Hasn't anybody figure out that the only winner in Facebook's IPO is Facebook and Mark Zuckerberg? Who else really makes money on this? Sure, I think some were short sellers who thought the price would go up and not down and they would make a killing. But the jokes on them. It really did not take anybody too long to figure out that Facebook's business model is flawed and very much reliant on ad revenue. When GM came out and said it was dropping Facebook ads and then surveys indicated that users don't click on ads or trust Facebook for purchases. I think the writing was on the wall that Zuck had problems.

While the premise of this opinion may have some merit, most of the issues identified are because of how Facebook is handling things, not about what their real potential may be. Fraud is a very strong word, and in this case, I think it has little basis to hold on to.

I have often said that Facebook will need to change their advertising methods in order to make real money from their user base. They have to date used what I characterize as a closed-limited model. As observed in the article, they only post ads when you use the web based version, and are missing all the other interface methods. In addition, they have not used their user network, and its information, for placing ads external to Facebook's web site. If they changed one, or both of these, they would surely see their revenue increase dramatically.

The same argument goes if they really started using the targeted information to their best advantage. How much information do they have on you? Well, I for one was shocked when I saw the timeline information that they had on me! It was not all even sourced from me, but was an amalgamation of all of the posts of pictures and events I was tagged in. They knew practically every vacation I had taken, when my children and grandchildren were visited. They even had information on a lot of my business travels (most of which should be confidential). They also know where I work, what I have "liked", and a lot about the toys I have bought, or that have been bought for me. If they were to tap into this is a meaningful way, they could surely send me a steady stream of interesting ads.

Heck they wouldn't even have to make it hard on themselves. In the same posts they give for alerts, they could add headline teasers that, if matched to my profile, would surely cause me to click a time or two to see what deals could be had. They could easily add links auto-generated to my, and my friends posts to "explore similar items". So that post my wife just did about our visit to a Sonoma winery, well it could be linked to other wine related links, that I unfortunately, would surely explore...

So in short, they have barely scratched the surface of their revenue potential. If they are smart, they can become more profitable in a very short time frame.

Thank you Rod for an insightful article. You are absolutely right on all counts. I can't believe the market doesn't see this. There is an unfortunate financial market impression that facebook will emulate Google, hence justifying this ridiculous valuation. But referring to your car example, all I can say is "exactly!". When was the last time you went to facebook and typed in "car" or "ford"? That's right - never. The value in google is that users do this, creating a context to deliver the appropriate ad, resulting in revenue. Not so in facebook. According to facebook, we're all overweight middle aged woman who need diet advice, anti aging cream and a new 'work from home' income stream. My guess at the real value of Facebook is more like $15 billion, based on current advertising revenues, their ad sales trends and a comparison with google. That said, I have not written Facebook off yet. Two things they could do 1) Charge for access and hope for user loyalty 2) Buy Bing, or Yahoo, or both then they can add a search bar and sell contextually accurate advertising. That may be worth plenty if they got it right.

It is potentially more interesting and suspicious to look at data about people who actually do see and CLICK on Facebook ads.

In short, there are a small number of people on Facebook who regularly 'like' dozens of ads a day, often 4 or 5 at a time, adding up to hundreds or thousands of likes per year...in other words, they click roughly a thousand times more frequently than most people click. I called them 'booklicants' at first because I thought they were bots, but now I realize they are real. That means Facebook is making a lot of advertising money from a very, very small number of users...and if my experience is any proof, once advertisers find out, they stop spending money on Facebook.

Importantly, the company is not informing advertisers nor investors of this fact - to the contrary, they claim that their 'socially relevant' ads are somehow _more_ valuable than regular display ads. That is a false assertion based on my research. See this blog posting for more detail and rough estimates of the potential scope of the problem: http://wahanegi.com/do-not-advertise-on-facebook-until-you-read-this/.

I never have clicked on any FB advertisements nor have read any in detail. But another interesting point I'd like to make is about Google ads. I always only clicked on Google ads above the results. I never see or click on the ads on the right hand side. I am not sure how much of this is true but google is widely used so statistics may prove that they are in fact being used but something to think about. And if it is true that people don't really use the right side ads, then I guess advertisers don't really care if someone clicks through as long as their ads are on the most used search engine.

To their defense, why would they selectively advertise cars to you if you had just posted pictures of your new car?