Is Facebook a real company? That sounds like ridiculous question, because they have a huge market cap and have thousands of employees. That certain looks like real company, even if they are not wildly profitable. Enron had a huge market cap and hired thousands of people, but they turned out to be an accounting fiction. No one thinks Facebook is cooking their books, but there is good reason to wonder if they are what they seem.

For example, dig around in how they make money and what you learn is they are mostly an advertising platform. Newspapers and magazines are advertising platforms too, but none are worth tens of billions. In fact, most are worth nothing as they can’t generate enough cash to cover their expenses. That does not mean Facebook is a cash furnace, but it raises the question of why they can make this model work and no one can figure it out, except for Google, which is a monopoly player on the internet.

Then there is the fact that it is an awful advertising platform. Go find a single person who has every looked at, much less clicked on, one of their ads. People talk about TV and radio ads all the time. The talk around every Super Bowl is about the commercials. No one has ever mentioned a Facebook ad – ever. There’s never been a viral video or ad that started on Facebook. In fact, it is always the other way around. The ad is created on traditional platforms and is hared by users of the new platforms.

That’s worth something, for sure, but is it really so unique to Facebook that they can command a huge market cap? More important, why would ad makers bother paying to be on Facebook, when a clever ad will end up on social media anyway? It seems that the main business model of Facebook depends on ad makers never noticing that ads on social media have no impact on their sales. At some point, they will notice and go back to those traditional advertising methods and not pay Facebook for their service.

Then there is the fact that no one knows how many people are actually on Facebook or any of these social media sites. They say about 80 million accounts are fake, but they are not counting the tens of millions of dead accounts. They are not counting the millions of accounts dedicated to pets or dead people or hobbies. Anyone who as ever run a message board knows that about 10% of accounts create 90% of the posts.

Talk radio has similar numbers. They say 1% of listeners will ever attempt to call the show and comment. In fact, this is so well known that the number of calls is considered more reliable than the ratings numbers. Similarly, comment sections in news sites see the same sorts of numbers. It’s called the Pareto Principle. That probably means the number of active users on Facebook is a fraction of what is claimed. Worldwide it is still a big number, but no where near what the ad men think they are getting.

Now we have the ultimate fake company going to market. Twitter is pretty much just an open RSS feed for idiots. Unlike Facebook, Twitter does have the ability to jam ads in your face on a mobile platform. That’s the Achilles heal of Facebook. These social media sites are best used on a phone or tablet. That limits ad space to nothing. Those microscopic ads at the bottom of apps are hilarious in their pointlessness. Twitter crams them into your feed and makes you look at them.

In theory, twitter can claim they are forcing users to see the ads and they can estimate how many people see them, based on user activity. Facebook really can’t do that as their ads are on the side or exist as corporate pages. Twitter still loses money, but at least they can plausibly claim someone is looking at their ads. The trouble is, most of their users may be fake. Rachel Maddow famously pumped up her Twitter followers by paying for fake accounts to follow her.

Again, we see the same problem as with Facebook. There’s no way to know how many users are really on their system. By the way, web sites had this problem too. Sites would claim millions of hits when it was just bogus traffic stuffing. Advertisers figured it out and sites can no longer fake their stats. The same scams are at work with social media, bu the ad buyers simply don’t understand how this stuff works, so they have not been able to see the problem. It will happen and when it does, the ad money goes away.

That gets back to the original question. Are these real companies or just elaborate confidence games designed to skim from the ad market? A real business provides a product or service. Facebook and Twitter provide a gateway and they operate like toll takes, but no one really knows if there is anything on the other side. Even if there is, why should these firms have exclusive rights to charge tolls? In the end, they don’t offer a product or service that has vale, so eventually, they go away.