Twitter (NYSE:TWTR) received a lot of attention leading up to its initial public offering last month. But now that the company has officially gone public, additional scrutiny is being applied to certain aspects of its business. In particular, some are looking more closely at the number of fake accounts on the social media site.
A recent report by The Wall Street Journal pointed out that buying Twitter followers to boost social network influence is fairly commonplace -- and cheap. One thousand followers can be purchased for a mere $11, and some can even retweet, tweet, and reply to messages just like real users.
So how many fake accounts does Twitter actually have? Not even Twitter is exactly sure, but the company estimates that less than 5% of its monthly active users are fake accounts.
In its prospectus, Twitter said that that number could be higher: "However, this estimate is based on an internal review of a sample of accounts and we apply significant judgment in making this determination. As such, our estimation of false or spam accounts may not accurately represent the actual number of such accounts, and the actual number of false or spam accounts could be higher than we have currently estimated." Estimates from WSJ put that number as high as 9%.
Twitter's fake accounts aren't unique to its service, but they are much higher than at social media competitor Facebook (NASDAQ: FB). In a recent SEC filing, Facebook said that "undesirable accounts, which represent user profiles that we determine are intended to be used for purposes that violate our terms of service, such as spamming" make up 0.4% to 1.2% of monthly active users.
Facebook may be able to hedge against fake accounts better than Twitter because it requires users to enter a real name for a Facebook account and limits them to just one account. Facebook users can obviously create a duplicate account, and the company estimates the percentage of those to be between 4.3% and 7.9%. But duplicate Facebook accounts are not necessarily "undesirable accounts" used specifically for spamming.
The high level of bogus Twitter accounts should be concerning for Twitter investors when you consider that Twitter is relying on advertising as its primary source of revenue. Fake followers means advertisers could potentially show ads to users that don't exist, even though the accounts are following, tweeting and messaging like real users. It's also problematic because fake accounts dilute communication between real users and hurt Twitter's legitimacy.
Unfortunately, there's not much stopping users from paying for cheap followers right now. Though Twitter has implemented software to catch fake accounts in the past, the problem still persists. Investors need to watch for any changes in the percentage of fake accounts Twitter reports, and any plans the company has to overhaul how users set up new accounts.
Fool contributor Chris Neiger has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool 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.