On the first page of Facebook’s prospectusfor its sale of stock to the public, it pegs the number of its “monthly active users” at a whopping 845 million people. The social networking site arrives at an even more astounding number when it comes to “daily active users”: 483 million people.
Those are some huge numbers. If it is hard to believe that so many people are clicking on facebook.com every day, that’s because well, they aren’t, exactly. Those eye-popping numbers should have an asterisk next to them.
If you managed to wade through to Page 44 of Facebook’s prospectus, you’d discover that the company provides a definition of an “active user” — and it is unlikely to be what you expected.
Facebook counts as “active” users who go to its Web site or its mobile site. But it also counts an entire other category of people who don’t click on facebook.com as “active users.” According to the company, a user is considered active if he or she “took an action to share content or activity with his or her Facebook friends or connections via a third-party Web site that is integrated with Facebook.”
In other words, every time you press the “Like” button on NFL.com, for example, you’re an “active user” of Facebook. Perhaps you share a Twitter message on your Facebook account? That would make you an active Facebook user, too. Have you ever shared music on Spotify with a friend? You’re an active Facebook user. If you’ve logged into Huffington Post using your Facebook account and left a comment on the site — and your comment was automatically shared on Facebook — you, too, are an “active user” even though you’ve never actually spent any time on facebook.com.
“Think of what this means in terms of monetizing their ‘daily users,’ ” Barry Ritholtz, the chief executive and director for equity research for Fusion IQ, wrote on his blog. “If they click a ‘like’ button but do not go to Facebook that day, they cannot be marketed to, they do not see any advertising, they cannot be sold any goods or services. All they did was take advantage of FB’s extensive infrastructure to tell their FB friends (who may or may not see what they did) that they liked something online. Period.”
Facebook appears to be using the term “active” as a euphemism for “engaged” rather than how many users are actually going to its site every month.
Of course, this raises an obvious question: How many users actually are active, using a more traditional definition?
In December, Nielsen Company, which tracks usage on the Internet, counted 153 million unique users on the Facebook Web site for the month in the United States, though Facebook says in its filing that it has 161 million monthly active users. Assuming that Facebook’s United States traffic accounts for only about 19 percent of its business, that means the numbers are off by at least 40 million users from the 845 million Facebook defines as “active.”
Facebook, which declined to comment for this column because it is in a so-called quiet period before its initial offering, says in its prospectus that its numbers “will differ from estimates published by third parties due to differences in methodology.”
The company acknowledged that “there are inherent challenges in measuring usage across large online and mobile populations around the world” because, for example, “applications on certain mobile devices may automatically contact our servers for regular updates with no user action involved, and this activity may cause our system to count the user associated with such a device as an active user of Facebook.” Still, the company says this kind of fictitious usage accounts for less than 5 percent of its totals.
This is not the first time that a dot-com company’s metrics have come under scrutiny. In a particularly egregious example that this column documented last year, Groupon created a ridiculously misleading accounting metric known as Adjusted Consolidated Segment Operating Income that included all sorts of income, but excluded marketing costs. The Securities and Exchange Commission raised questions and the company dropped the metric.
Facebook’s definition of “active” is nowhere near as problematic as Groupon’s fanciful accounting, and it does not appear that Facebook is trying to deceive investors.
Facebook’s counting is, oddly enough, actually more transparent than that of some of its rivals. Google was recently criticized for disclosing only the number of registered users on its Google Plus service, not how many people actually use the service regularly. Twitter has similarly been criticized. At least Facebook is trying to count only those people who are somehow engaged with the service in a meaningful way.
In fact, Facebook’s “Like” button on third-party sites or through “Facebook Connect” — its platform allowing users of other Web sites to sign in through Facebook and share information — is valuable, even if it isn’t easily monetized.
All of those “Likes” help Facebook create a treasure trove of data that should make its ability to target advertising to its users all the more valuable. (Of course, some people will be unnerved by how much Facebook knows about them.)
And there is no question that Facebook users are an engaged bunch and growing. A Pew Study recently rebutted any concerns about “Facebook Fatigue”: “We found no evidence among our sample that length of time using Facebook is associated with a decline in Facebook activity. On the contrary, the more time that has passed since a user started using Facebook, the more frequently he/she makes status updates, uses the ‘like’ button, comments on friends’ content and tags friends in photos.”
The big question is how Facebook can put all of its “active,” er, engaged users in front of advertising?
At the moment, none of its mobile users — which the company counts as 425 million of the 845 million monthly active users — see any advertisements. That is likely to change; but the margins on mobile advertising, at least for now, are much lower than on a computer screen.
Will Facebook one day be able to force third-party Web sites that have integrated its “Like” button into their pages to also accept a small ad next to it? Perhaps.
In the meantime, while Facebook has clearly become an important platform with hundreds of millions of users across the Internet, it could make more “friends” by being slightly more transparent: disclosing the distinction between the number of people engaged with Facebook broadly and those who go directly to its Web site.