Bank of America Manipulating Customers?

Bank of America wants to rid itself of its expensive Real Estate and pare down the number of tellers.  They are manipulating customers in order to do this.

I have written extensively about Bank of America in the past.  Until this morning, I was a shareholder.  Bank of America is like having a needy friend.   They can be a great friend, at times, but other times, they seem to take up a lot of your time and make you jump through hoops.   And lately, it seems this is getting worse and worse.

In my posting, Big Bank, Little Bank?  I mentioned that while small banks are "down-home friendly!" they often are not very user-friendly.  Clunky websites, few in-network ATMs you can use, and sometimes some pretty bad customer service.   Large banks, like BoA, on the other hand, have a network of ATMs throughout the country, and your cash is only a few moment's drive or walk away, if you need access to it.   If you travel, as I do, having a big bank is handy, as it helps you avoid ATM fees.

No one should pay ATM fees, or any banking fees, if they can help it.   There are banks out there today that offer fee-free checking and savings accounts, so why pay a fee, just to use your money?  Now, granted, banks incur expenses for certain things - usually things that involve tellers having to do real work.   Labor is their largest cost, right after their Real Estate costs.  So things like bounced checks and the like do incur fees.    And "maintenance fees" for dormant accounts are a way of cleaning out abandoned accounts from their books - most banks have these, nowadays.  So there are fees you may have to pay - if you don't watch your money carefully.   But if you play the game right, it should be fee-free.

Now, granted, it is possible to pay cash for everything and thus avoid any banking fees.  But there are a lot of places that just don't take cash, and despite the urban folklore you may have heard, no one is required to (the phrase "legal tender for all debts, public and private" only means that cash may be used to pay debts, not that anyone is required to accept it.)   Some folks try to "work around" banks by using prepaid debit cards or prepaid credit cards.   But these are very expensive alternatives, and being afraid of banks is no answer to the problem.

And in addition to ATMs, banks today offer one of the greatest services ever - paying bills electronically.   Writing checks is not only time-consuming and risky - it is expensive as well.   As I noted in that earlier posting, you save 44 cents or more when you pay a bill online, as opposed to writing paper checks and mailing them.   This is a service that puts money in your pocket, and with most banks, it is FREE.

So, big banks are great, right?   Well, yes and no.   They have real overhead, and many are struggling on a day-to-day basis, mostly due to unrelated losses in Real Estate loans and other shenanigans.   So many are looking to alternative revenue sources to improve their bottom line.  Bank of America floated the idea of a $5 a month ATM card fee, but was shouted down resoundingly.  So today, they are scrambling to find other sources of income.

They already charge a staggering $12 just to receive a wire transfer, which is sort of ridiculous.  In Europe, wire transfers are used in the same way we use electronic bill pay - you can send someone even a dollar this way, with little effort.   In the US, however, wire transfers are viewed as a way of transferring house payoffs, lottery winnings, and other "big tickets" from one person to another, securely.  So charging $12 to receive $500,000 doesn't seem like a big deal.    But when I receive $500 from a client in Europe, it is a big deal, and a big pain in the ass.

And of course, they charge pretty hefty fees for bouncing checks and "going over" your credit limit on credit cards.   The latter, of course, is an "opt-in" feature - you have to ask for "overlimit protection" which nicks you with a $30 fee if you go over your limit.  They cover the charge, and charge you a lot.   If you are astute, you would "opt out" of this "feature" as it doesn't help your bottom line at all.

Bank of America has been caught in a particularly nasty debacle, in that they bought Countrywide Mortgage at the height of the Real Estate Boom, and apparently didn't realize they were buying a steaming pile of turd at the time (or did they?).  So, as you can imaging, BoA is fishing around for ways to cut costs and improve the bottom line.

One way to do this, is to reduce the number of employees - the tellers - and the related hardware and Real Estate.   Bank of America is saddled with huge buildings in most towns and cities, which are usually quite identifiable as "Bank of America" buildings.   Paying tellers to work there is expensive, as you have to pay their salaries and benefits and health care, and retirement, not to mention that 9% matching Social Security and Medicare taxes, unemployment insurance, workman's comp, and the like.

