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Why Facebook Shares Sold Off Today

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Just when you thought social-networking kingpin Facebook (Nasdaq: FB  ) was regaining its footing after its gigantic and controversial IPO, Facebook saw its shares close down 8% today, much worse than the broader market.

The culprit this time is renewed doubts over the effectiveness of Facebook's advertising business, highlighting by an investigation by the BBC. At the heart of the concern are fake or duplicate accounts that end up costing advertisers, who pay more based on their followings of users who have "liked" them.

Spam and phony accounts are par for the course when you're talking about the Internet, but they represent a renewed concern on a young advertising platform like Facebook's, as opposed to the more traditional search-based advertising realm that Google (Nasdaq: GOOG  ) now dominates. Since Facebook charges advertisers based on how many fans it has, fake fans directly translate into wasted dollars going straight into Facebook's coffers.

For example, the BBC created a Facebook page for a fake company called VirtualBagel, which has no products, just to see whether it could get fans without any type of offering or even interesting content. Within a day, the fan page had garnered more than 1,600 "likes," with a disproportionate number of these "fans" coming from the likes of India, Egypt, Indonesia, and the Philippines. Many of these users were pretty clearly fake, like a 13-year old who was supposedly a manager at Chevron.

An anonymous social-marketing exec for a British company added:

Any kind of investment in Facebook advertising has brought us very little return on sales. The fans you get from advertising may not be genuine, and if they are genuine, are they people who will engage with your brand? The answer, more and more, appears to be no.

Facebook officially estimates that roughly 5% to 6% of its monthly average user, or MAU, base in 2011 were fake or duplicates. The company ended the year with 845 MAUs, translating into between 42 million and 51 million fake accounts. By its own admission, Facebook's method for detecting duplicates is imprecise at best.

Ultimately, the effect of fake users is probably relatively small in the grand scheme of things, and Facebook actively tries to eliminate duplicates. But one thing is for sure: It doesn't help Facebook's perception with its core advertiser base.

Concerns over Facebook's advertising model continue to persist, which is one reason you should be checking out this social-media play instead. This social networker has a more reliable monetization model, and its top line shows it. Grab yourself a copy of this free report while you still can. It won't always be free.

Fool contributor Evan Niu holds no position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Facebook and Google. Motley Fool newsletter services have recommended buying shares of Chevron and Google. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (5)

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  • Report this Comment On July 17, 2012, at 7:05 AM, Stockpicker222 wrote:

    "Within a day, the fan page had garnered more than 1,600 "likes,"

    That is a flat out lie. If you ever actually used Facebook, you would know that this would NEVER happen.

    The amount of totally false an uninformed reports about the effectiveness of FB advertising is amazing. Must be a lot of people who want to keep the stock price depressed.

  • Report this Comment On July 17, 2012, at 11:29 AM, naughtyguy wrote:

    My brother passed away two and a half years ago and is still on facebook with no activity in all that time. It seems if Facebook had a way of eliminating all accounts that had no activity for a year, then advertisers would not be so deceived.

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