There are three ways to get likes on Facebook (NASDAQ:FB): You can promote your page organically, you can buy them illegally from "like farms" in developing countries, or you can pay Facebook to promote your page.
One Facebook critic has taken to YouTube and believes those "like farms," which proliferate fake "likes" all over the social network, are responsible for illegitimate likes on legitimately promoted Facebook pages. Ultimately, these "likes" are useless, unengaged followers. His video has garnered nearly 1 million views so far.
Twitter (NYSE:TWTR) is well known for being able to buy followers on the gray market. And Sina's (NASDAQ:SINA) Weibo in China is filled with zombie accounts as real users flee due to too much advertising. The fact is, there's practically no way for a social network to stop the problem.
What's an advertiser to do?
Facebook is well aware of the like farms that spam its network. In its 10-K, the company calls them "undesirable accounts" and estimates that they represent between 0.4% and 1.2% of the sites monthly active users, or MAUs. The problem is naturally worse in developing countries like India and Turkey compared to the United States and U.K.
Certainly, advertising in countries like India will result in a lower return because users generally have lower discretionary income, but it also carries the risk that a lot of ad engagement will be worthless. Unfortunately, that risk carries over to developed countries, where ads targeted toward the U.S. or Canada still get clicks from "like farms."
The thing is, Facebook's ad prices are based on bids, and advertisers have noticed useless "likes" in the past. As a result, the free market should correct for this problem on its own. The market says that advertisements in the developing countries aren't worth a whole lot.
Facebook doesn't hide this. Facebook's advertising revenue per user in the U.S. and Canada is more than twice as much as any other region.
It's probably not better on Twitter
Just as you can buy likes on Facebook, you can pay for followers on Twitter. Twitter's ads work by charging advertisers for each favorite, retweet, or follower a promoted tweet or promoted account brings in. If Facebook "like farms" are legitimizing their accounts by clicking on ads for free, why wouldn't Twitter spammers follow or retweet things for free to make their accounts look more legitimate?
Twitter mentions in its S-1 filing that it combats spam accounts by using algorithms to identify them and terminate the accounts. Good spammers will always stay one step ahead of Twitter's engineers, and legitimizing accounts by clicking on advertisements, gathering their own "followers," and tweeting and retweeting randomly will likely help legitimize the fake accounts.
Facebook and Twitter just need to combat Sina Weibo's problems
Sina claims its Weibo, the Chinese equivalent of Twitter, has about 600 million MAUs. A study conducted by the China Internet Network Information Center found that only 60 million of those were active daily. The conclusion is that up to 90% of Sina's Weibo are zombie accounts, or accounts made to follow other users for money.
To make things worse, Sina cluttered its interface with advertisements. As a result, legitimate accounts have fled the service, turning to services like TenCent's WeChat. The weibo industry as a whole saw users decline 9% in 2013, and Sina saw its Weibo revenue shift more toward advertising (which fake accounts can contribute to) from high-margin mobile services (which they cannot).
So what's the big deal?
Facebook and Twitter still provide very good platforms for advertisers, as evidenced by their growing ad revenue. Facebook improved its average ad price 92% year-over-year in the fourth quarter, but decreased its total ad impressions by 8%. Twitter, conversely, saw its average cost per engagement decrease 18% year-over-year as it increased its ad load. The company plans to be very conservative on further expansion of its ad load and plans to grow ad revenue through user growth and higher ad prices.
I don't see either company falling prey to the problems that plague Sina Weibo anytime soon.
This social-media company doesn't appear to have a fake account problem
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Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Facebook, Sina, and Twitter. The Motley Fool owns shares of Facebook and Sina. 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.