So, many banks are experimenting with virtual banking - using ATMs to not only withdraw money, but handle deposits.  If you think about it, there is no reason why the dreary job of "Bank Teller" couldn't be automated like anything else.   And the technology works pretty well.   Checks are scanned in, read, and then automatically deposited.   In this era of Check-21, physical checks are not moved about anymore anyway, but rather are shredded and their electronic counterparts retained.   And some banks, like Citibank, are trying to sell this "virtual" account deal, to people like me, even though they have no branches in my area, just ATMs.

And the interesting thing is, if you do go into a physical bank these days, and see who is in line with the teller, you will see there are two kinds of customers, generally.   First, there are the local merchants, with a wad of money and checks from their businesses, making a deposit.   These are profitable customers for the bank, as they usually have commercial accounts that charge monthly fees.   And chances are, they have pretty good bank balances and maybe a line of credit or business loan as well.

But for many of this first group, a night deposit slot may be all they need.   Take the money and checks, put it in the night deposit, and the bank can process the deposit at its leisure the next day.

The second type of customer are poor people.   These are the folks who want to "cash a check" or withdraw $25 from Savings.   They have low balances and end up costing the bank more money than the bank can make from interest on their meager deposits.   Wealthier folks use checks, credit cards, debit cards, or the ATM outside.   It is only the very poor who try to use a savings account as a checking account, making multiple deposits and withdrawals per month.

So, you can see that tellers are not only expensive, but that for the most part, the only people using them are the customers who make the least amount of money for the bank.

Now, I know what you are going to say.  Suppose there is a "problem" with your account?   You want to talk to someone in person!  Right Away!   But of course, this "person" isn't available until 9:00 or 10:00 AM, and then only if you drive to the bank and then stand in line and explain your story.   And even then, you are referred to the bank manager, forced to wait in line outside her office, and then you have to explain your story again, at which point she calls someone in customer service and starts the process all over.   You might as well cut to the chase and just call customer service yourself.

So, it would seem that the Banks have an interest in you using the ATM for all of your transactions, to use the computer to get your balance and your statements online.  To use the call-in customer service, instead of a teller.  And for the most part, people use these modern conveniences - people such as myself, who have not set foot in a bank lobby in years.

But how do you go about making people do this?  That is an interesting conundrum.   A year or so ago, I received pleas from Citibank to open a virtual-type account, promising me a $100 bonus if I signed up.   Since there are no offices in my town, all my banking would have to be through their Automated Teller Machine.  It was a tempting offer.  The carrot is an effective tool.

So is the stick.

My account with BoA was opened in 2005 in New York State.   In the seven years I have had the account, I have never paid a monthly service charge - and why should I?  Other banks offer charge-free accounts.   They did have $3 a month service charge for savings accounts, unless you transferred a minimum $25 to savings every month.  But that was easy to set up using automatic online-transfers.  So for seven years, I have never paid a service charge to use this account.

That is, until this morning.

Logging onto my account, I was chagrined to see "Monthly Service Fee, $12" on my account.   So, as you might imagine, I lit up the phone lines to customer service.   And the story I got was, well, a load of horse shit.

The person answer the phone tried to tell me that this was the regular monthly service fee - you know, the one I pay every month.   I explained that I have never paid such a fee in seven years.  She countered that unless I had automatic deposit of at least $250 a month, or a minimum balance of $1500 at all times, the service fee applied.   I explained that I have never, in seven years, had automatic deposit, as I am self-employed, and moreover, my balance has gone below $1500 on numerous occasions without such a fee being applied.

At that point, she kept repeating herself, so I asked to speak to a supervisor.

The supervisor, after many keystrokes, claimed that my monthly fee was "waived" for the first seven years, and that his "waiver" had expired.   Again, horse hockey.   When I opened the account, there was no "service fee" discussed or waived.  BoA is changing the rules of the game, in the middle of the game.

