
Facebook earnings gain as ad sales surge 82%; CFO is stepping down - Kopion
http://www.marketwatch.com/story/facebook-earnings-gain-as-ad-sales-surge-82-2014-04-23
======
ENGNR
They've actually pulled a bait and switch on small business.

First the pages were free and great, then they started to reduce the number of
people who'd see your posts (fair enough, not everyone can see every little
thing)

Then they reduced the % of people seeing posts to 3% and less, and really
focussed on getting those page owners to buy ads to maintain their previous
view numbers.

Maybe page owners are paying for now, potentially reliant on traffic, but I
don't think they're going to be happy paying forever when free alternatives
will crop up again. The traffic quality is reported as being low (many mis-
clicks on mobile). If the profit isn't there then business won't be able to
afford to pay in the long run.

Maybe I don't want to see posts for 'Jim's oil change' every three seconds,
but good content is getting cut away also making FB far more boring.

~~~
Silhouette
I don't know if I'd call it a bait and switch, because you never really knew
exactly what you were getting with Facebook anyway. The kind of auction system
they use is practically designed to avoid transparency (and they're obviously
not alone in that among on-line ad platforms).

It always comes down to the numbers, though. If we're advertising a small
business on Facebook, and it generates more in revenues from sales than it
costs in customer acquisition, it's still a net win. Is it the best place we
could have invested those advertising funds? Maybe, maybe not, but it
certainly becomes less attractive as their cost-per-whatever figures go up,
and no matter how much they fudge the presentation, we still know how much we
paid overall and how much revenue we got in return.

In any case, every time this comes up there are plenty of posters who have
small businesses and make the above argument, but generate revenues in the
100-200% bracket, i.e., they're at least breaking even and maybe doubling
their investment, but no-one's buying the private jet and yacht any time soon.
It doesn't take anything shady-sounding like a bait and switch for Facebook to
lose all of that business, it just takes increasing cost-per-whatever a bit
more until the return on investment is no longer a safe bet. At that point,
they lose to other options with either generally better returns (so you don't
care about the odd few percent, because you know you're still comfortably
winning overall) or a more predictable model (so you can still run it on
tighter margins).

~~~
mrtron
I think the details matter here. The bait and switch being referred to is in
regards to engaging with followers, not the ad platform directly.

Businesses grew their followers on Facebook over the years with the intention
of growing a user-base they could engage with. Now a substantially lower
number of your followers see content you post due to algorithm changes. The
way to increase your reach to your followers is by paying for ads to basically
recapture the engagement you were once getting free.

It would be like if Twitter started charging businesses to display tweets to
their own followers.

~~~
Theodores
Or if Google started to only show you in organic search results 3% of the
time.

~~~
dchuk
Well Google has basically done that by filling up the search results with
additional pieces like ads, images, news, maps, local results, etc. Organic
results practically don't exist anymore above the fold.

~~~
GenerocUsername
Yeah, I can never find what im looking for on google /s

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johnvschmitt
Facebook Ads are a real shakedown scam, & getting worse.

After reading up on other's experience, I ran an experiment last week:

I started a stupid comic blog ([http://omgcmon.com](http://omgcmon.com)). I
made a facebook "page" for it too.

I posted an link from my stupid comic blog to the facebook "page". I posted
the same link to my personal status.

The posting didn't even show up in my OWN news feed, unless I changed it from
"top stories" to "most recent". (All other posts from me, show up in my "top
stories" at least.) My friends & family didn't see it either.

But, when I took the same image in the blog post, & put it in facebook as a
"Photo", then people saw it, commented, liked, etc.

So, it sure does look like Facebook knows that the link was on a "page", &
then used it's secret algorithm to suppress it, as it knows that will, over a
large population, cause more ad dollars to be spent to boost "pages".

So, the money/profit will flow well, but not forever.

Run your own experiments if you doubt it. It's not hard to get this data
yourself.

~~~
nyrulez
I don't see this is completely weird. If I was designing the news feed, I
would give way more importance to personal posts (especially photos) than non
personal posts, as I would like to preserve the personal nature of Facebook
and not pollute it with non-personal info.

However, if a business (a non personal entity) wants to gain entry (and
potentially pollute the experience to some extent), there is a price they have
to pay. And that constitutes facebook's business model.

