The Digital Skeptic: Making Book on Facebook

Tickers in this article: FB

NEW YORK (MainStreet) -- For better or worse, in these nutty days, you just can't judge Facebook by its cover.

On the downside, the social media giant is finally sobering up to reality after its pre-IPO crack high. Investors are figuring out that a business with Harvard, Goldman Sachs and a major motion picture behind it actually might not be much of a business at all. Instead of headlines and widely quoted figures about Facebook being magically worth $50 billion, as was the case when Goldman placed its Facebook bet in January 2011, now the headlines say that this book has lost $50 billion in value since it went public.

And the howling chorus of questions about the firm is on the rise.

Rob Cox, who reliably writes about digital investments over at Reuters' Breakingviews, noticed that while sales and subscribers sound cool, costs matter too. Revenue may be up $2.4 billion in the first six months of 2012, as he wrote last week, but costs rose even higher -- to $2.6 billion in the same period.

Even the gritty issues of social media click fraud and ad effectiveness are finally dinner table conversation for investors. Manorville, N.Y.-based Limited Run, which offers a Web retail sales service for bands and artists, was widely reported to have deleted its Facebook page due to nonhuman bots that sapped value.

To be fair -- which is most definitely getting overlooked in this ugly din -- Facebook is taking these issues seriously. Limited Run said in a follow-up post that the company is investigating its problems. And the social media giant is conducting industry outreach. It worked with a metrics shop, Reston, Va.-based comScore, on a white paper called The Power of Like 2 to spell out the argument for social media as an ad medium.

And -- even more startling for Facebook -- real company executives are answering real journalist's questions. Mark Rabkin, a director of engineering, submitted to a Q&A with Forbes, and in it he did a reasonable job of explaining the company's security concerns and revealing that the operation has a legit staff of 300 people who manage spam.

So the question becomes: Has Facebook finally gotten on with the boring business of managing a real business in the diminished realities of the digital age? It indicates that maybe, behind all the negative chatter, lurks an investor opportunity.

The answer, of course, is that so much of the book on Facebook remains unfinished that your guess is as good as mine.

Is there a finished book in Facebook?
The essential takeaway when dusting off the cover and flipping through the pages of Facebook is how much of this fabled company remains just that, a fable.

Take the comScore report. Remember back in the day, like last month, when Facebook was all about users, friends and likes? Well, now a billion users is apparently no longer enough. Marketers, according to this document, must start focusing on slippery concepts such as "fan reach," "engagement" and -- my favorite -- "amplification." It's all rather murky, in a Spinal Tap sort of way, but I think it means getting a liker to comment on what you liked and then getting that person's friends to comment or like your comment or like. I got that, like, right, right?

And the Limited Run incident is by no means the only case of Facebook advertising not working as advertised. The BBC conducted a hilarious, and very disturbing, study in which it created a fake business called VirtualBagel that got 1,600 likes in 24 hours, even though it had no products. The Facebook page for this nonservice has become must-read for all those interested in advertising with this company.

But even darker, as the company seeks to disclose its issues to the media: If you dig into documents the company discloses with regulators, it's clear Facebook knows it has much writing to do. There are the issues with getting paid in the mobile space; issues about security; and then on page 24 of a recent 10-Q filing there is language that estimates that close to 4% of its accounts may be suspect, bots or outright spam.

The overall unfinished-book feel to Facebook is not lost on analysts who read up on the company.

"This is a totally new platform," Andrew Lipsman, vice president of industry analysis at comScore and the report's co-author, told Time.com. "There are some unique aspects to it, and we're still in the early days. This process will play out over the next couple of years."

The scary part is that all this on-the-fly business model writing will have to get done in an utterly new digital economy that devalues most every bit of information it touches. The story that gets written here will be, at best, a guess.

Meaning making the book on Facebook will be one of the toughest investor reads ever.

Tickers in this article: FB