That was the windup, here was the pitch:   The helpful service person said that, since I use the ATM and online services anyway, I could "convert" my account to a virtual type "eAccount" and avoid the fee in the future.  Interesting gambit.

The virtual account is the same as my existing account, except that I cannot use the teller at the bank for any transactions - deposits, withdrawals, check cashing, etc.   And that was the real deal behind this whole poorly thought-out charade - to get me to transfer my account to this "eAccount" status.

Naturally, I agreed to this, and as she "converted" my account (and refunded the $12 fee), I went online and dumped my Bank of America stock.  Why?  These are the actions of a desperate company, in my opinion.

Converting the account gives me time to think about where I will be transferring my business to.   BoA has been a good ride, but this just strikes me as crass manipulation.

And coming right after a very suspicious "theft" of my debit card, it makes me feel as though I am a cow being lead to the slaughterhouse.   As you recall, I had no problems with my debit card, but for some reason BoA decided I needed a "new" card, which they sent me without my request.  Almost immediately, this new card was stolen, and fraudulent charges made.   While the charges were reversed, it was not without a lot of hassle - and a dozen phone calls as well.   And of course, every step of the way, a helpful BoA employee would remind me of how convenient and easy this would have been with a BoA credit card.   It makes one wonder, after all, with the recent cut to debit card fees, whether this was by accident or design.

But of course, I don't believe in conspiracy theories.

Is this new "eAccount" a good deal?  Maybe, maybe not.   The point is, the way this was forced upon me was sort of crass.  And this lame excuse that my account had some sort of "special waiver" that mysteriously expired this month was, well, lame.   And I am curious as to how many other people out there got a similar surprise charge to their account this month?

But what really is interesting, is that BoA really isn't "saving" any money by steering me to this type of account.  I haven't seen the inside of a BoA branch in over a year, if that.   So it is not me that is tying up the tellers and using up that valuable face-time.  

But I suppose there are a lot of other customers out there - the kind that like that "face to face" with the teller - who will see a $12 fee on their paper statement (which they get by mail) and say, "Well, whaddya know about that?" and then put the statement on the coffee table and turn on Reality TeeVee and order a take-out pizza and forget all about it.    And I suspect that includes more than few million people, which represents a lot of "found money" for Bank of America.

But to me, it is a violation of trust.   I no longer trust this Bank as working in my best interests.   I feel I have to watch these people like a hawk.  It is like having a cousin who steals things from you.   As long as you beat the shit out of them every so often, they keep their mitts out of your wallet.   But eventually, you get tired of beating them.   And frankly, it is just easier to avoid time-consuming folks like that.

And that is what Bank of America has become - a time-bandit needy friend.

My Short Life With the Big Firm

For a very brief time, I worked at a law firm that did Venture Capital Placement and IPOs.  It was an eye-opener.

Sometimes, I think I am not very bright.   After all, I don't understand things that other people seem to think are really smart deals.   For example, when I was in Ft. Lauderdale in the 2000's, everyone was buying Real Estate and jacking prices through the roof.  On paper, everyone was a Millionaire.   But it troubled me that it seemed like a Ponzi Scheme - no one actually had money, other than borrowed money based on inflated Real Estate Values.

So I cashed out my investments and got out of the game.  I didn't understand why the market went berserk, and why this would be sustainable.   And smart people told me I was an idiot, and gave me lengthy explanations as to why it was a rational market and I was the fool.   And after 20 minutes of such explanations, I was no more the wiser.  So I must have been the idiot, right?

Well, maybe I was just an idiot savant.   As it turned out, my "smart" friends are all broke, upside-down on houses, facing bankruptcy or eviction, and I am living in a house that is paid for.  Who's the fool now?

The same thing happened when I took a job with a big law firm that did IPO and Capital Placement.  There were lots of companies in Silicon Valley, and even back East, that wanted to go public or find investors.  And our firm did a lot of this work, and tried to act as hip and cool as the Silicon Valley outfits that were our clients.

