Does Facebook Have a Fraud Issue?

The social network's advertising platform has been called out for its potentially worthless clicks. Is it true?

Feb 12, 2014 at 8:00PM

Facebook (NASDAQ:FB) banked close to $7 billion in advertising revenue last year. The company's future plans include getting the 4.4 billion people without Internet access online, presumably to serve them advertising to further pad their revenue. However, there may be a small hiccup along the way to Facebook's world domination. As a prominent YouTube user points out in a video that gained more than half a million views in a day, Facebook's advertising model may be broken. And at this crucial time when advertisers are dipping their toes into digital and social media markets, it may hinder future growth at Facebook.

Images

Facebook celebrates 1 billion monthly active users, though more than 11% may not be true users. Source: Facebook.com.

The issue
As the video explains, you can pay to promote your Facebook page in order to gain "likes." When a user likes a page, they have basically subscribed to that page's posts, which depending on their popularity, could show up in that user's feed. The more users who interact with a post through comments, likes, or sharing, the more that post is shown to other users. For a business, a large number of page likes can be a great network to spread news about new products, services, or sales.

The problem is, according to this user, the majority of likes that he gained when advertising were from what he thinks are fake profiles. And since these fake profiles don't engage with his posts, his posts weren't shared among the real likes as often. The more fake likes, the less his posts were seen.

A majority of these supposed fake likes were from "click farms" in countries like Egypt, India, and Indonesia. Companies in those countries could create fake profiles that like a substantial number of pages for businesses that pay them. But to make sure these profiles aren't caught by Facebook, they might like a bunch of pages that haven't paid them. And even when selecting to advertise to countries without these supposed click farms, like the U.S. and the U.K., the profiles that liked a page still seemed questionable with thousands of strange likes.

It appears this user's experience isn't an isolated case. A BBC reporter did a similar experiment with a virtual bagel company. The U.S. State Department apparently spent more than half a million dollars to gain millions of likes, only to find only 2% of these fans actually engaged with any posts.

In the end, a business could pay for likes that produce no actual return.

In Facebook's defense
Facebook responded to these accusations in an email to Mashable, writing that "[f]ake likes don't help us. For the last two years, we have focused on proving that our ads drive business results, and we have even updated our ads to focus more on driving business objectives."

Others claim that these experiments are just poorly run advertising campaigns. Facebook's advertising tools can significantly narrow down the demographics of what user sees an ad, and advertisers have to take time to learn these tools and adjust campaigns accordingly.

The conclusion for now
Facebook reports how many accounts it believes are duplicates, misclassified, and undesirable. For 2013, it reported that between 4.3% and 7.9% were duplicates, 0.8% and 2.1% were misclassified, and 0.4% to 1.2% were undesirable. This means at the largest estimations that of Facebook's 1.23 billion users, 137 million aren't a traditional, real user. This is a big issue, especially when businesses are paying to access these users. The more businesses that have a bad first experience with fake likes, low engagement, and low returns, the more their advertising dollars will flow to Facebook's competitors.

On the other hand, the majority of these fake accounts are from countries where Facebook makes the least money. Last quarter, the U.S. and Europe brought in 74% of advertising revenue. If Facebook can help advertisers tailor their targeting to home countries, a majority of these fake engagement issues might be avoided, and a healthy chunk of revenue is safe. Of course, as Facebook grows its revenue from Asia and the rest of the world, it will be under greater pressure to find a better way to thwart fake likes.

If Facebook chooses to keep relying on advertising for its revenue model, it needs to make sure advertisers are getting value for their dollar.

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Dan Newman has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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