February 18, 2012

Ritholtz: Less Than Meets the Eye at Facebook

Barry Ritholtz, writing for The Washington Post:

“What I learned from Facebook’s filing was that they have 161 million active users who actually go to Facebook.com each month. That’s not shabby — but it’s a far cry from the MAU claims of 850 million. That definition of active users is probably overstated by a factor of 500 percent. I suspect that the $100 billion valuation may be overstated by nearly as much.”

(via The Big Picture.)

Barry found these detailed numbers by examining the company’s S1 filing, the document announcing to the Securities and Exchange Commission Facebook’s IPO intentions.

Ritholtz is guilty of mis-reading the S1. The 161 million number is Facebook’s reported monthly active users (MAU) figure for the US alone in December, 2011. (Go here and scroll down to “Trends in Our User Metrics” for a discussion of what constitutes an MAU.) He appears to quote it as MAU ex-third party application access, in other words, actual facebook.com web site access by human users. That’s not the case.

The point remains, though, that Facebook reports a very large number of monthly users (~850 million), but is only logging a fraction of that as actual marketable eyeballs.

How can Facebook claim an active user number higher than a count of actual active users? By counting every click of a Like button, anywhere on the Internet, as an active use. A user need never go to Facebook’s web site to be counted as an active user.

Such users don’t expose themselves to Facebook’s advertising and other monetization methods, but they do increase the cost of maintaining Facebook’s infrastructure. They’re a reason Facebook makes less revenue per user than other popular services.

Investors expecting to buy into an 800,000,000-user service are really buying into a much less-used product, a fact worth considering before investing.