I couldn't understand why this was such a big deal and how people, other than the Lawyers, made money.  We would find some small start-up company that had two computer geeks and an idea, and then "place" Venture Capital with them.  During the "closing" we would celebrate with Champagne, and as one partner told me, "Get them to sign off on the bills, before they sobered up."

Why?  Because the next day, they would sober up and realize they sold off 95% of their company for a few million dollars, the lion's share of which went to our legal fees.  The people who started the company had little incentive at that point to make it succeed.   And the VC firms often ended up with little to show for all their cash.   I could not understand why this was a good thing for anyone involved, other than the partners at the law firm.

IPOs made even less sense back then.   In that "dot com" boom era, companies would do Initial Public Offerings, where blocks of shares would be "subscribed" to friends of the Wall Street Bankers at IPO prices.  So, for example, XYZTECH company would "go public" at an IPO share price of $15.   The subscribers would then buy their shares at $15 and immediately resell them for $30, making a 100% profit in a matter of minutes.

And everyone would cheer what a wonderful IPO it was! 

But again, being stupid, I would ask stupid questions.  "If the stock was worth $30, why not price it at the IPO at $30?   The company would realize twice as much money from the IPO instead of just handing over half the cash to some insiders who happen to be friends of the Underwriters?"

And one of the Partners at the firm would shush me and tell me I was an idiot.

But it is a valid question and illustrates how these IPOs were raw deals for small investors.  Because it was the small investor who was buying at $30, not understanding anything about the business, the P/E ratio, profits, or whatever.   They were buying stocks like some folks buy tickets at the horse track - with dreams of avarice, hoping a long-shot will come in, and perhaps liking the name of the horse.   But long-shots rarely do come in.

The real answer to the question is, of course, that people on the inside get to cash out.   That is who is making money.  And the underwriting firm and the lawyers.   By underwriting the IPO, a sure stock price is determined.   And thus, the stage is set for a little pump-and-dump deal, where the stock is hyped in a "roadshow" for weeks, and talked about on the financial channels (throw a few shares at the host, he won't mind!).  Yea, you are giving half your equity from the IPO away, but those two geeks with an idea can now sell their insider shares, and cash out and become real Billionaires with real money, not just hyped-up stock that is really worth nothing.  The Ferrari dealer won't take "dot com" stock in payment.

But needless to say, asking too many pointed questions at a Big Law Firm is not going to make you popular, and I left after only a few months.   They paid a lot of money, but it wasn't worth the hassle.

That was a decade ago.  Today, IPOs are taking a different tack.   They are being offered at initial offering prices, going up slightly in value, and then tanking - for the long-term.  We are seeing this with Facebook, and also with other recent IPOs, such as Zynga, Zipcar, Groupon, and others.  Why is this?

Well, as one commentator notes, the Facebook IPO was a "Brilliant Disaster" in that, while the stock price did not shoot through the stratosphere, the original investors and employees of Facebook who sold their stocks (such as Zuckerberg himself) still cashed out at the top price.  Much of what was sold during that first day were shares owned by insiders, not just the initial subscribers.   So the subscribers may have gotten a screw-job on this, but that means more money for the insiders - and more money for the company.   If they had priced the stock at $19 and let it balloon to $38, they would have lost out on half their dough.

So, perhaps he is right - this "botched" IPO made a ton of dough for Facebook, and a ton of dough for the founders and the early investors (including Microsoft).   But the folks who bought at the IPO price got screwed.   No more doubling-your-money in 10 minutes.   No free lunch.   In fact, they probably stand to lose half their investment, if not more, if they hang on.

But this illustrates why most sound financial advisers say to stay away from IPOs.   Like Commodities trading (and BTW, Gold is a COMMODITY), or Derivatives, they are volatile markets were fortunes are made, and LOST, overnight.   Leave these risky bets to the experts - you as the small investor will inevitably be the chump that the big boys make their money from.

