White paper suggests Facebook is not in a good place

What if someone without any preconception of Facebook offered an objective assessment of their business?  My guess is that they would be scorned for their unfamiliarity, they would be nit-picked for ticky-tack factual errors and their completely valid points would be summarily dismissed.

Fortunately, Janet Tavakoli isn’t your average non-user.  She is an expert on financial products, author of three books including one stemming from her personal conversations with Warren Buffett.  She’s in a pretty elite class of financial experts, or put more succinctly she’s a pretty big deal.

To read her white paper on Facebook (“Facebook: Soaring Fraud and Decelerating User Growth”) is to read about a company in pretty dire straits.  

The current state of Facebook

Tavakoli makes these three main points in her paper:

Facebook is not profitable.
Facebook fraud is either understated or is accelerating.
Facebook’s growth is decelerating.

Let’s take a look at the specifics of her claims:

Facebook’s profitability.  Facebook releases quarterly financial filings that verify her point that by GAAP (generally accepted accounting principles) Facebook has lost money every quarter since going public.  She also points out that future claims such as taxes on employee stock sales will be paid with a line-of-credit rather than by selling additional stock (which is an unusual arrangement).  Her projected outlook for Facebook’s advertising product is pretty bleak as well.  It should also be noted that Facebook releases a parallel set of non-GAAP numbers which present a more favorable picture.

She also discusses how Facebook executives selling stock probably had inside information of the just announced contract renegotiation with Zynga.  She points out that Zynga was the second largest income source for Facebook (the first being advertising), and the reliability of that income is now in greater question.

Fraudulent accounts.  In their first regulatory filing Facebook Facebook claimed that they had between 5-6% fraudulent accounts, which by their second filing climbed to 8.7%.  Her assertion that Facebook either under-reported fraud at first or fraudulent accounts grew faster than regular users is completely reasonable.  She also addresses Facebook’s claim that there is less fraud in the US and Australia than in other parts of the world concluding that their logic is “laughable.”

She goes on to explain how a cursory subjective polling of her friends revealed that many have duplicates that they use to filter different segments of people (such as personal and professional).  When I thought about that for two seconds, I realized that I have Facebook friends that do the same thing without any penalty from Facebook.  She concludes that Facebook probably has no idea how widespread fraud is, which calls into question a lot of their data points.

“Using its own standards, the quality of Facebook’s user data stinks.”

Decelerating growth.  Tavakoli shows pretty clearly what has been happening year-over-year for Facebook’s growth but then throws in an important caveat.  Not only has growth decelerated but the method that they estimate their mobile user data may be inflating their numbers.  She points out that Facebook doesn’t have a reliable way to associate multi-platform users, which probably results in double-counting to some extent.  Her conclusion that things are probably worse than Facebook is reporting may have some validity.

But this doesn’t have any bearing on user experience, right?

Tavakoli is assessing Facebook from an investor standpoint, but her observations of course have bearing over the user experience.  The most obvious example of this are the advertising products that take up an increasing portion of each users pages.

Tavakoli talks extensively about the Facebook advertising product, especially the “suggested post” product that allows advertisers to reach you without any pre-existing ties (i.e. you or your friends “Like” a page).  She discusses the different legal and regulatory entanglements that this has exposed Facebook to, concluding this about Facebook’s rationale:

“Why would Facebook do this? Desperation is my guess.”

There is still a lot to like about Facebook.  The user population provides unprecedented opportunity to connect and there is enough content to keep people engaged for unprecedented blocks of time.  But the picture that Tavakoli draws is one of a company in crisis: unprofitable, inflated and stagnant.

If you do have opportunity to read her paper – do not skip over the appendices which are a fantastic exploration of everything from Mark Zuckerberg’s trustworthiness to a more thorough analysis of “pump-and-dump” stock trading relating to the latest Zynga contract and inside information that executives may have had.

What do you think?  Can Facebook right its ship?  Is user experience being compromised because of the state Facebook’s business?

Jim Dougherty

Jim Dougherty

Writer and chief of miscellany at leaderswest.com
I'm the guy that wrote the article you just read. Sorry for the typos.
  • http://twitter.com/westseattleblog West Seattle Blog

    FB has compromised my experience as a business-page owner. I and others like me have provided free content to draw users to their site – and yet they are asking us to pay to have it seen by more than a relatively small number of people. On my personal profile, I also have been solicited to pay money to have a status update seen by more people. With all the info they are collecting, there is no way they should be having to tack these tacky solicitations on top of advertising sales. As an owner of a website providing a service free to readers/participants, I appreciate what goes into it – but I would never start suggesting, for example, that commenters pay to have their comments read!

    • jimdougherty

      Great insight Tracy (my wife is a huge fan of your blog by the way, though I plucked her from West Seattle)! Your comments echo the comments that Mark Cuban made this week too – what’s the use of accruing fans if you have to pay to re-engage them? It makes me wish that there were a more viable alternative to Facebook that might temper their ambitions to force their advertising products on companies,

  • TheTysonReport

    Very interesting Jim. As a personal user of FB I find the increasing number of ads, especially on the mobile version, annoying and offputting (and as a marketer I consider myself more forgiving of ads than most).

    They’re annoying largely because they are completely irrelevant to me – so what if one of my friends likes ‘Tough Mudder’? I couldn’t care less and the fact a friend happened to click ‘like’ on something sometime in the past is frankly no endorsement whatsoever.

    Of course ads are increasing because FB must generate revenue. But the upshot of this clumsiness is that users get annoyed, reduce their time on the platform, FB gets more desperate and give away more to advertisers and pretty soon it’s a vicious circle.

    • jimdougherty

      Ha! I get that Tough Mudder ad all of the time and though it’s funny to say I haven’t seen fit to figure out what it is. I like how you describe it as a vicious circle, because it doesn’t seem like it’s going to improve. To me, the concerning part is that the user experience is degrading and Facebook still is dissatisfied with their ad product.

  • AmyMccTobin

    Every time I log into FB now the FIRST post I see is a sponsored post; blah! I have a post coming out about this on Spins Sucks tomorrow (or Tues – still not sure of the exact date) that details my thoughts… but sadly, I think it is going to dwindle into myspace like regions :(

    • jimdougherty

      I’m excited to read it! I agree with the “desperation” comment wholeheartedly. Seriously, who wants to see ads everywhere? If you haven’t checked out MySpace lately – you should. They may not be a punchline much longer – very impressive stuff that they’ve done over there.