The fact that they introduced "Free" business pages which allowed free entry
to people's news feeds before ads has skewed the perception of their
intentions. But if I were to design it from scratch today, my design would
probably be somewhat similar.

~~~
johnvschmitt
Good point. Yes, let's prioritize personal things on a personal platform.

However, ~30% of the "top stories" in my newsfeed (anecdotal of course) are
public URL's that my friends share. And, those don't look like ads or promoted
posts, but they sure could be!

That said, in the past, we'd promote a business by trying to get email
signups, then trickle monthly updates to our users to engage them more. (That
still works!) Now, email is seen as "unsexy" & we're told to go social to get
viral, & make everything have a Facebook share (+pinterest/etc). That's just
not as effective as email, sorry. I just wanted to share my experience about
what works best for startups.

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bertil
I have reasons to believe that Facebook earnings correspond to unstable
practice: namely, both brands and games have bad metrics (i.e. uninformative)
of their activity, and both are re-considering how their price fan- and user-
acquisition. There is a stunning lack of understanding of social network
dynamics among Facebook client companies. I have been through a lot of
interviews lately, and no one to whom I talked seemed to know basic things
like the Friend paradox, avalanche thresholds, or that the first fans are
naturally more engaged -- Facebook ad purchase interface doesn’t really help
either.

Nothing about game session duration, rhythm? Nothing about the thousands of
odd Pakistani accounts liking the page of random family restaurants in the
North of Ireland?

Some people at Facebook know those very well, but as far as I can tell, no one
has connected that issue with a Wil-E-Coyote moment: strong sales out of
momentum, filling an inflated inventory but widespread skepticism. There is
indeed far more ads in the Facebook mobile thread, but almost exclusively for
miss-targeted offers (I recently moved to a different country, twice, and I
keep seeing things for local apps in a city 2,400 miles away) and for mobile
games with Zynga-like gameplay: pay or… well, you can pay too.

I’m not sure Facebook is aware of that; I am sure however that Zynga wasn’t,
or at least that the people in charge of the financial stability of the
company dealt with that issue in an unethical manner. Seeing both a trend and
someone to chosen to reinforce it scares me.

~~~
prostoalex
59% of their advertising revenue is off mobile, where their main products are
app installs and click-through ads.

They don't break it down, but an ad product boosting likes to a business page
that you're describing as highly susceptible to fraud is probably not a best-
seller, and isn't even offered on mobile.

~~~
bertil
Those are two distinct manifestation of potentially different issues.

Mobile is over-invested because there is a presumption of high user value that
isn’t adjusted with history.

Organised click-farms use non-commercial links to avoid detection. There is a
lot to be said about Facebook detection technology there.

~~~
prostoalex
What I'm saying is that desktop like ads are non-essential for Facebook's
revenue figures, because hardly anybody buys those ads.

YouTube had a similar issue when they started paying out content producers
based on views, and all of a sudden "view farms" appeared out of nowhere,
generating required thousands of views. It's a big deal if you buy ads on
YouTube and get charged per views, but in the grand scheme of things it's a
drop in the bucket for Google Inc.

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chollida1
Certainly not related to the numbers. They killed it this quarter!

They had a NON-GAAP EPS of 34C while estimates were at 24C.

That's pretty incredible considering that mobile advertising contributing
about 59% of their advertising revenue. That's been the one area that analysts
were worried about.

~~~
pbreit
And while revenue was up 72%, income nearly tripled! This is why you invest
every penny you have into growing a software company and push profits out as
far as possible.

~~~
ZenPro
Facebook is not a software company.

[http://www.forbes.com/sites/joemckendrick/2012/06/29/rip-
sof...](http://www.forbes.com/sites/joemckendrick/2012/06/29/rip-software-
companies-hello-data-companies/)

~~~
dredmorbius
In terms of what actually directly provides value, it's less data and more
social lock-in.

Arguably software is a large driver of the company's value.

This is all pretty much an angles dancing on heads of pins argument, though.

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ZenPro
I fully imagine the descent will even more rapid than the rise.

When people congregate; advertisers follow seeking the _staggering_ ROI of the
early marketers on the platform.

The platform, under shareholder pressure, will accept as many ads as it can
until the platform is so saturated the customers leave and the ad ROI
plummets. Advertisers are normally last to arrive at the party and also late
to leave...

I recently saw a photo that demonstrated Facebook has an 8/1 content ratio.
For every 1 meaningful piece of content a user is subjected to 8 ads including
sidebar + newsfeed. If you include the horizontal scrolling for mobile adverts
it rises to 13/1.

I think this party just hit it's peak. I deleted my FB a month ago, have not
really missed it and a few of my friends have followed. Anecdotal evidence
admittedly but no one did it in the usual "I am out!". The deletions were more
of a _shrug_. Personally I find that the most emphatic indictment; when people
have just grown bored of your platform.

~~~
SDGT
Every single week that I sit down and stare at my newrelic monitor, I think
the exact same thing: "This is all going to collapse soon."