And it illustrates too, the old adage, "Never Invest In Something You Don't Understand."   Or perhaps, it illustrates what this old adage really means.   If you think you are "too stupid" to figure out why the Facebook IPO was such a good deal, maybe you are not stupid at all, but just asking too many pointed questions that people can't answer, without resorting to a lot of hand-waving and smoke and mirrors.

Play dumb.  Sometimes it can be very profitable.  The most fundamental questions are the most revealing.  And when people can't answer them to your satisfaction, you are not an idiot, chances are, they are just trying to deceive you.

Dictating Rates of Return

When someone promises a "guaranteed high rate of return" it probably is a con.  Some people think they can dictate to the market, their rates of return.   It can't be done.

I ran into a fellow the other day and we were talking about investments.  I sort of ran though my investment philosophy - to invest for the long haul, cut expenses, live within your means, put a little bit aside over a long period of time - that sort of thing.

He replied, "Well, that is all very well and fine, but I have to catch up on my retirement savings, so I need to invest in something that will give me a high rate of return!"

This sort of floored me, as it seems, from his perspective, that investments came in different flavors, just like at Baskin Robbins, and you could just choose to get a high rate of return.

It is sort of like how some people think the President sets gasoline prices (which this fellow thought as well, he wasn't particularly bright).   Every morning, the President gets up and decides how much gas will be.  Obama picks $3.89 a gallon.   Newt Gingrich tells us he would select $2.50.

Of course, this sort of thinking is idiocy.  If you really could set gasoline prices, why not pick the lowest one?  And if you could really just dial-in your rate of return, why on Earth would anyone pick low rates of return, when higher rates are there for the picking?

And the answer is, of course, that there are no investments with guaranteed high rates of return.   The rate of return is directly proportional to risk.  And when an investment does yield a high rate of return, it is likely because it is risky - and may yield no rate of return in the future, or go broke.

But all that was lost on my friend.   He needed a high rate of return, and he was going to dictate to the market what rate he would get.   A nice theory, but flawed in so many ways.  And yes, I believe he was one of those followers of "visualization" theory - in other words, not all there.

I tried to let him down gently, but he would have none of that.   What was sad was that he had failed to plan for retirement, mostly though making bad investments in other get-rich-quick schemes.   At this point in his life, he felt backed into a corner.   It was too late to adopt a safe and sane strategy of investment.  Rather, he had to double-down his bet, he thought, so that he could cash in on some long-shot.

It was sad to watch, because you know how it is going to play out - he will end up broke and wonder what happened to all his money.

And what happened to all his money?   There is an army of people out there who make money from people like him - raging true believers, who are willing to invest in any "sure thing" that they hear about on the web, or on a sign on a lamp post.  They listen to the financial channels, they sign up for advice from the clown-suit people, they buy Facebook stock.

Maybe it is too late for him to fully fund a comfortable retirement.   But it isn't too late for him to get out of debt, put aside a little money, so he can make the best of a bad situation.   But alas, his plight is that of many poor people - money passes through their hands like so much water - not understood and completely mystifying as to where it went.

All you can do is look away from the horror.

It's a Simple Little System!

When someone tries to sell you a "system" - watch out!
Chances are, it isn't a "Trustful place for Trustful Invest" - whatever that means.

A friend of mine who worked at the Patent Office used to spend every spare moment at the track, betting on horses.   He was convinced that he could come up with a "system" for winning at the track, and even paid money for "tip sheets" and "systems" from other people.   Needless to say, he never really got ahead.

The problem with horse racing - and markets - is that they are chaotic systems that, while they have predictable aspects, do not have predictable outcomes.   There is no "system" for picking, consistently, winning horses.  There is no "system" for picking, consistently, winning stocks.  Anyone who tries to sell you such a system is basically lying to you - to get you to buy their system which is the only one "sure bet" in any casino.

Unfortunately, the vast majority of human beings need a savior - a charismatic figure, whether it is Warren Buffet, or The Shouting Guy™.  And they listen, with bated breath, for the latest pronouncement from these oracles of wisdom.

