to the god of web 2.0 hype. They may be blind, as I used to be. They may be truly surprised when the supply of suckers runs dry.

More likely, in the end, they will get teenagers to pay a monthly fee to host all of their party photos. Of course, then the next VC-funded Facebook (just as MySpace killed Friendster, and Facebook killed MySpace, so will NextFB kill Facebook) will offer the same services and be free and take over the "market." The cycle repeats itself.