Does Facebook Have a Fraud Issue?

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.

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

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.

A better investment than Facebook likes
Opportunities to get wealthy from a single investment don't come around often, but they do exist, and our chief technology officer believes he's found one. In this free report, Jeremy Phillips shares the single company that he believes could transform not only your portfolio, but your entire life. To learn the identity of this stock for free and see why Jeremy is putting more than $100,000 of his own money into it, all you have to do is click here now.

Read/Post Comments (0) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2836013, ~/Articles/ArticleHandler.aspx, 8/31/2015 9:32:21 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Dan Newman

Writing for the Fool since 2011. Interested in technology, the future of society, and how both overlap.

Today's Market

updated 2 days ago Sponsored by:
DOW 16,643.01 -11.76 0.00%
S&P 500 1,988.87 1.21 0.00%
NASD 4,828.33 15.62 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 3:59 PM
FB $91.01 Down +0.00 +0.00%
Facebook CAPS Rating: ***