The problem with these gurus, is, of course, that they are not immune from failure.  And just because they have a track record of success, does not mean they always will.   And more importantly, as an individual, you need to save for retirement and not speculate in the market.   But most people prefer to do the latter, as it is more "interesting" than boring saving.

So they sign on for systems - and the people selling them will show them backward-looking data that shows that their system has amazing results.    But the problem with backward-looking data, is that it is only helpful for people owning a working time machine.   You need forward-looking data - and that simply doesn't exist.

So, for example, Joe Blow, who is touted as a Guru of the "Investment Portfolio System" is touted as have a great rate of return since 1985.   But then again, anyone who invested in any diversified portfolio since 1985 did pretty well.   The question is, moving forward, does his system make sense?

And if you look at his "system" since 1970, maybe it is a disaster, or just did OK.  You can pick starting and endpoints on a graph and make yourself look like a genius.

For example, I made a 1700% rate of return on AVIS stock since February 2009.  I must be an investment genius, right?  And if you invest in AVIS stock, you will see a 1700% rate of return as well, right?

Wrong.  Trends don't go on forever, and in fact, once something trends in one direction, you can pretty much bet it will trend the other way, at least for a time.   But when trends turn directions is tough thing to call - I called the Real Estate Bubble two years before it happened, and "missed out" on cashing in at the ultimate peak.   However, if I had called it two years too late, I would have been far worse off.

You can't time the market.  You can't use a "system" to do so.   All you can do is try to diversify your investments among a number of types, accounts, and companies - and even diversify within these.  (And no, putting your money into four things is not diversifying).

The best you can hope for is a reasonable rate of return.

Gambling your retirement, your future, and your ability to buy yourself out of hock, on some "system" touted by fanatics and salespeople, is just a sure-fire recipe for failure.   No one sells the goose that lays the golden egg.  If there was a sure-fire system to make money, why on Earth would anyone ever, ever tell anyone else, particularly YOU, about it?

They would not.

It's all in the S-1

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

Facebook, Inc.

(Exact name of Registrant as specified in its charter)

Form S-1 is the registration form an IPO has to file with the Securities and Exchange Commission (SEC).   In that form, a company has to list "risk factors". Few people bother to read these forms, before investing.

The following is an excerpt from Facebook's form S-1.   Note that they are no longer claiming a Billion active users, or even 900 Million active users, but 845 Million active users - which I presume includes me - and I no longer use the site, although I have yet to close my account.

Note that while a lot of the risk factors are "what if" scenarios (which are rapidly becoming "what is" scenarios), the preamble mentions risk factors that are inevitable - namely that as the user base grows, the increase in growth rate will stagnate.  (I have underlined this portion).  This is a predictable mathematical scenario, as you cannot increase your growth rate indefinitely.  Like any pyramid scheme, it eventually unwinds.

Facebook may settle down to a much smaller, but still-profitable company, with a reasonable stock price and P/E ratio, much as other IPO companies have done.   At $6 a share, it would be rationally priced.   At $30 a share (today's opening price) it would have to increase profits by a factor of five to six.

Anyway, the following is an interesting piece of reading, in retrospect:

Risks Related to Our Business and Industry

If we fail to retain existing users or add new users, or if our users decrease their level of engagement with Facebook, our revenue, financial results, and business may be significantly harmed.

The size of our user base and our users’ level of engagement are critical to our success. We had 845 million monthly active users (MAUs) as of December 31, 2011. Our financial performance has been and will continue to be significantly determined by our success in adding, retaining, and engaging active users. We anticipate that our active user growth rate will decline over time as the size of our active user base increases, and as we achieve higher market penetration rates. To the extent our active user growth rate slows, our business performance will become increasingly dependent on our ability to increase levels of user engagement in current and new markets. If people do not perceive our products to be useful, reliable, and trustworthy, we may not be able to attract or retain users or otherwise maintain or increase the frequency and duration of their engagement. A number of other social networking companies that achieved early popularity have since seen their active user bases or levels of engagement decline, in some cases precipitously. There is no guarantee that we will not experience a similar erosion of our active user base or engagement levels. A decrease in user retention, growth, or engagement could render Facebook less attractive to developers and advertisers, which may have a material and adverse impact on our revenue, business, financial condition, and results of operations. Any number of factors could potentially negatively affect user retention, growth, and engagement, including if:

