Facebook shares down ahead of earnings report

July 26, 2012

Facebook shares are down in mid-afternoon trading ahead of the company’s second-quarter earnings report, which is due after the bell. It will be the first report ever for Facebook as a public company — meaning that every part of the announcement will be scrutinized closely.

Facebook was trading at $27.46 per share around 1:45, down from an open of $27.75.

Investors spooked by Zynga’s poor performance may be part of the problem, but recent surveys suggesting user engagement is down across the site have also raised questions about the company’s long-term prospects.

Analysts project that the company will have around $1.15 billion in revenue, and will be looking closely at user growth and engagement to assuage concerns about dropping engagement.

The report Thursday also will provide guidance on whether talk about Facebook losing its relevance is truth or hype. When the company went public in May, the Associated Press released reports that many Americans believed the site was a “fad” and that 60 percent of those polled didn’t trust the company with private information.

If Facebook sees slower user growth and lower site engagement due to a sinking reputation, that’s very bad news for the company, which relies almost exclusively on ads for its revenue.

One issue that could be further exacerbating the trust issue is the appearance of counterfeit ads on the site.

Social media marketer Eric Feinberg began noticing ads for counterfeit merchandise on his legitimate marketing pages. The prevalence of the ads prompted Feinberg to start an organization called Fans Against Kounterfeit Enterprise, or FAKE, which aims to educate users about the ads.

Since then, he’s conducted experiments to prompt the appearance of counterfeit ads by posting particular pictures or mentioning certain brands on Facebook pages. In the past seven months, he’s cataloged 7,000 ads that lead to fake merchandise. He regularly reports the ads to Facebook, and has contacted the company, but was told that Facebook could only act if they received complaints from copyright or trademark owners.

When asked about the counterfeit ads, a Facebook spokeswoman said the company acts quickly to take down ads that violate its ad guidelines and has a team dedicated to monitoring those ads.

“At Facebook, we strive to create a trusted environment for our users and advertisers. We offer the ability for users to provide immediate feedback on our ads and encourage them to report anything they find offensive or misleading,” she said.

According to Facebook, fewer than 0.5 percent of its 901 million users see spam on any given day.

The company has taken steps to combat bad ads, becoming a founding member of the Ads Integrity Alliance. The group, which also includes Twitter and Google, is working to set up industry standards on how to deal with counterfeit and malware-laden ads.

It’s difficult for companies such as Facebook to fight against counterfeiters, who often set up elaborate sites that aren’t easily traceable, said Ondrej Krehel, a security expert from Identity Theft 911. He said it’s “unrealistic” to expect companies such as Facebook to screen every ad and that battling counterfeiters has to start with consumer education.

Still, if the ads continue, they could raise some red flags for the social network, said Bradley Shear, a social media lawyer who has seen Feinberg’s results.

“I find it troubling that this amount of ads are showing up,” Shear said. “If consumers are confused as to what’s real merchandise and what’s counterfeit merchandise, that could create tremendous legal liability for Facebook.”

Feinberg, for one, would like to see the government take a closer look at the problem.

“We’re being duped,” he said. “There needs to be oversight.”

Policing ads also makes sense from a pure business angle. Since Facebook is free, the company’s revenue depends on users clicking ads. With four out of five Facebook users telling Reuters/Ipsos in a recent poll that they never click on the site’s ads, the site will want to put any concerns about legitimacy to rest as soon as possible.

“The more that we hear about or experience ourselves bad ads, the less likely we’re going to be to click,” said Maxim Weinstein, the president of StopBadware — the nonprofit backing the alliance. “And the system only works if people click on the ads.”

Related stories:

Facebook earnings: What to listen for

Scammers claim to be U.S. Airways

Zynga posts loss; Facebook investors worry

Hayley Tsukayama covers consumer technology for The Washington Post.
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