Paul Sakuma/AP

How much for that thumb?

Looking to get more popular on Facebook? Alex Melen will sell you 1,000 “likes” for about $75.

Melen runs an Internet marketing company. About six months ago, companies he worked with started coming to him more and more with a simple problem: They had created pages on Facebook, but nobody had clicked the “like” button.

“You would go there, and there would be two likes,” Melen says. “And one of them would be the owner. And people right away lost interest in the brand.”

For the right price, Melen can fix that.

Facebook knows an incredible amount about hundreds of millions of people — what they like, what they want, who their friends are, where they live. This is the key reason why investors think the company is so valuable. But that value only holds up if the data is real — if all those people actually like what they say they like.

When Melen sells likes to a company, he goes through an intermediary, who in turn could be working with people anywhere in the world. The people on the other end are just doing it for money. They get paid a very small amount — 10 cents, say — each time they like a company.

“Right now on the black market, you can actually buy and sell bundles of Facebook account credentials,” says Ben Zhao, a computer science professor at UC Santa Barbara. “Tens of dollars or hundreds of dollars for hundreds or thousands of Facebook accounts.”

In some cases, there are no people involved at all. Those fake accounts are controlled by robots and create fake data. (Melen says all his likers are real people.)

Business

Facebook’s Growth And Reach At A Glance

The people who pay Melen for likes range from an LED light bulb company to a publicity company for a reality show.

The show had 95,000 Facebook fans already, but it wanted about 25,000 more. These likes really matter to television networks, which sell advertising based in part on the number of likes they have.

Facebook knows this sort of thing is going on. And the company has created an elaborate system to root out bad data. It has social bot hunters whose job is to track down fake Facebook profiles and kick them off the network. But it’s still happening.

Another company that sells likes showed us a Nashville country singer who was a client. She had a lot of likes — mostly from Egypt.

Kimihiro Hoshino/AFP/Getty Images

How much for that thumb?

Looking to get more popular on Facebook? Alex Melen will sell you 1,000 “likes” for about $75.

Melen runs an Internet marketing company. About six months ago, companies he worked with started coming to him more and more with a simple problem: They had created pages on Facebook, but nobody had clicked the “like” button.

“You would go there, and there would be two likes,” Melen says. “And one of them would be the owner. And people right away lost interest in the brand.”

For the right price, Melen can fix that.

Facebook knows an incredible amount about hundreds of millions of people — what they like, what they want, who their friends are, where they live. This is the key reason why investors think the company is so valuable. But that value only holds up if the data is real — if all those people actually like what they say they like.

When Melen sells likes to a company, he goes through an intermediary, who in turn could be working with people anywhere in the world. The people on the other end are just doing it for money. They get paid a very small amount — 10 cents, say — each time they like a company.

“Right now on the black market, you can actually buy and sell bundles of Facebook account credentials,” says Ben Zhao, a computer science professor at UC Santa Barbara. “Tens of dollars or hundreds of dollars for hundreds or thousands of Facebook accounts.”

In some cases, there are no people involved at all. Those fake accounts are controlled by robots and create fake data. (Melen says all his likers are real people.)

Business

Facebook’s Growth And Reach At A Glance

The people who pay Melen for likes range from an LED light bulb company to a publicity company for a reality show.

The show had 95,000 Facebook fans already, but it wanted about 25,000 more. These likes really matter to television networks, which sell advertising based in part on the number of likes they have.

Facebook knows this sort of thing is going on. And the company has created an elaborate system to root out bad data. It has social bot hunters whose job is to track down fake Facebook profiles and kick them off the network. But it’s still happening.

Another company that sells likes showed us a Nashville country singer who was a client. She had a lot of likes — mostly from Egypt.

In his latest column for the New York Times Magazine, Adam Davidson writes about a peculiar thing companies do to get our attention: they burn money on frivolous ads. Economists call it “signaling,” where a company shows its strength by spending an eye-catching fortune, on, say, a pop star:

or several stars:

or even a monkey:

None of these ads reveal a thing about the products (unless you think Nicki Minaj has better taste in soda than Carol Channing). What they do reveal is that the company has money to burn.

Wasteful as it may seem, many economists agree that these ads send a valuable signal to consumers. They show that the company is confident in its product and knows some customers will come back for more. If it were wrong, those costly ads would soon put it out of business.

Do we still need signaling in an information age, when anyone can look past the flashy ads and pull up product reviews on their smart phones? Read the full column here to find out.

In his latest column for the New York Times Magazine, Adam Davidson writes about a peculiar thing companies do to get our attention: they burn money on frivolous ads. Economists call it “signaling,” where a company shows its strength by spending an eye-catching fortune, on, say, a pop star:

or several stars:

or even a monkey:

None of these ads reveal a thing about the products (unless you think Nicki Minaj has better taste in soda than Carol Channing). What they do reveal is that the company has money to burn.

Wasteful as it may seem, many economists agree that these ads send a valuable signal to consumers. They show that the company is confident in its product and knows some customers will come back for more. If it were wrong, those costly ads would soon put it out of business.

Do we still need signalling in an information age, when anyone can look past the flashy ads and pull up product reviews on their smart phones? Read the full column here to find out.

Facebook will be valued at about $100 billion when it goes public this week. What would it take for that valuation to be justified?

As we noted yesterday, the value of a typical big, public company is 15 times the company’s annual profit. So a company valued at $30 billion would typically have annual profits of $2 billion.

Facebook will be valued at 100 times its current annual profits. That’s because investors expect the company’s profits to go through the roof in the coming years.

For Facebook to achieve that kind of growth, some combination of two things will need to happen: The company will need to add more users, and it will need to get more revenue out of each user it has.

The company has been doing both over the past few years, though growth has been flagging recently.

Notes

*Payments and Fees* represents the fees that developers have to pay to use Facebook for electronic commerce. If a person buys a product on Facebook, the social media network receives a fee. Most of this revenue currently comes from online game maker Zynga.

Source: SEC

Credit: Lam Thuy Vo/ NPR

For Facebook to live up to its valuation, that growth will need to accelerate. If we assume profit margins of 33 percent (lower than the company’s current margins, but higher than those of most companies), here’s how much revenue-per-user the company would need under different scenarios:

Notes

*Current Average Revenue Per User* was annualized using numbers from the first quarter in 2012.

Source: SEC, NPR Calculations

Credit: Steve Henn and Lam Thuy Vo / NPR

In other words, even if Facebook grows to include nearly half the people on the planet, it will still also need to increase the amount of money it gets for each user by nearly 50 percent.

For lots more Facebook graphics, see Facebook’s Growth And Reach At A Glance