•

users increasingly engage with competing products;

•

we fail to introduce new and improved products or if we introduce new products or services that are not favorably received;

•

we are unable to successfully balance our efforts to provide a compelling user experience with the decisions we make with respect to the frequency, prominence, and size of ads and other commercial content that we display;

•

we are unable to continue to develop products for mobile devices that users find engaging, that work with a variety of mobile operating systems and networks, and that achieve a high level of market acceptance;

•

there are changes in user sentiment about the quality or usefulness of our products or concerns related to privacy and sharing, safety, security, or other factors;

•

we are unable to manage and prioritize information to ensure users are presented with content that is interesting, useful, and relevant to them;

•

there are adverse changes in our products that are mandated by legislation, regulatory authorities, or litigation, including settlements or consent decrees;

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technical or other problems prevent us from delivering our products in a rapid and reliable manner or otherwise affect the user experience;

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we adopt policies or procedures related to areas such as sharing or user data that are perceived negatively by our users or the general public;

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we fail to provide adequate customer service to users, developers, or advertisers;

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we, our Platform developers, or other companies in our industry are the subject of adverse media reports or other negative publicity; or

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our current or future products, such as the Facebook Platform, reduce user activity on Facebook by making it easier for our users to interact and share on third-party websites.

If we are unable to maintain and increase our user base and user engagement, our revenue, financial results, and future growth potential may be adversely affected.

We generate a substantial majority of our revenue from advertising. The loss of advertisers, or reduction in spending by advertisers with Facebook, could seriously harm our business.

The substantial majority of our revenue is currently generated from third parties advertising on Facebook. In 2009, 2010, and 2011, advertising accounted for 98%, 95%, and 85%, respectively, of our revenue. As is common in the industry, our advertisers typically do not have long-term advertising commitments with us. Many of our advertisers spend only a relatively small portion of their overall advertising budget with us. In addition, advertisers may view some of our products, such as sponsored stories and ads with social context, as experimental and unproven. Advertisers will not continue to do business with us, or they will reduce the prices they are willing to pay to advertise with us, if we do not deliver ads and other commercial content in an effective manner, or if they do not believe that their investment in advertising with us will generate a competitive return relative to other alternatives. Our advertising revenue could be adversely affected by a number of other factors, including:

•

decreases in user engagement, including time spent on Facebook;

•

increased user access to and engagement with Facebook through our mobile products, where we do not currently directly generate meaningful revenue, particularly to the extent that mobile engagement is substituted for engagement with Facebook on personal computers where we monetize usage by displaying ads and other commercial content;

•

product changes or inventory management decisions we may make that reduce the size, frequency, or relative prominence of ads and other commercial content displayed on Facebook;

•

our inability to improve our analytics and measurement solutions that demonstrate the value of our ads and other commercial content;

•

decisions by advertisers to use our free products, such as Facebook Pages, instead of advertising on Facebook;

•

loss of advertising market share to our competitors;

•

adverse legal developments relating to advertising, including legislative and regulatory developments and developments in litigation;

•

adverse media reports or other negative publicity involving us, our Platform developers, or other companies in our industry;

•

our inability to create new products that sustain or increase the value of our ads and other commercial content;

•

the degree to which users opt out of social ads or otherwise limit the potential audience of commercial content;

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changes in the way online advertising is priced;

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the impact of new technologies that could block or obscure the display of our ads and other commercial content; and

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the impact of macroeconomic conditions and conditions in the advertising industry in general.

The occurrence of any of these or other factors could result in a reduction in demand for our ads and other commercial content, which may reduce the prices we receive for our ads and other commercial content, or cause advertisers to stop advertising with us altogether, either of which would negatively affect our revenue and financial results.