After almost two years of staring at six figure weekly revenue values on the
analytics and tracking applications I've built (I obviously am not making this
much), I begin to question my inherent concerns on FB's long game.

~~~
ZenPro
From a quantitative perspective I cannot fault them _right now_ but from a
qualitative perspective...something is rotten in Denmark.

Facebook is not the platform we need, it's the one we deserve right now ;-)

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gcb0
i sent a link over their newly acquired IM service... and now all my ads are
for the company owning that link.

for one side I'm impressed at their speed in incorporating that new window
into my privacy. ...or maybe the selling price was so high because that was
already a feature? anyway, on the other hand, I'm unimpressed by either their
inventory of ads or ability to classify the content they know i know.

if they showed me things relevant to that link it would be interesting. they
just flooded me with ads for something i might even own already. its like the
cheap ad networks on desktop. see one item at amazon, now all sites in the
world will show you that item. they just spent billions to race the mobile ads
to the bottom from the get go.

~~~
Encosia
Isn't it more likely that the page you visited to get the link had a Facebook
"like" button on it that tracked your potential interest at that point?

~~~
gcb0
nope. typed it on my phone. it was a service i use 2 months ago and a friend
asked me about it during the chat

------
pyrrhotech
I am short, but congrats on a great quarter! Enjoy it while it lasts. I still
doubt the company will exist by 2025, but I've been wrong before so who knows.

~~~
jpeg_hero
That's a long time to be short.

From my trading days, I've learned the importance off only short term trades
when betting against a stock.

~~~
pyrrhotech
I don't plan on shorting to $0. I went short the day after the Whatsapp
announcement at $67. Originally planned to cover around $50, but may cover at
any point now. They are definitely rolling and investors are enthused in the
short term at least

~~~
Gustomaximus
What method did you use to short them?

~~~
pyrrhotech
regular short sale, no options or anything. In Interactive Brokers, just
selected 'sell' instead of 'buy' before placing order

------
waps
What I don't understand. How do these figures justify a $70 share price ?
Companies tend to be valued at 15 * revenue, on large aggregate.

With these earnings their PE ratio will go from 72 to 57, assuming the stock
price doesn't increase. If this stock deleverages at the same speed as google
stock did, over 2 years, the share price will be $35-$30 by the end of the
year ...

If the pe ratio gets in line with S&P 500 "normal" pe ratio of 15 (actually
more like 10-15, but recently it's been nearer 15 than 10), facebook is only
worth $17 per share.

Now the default argument is "but growth", so I fit a third degree curve to
their earnings. So I fit a second-degree curve to their eps (this assumes it's
on an exponential growth trajectory, quite generous I would say), and at what
point would their valuation become justified at standard S&P 500 ratios ? Q1
2017. This is assuming FB's exponential growth holds up. That's not as bad as
I feared it would be, but still it's pretty bad.

EPS curve for facebook: 0.005 x^2 - 0.0015 x + 0.12 (x is measured in number
of quarters since Q2 2012. Data from streetinsider.com)

~~~
stormbrew
If share prices were determined by a simple mathematical formula based on
earnings reports, there'd be very little profit in buying and selling stocks.
People (and organizations) who buy fb believe it is undervalued in the long
run. They may be wrong or they may be right, but you can't math that
perception out of existence.

~~~
lutusp
The tl;dr: anyone who thinks equity valuations are based on rational decision-
making are going to be taken to the cleaners.

~~~
stormbrew
Well, for a certain definition of rational. I think the operative definition
in this subject amounts to roughly "not random," though. People (or nowadays
trading bots) have _reasons_ , they just aren't necessarily _good reasons_.

~~~
lutusp
> Well, for a certain definition of rational.

I wasn't going too far afield -- by "rational" I meant on the basis of P/E
ratios and other conventional sources of information, rather than mass
psychology or hunches.

As to trading bots, depending on how much capital they move, they can twist a
small market until it cries uncle, and in a matter of minutes in the worst
cases. That's rational by some definitions. :)

------
001sky
_The world’s largest social network has been on an acquisition tear this year,
effectively moving to transform itself into a tech portfolio company._

>Interesting take on things ...

------
ghx
The headline should read, "Facebook earnings gain as they insert 82% more
ads".

There's got to be a point where it just gets too saturated for users, just
like Myspace did. Maybe not this time?

~~~
encoderer
Nope. Try again. They're making higher CPCs and CPMs.

~~~
ZenPro
To be fair, those figures have been disputed and also called outright
fraudulent by a number of parties.

An advertiser recently had an $800,000 invoice struck off because he
threatened to sue Facebook. They decided just to let it slide instead of have
the public debate.

