On Wednesday, November 16, Facebook Inc (NASDAQ:FB) reported a problem in the way it calculates user numbers. Given that in the realm of social media, user numbers—especially their growth—are an important indicator of performance, this is not a trivial matter. Facebook acknowledged that it may have inadvertently inflated user numbers. The company has announced a series of measures to remedy the situation, but Facebook stock continued to drop. (Source: “Facebook reveals more miscalculated ad metrics,” Vatronews, November 16, 2016.)
The problem is that user numbers and related metrics determine the extent and value of advertising the company can attract. This is not the first time Facebook has had to admit that its metrics might not be up to snuff. The problem has dented its credibility. Indeed, it’s the second time in a few months that the biggest “social network” firm has had to confess this type of problem.
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In September, it acknowledged having supplied advertisers overestimated video viewing times by 60% to 80% over two years. As for videos, Facebook underestimated the number of people watching videos published on its network from start to finish. The number of “watched videos at 100%” should therefore drop by about 35%. (Source: Ibid.)
But, the inflation has affected just about all of Facebook’s major metrics. These include: “Video,” “Page Insights,” “Instant Articles,” and “Apps” referrals. For example, Facebook admitted to having over-reported the average time users spend reading articles by seven to eight percent since August of 2015. (Source: Ibid.)
So far, given that Facebook stock hasn’t dropped sharply, it seems investors are not too concerned. But, if the company reports such problems again in the future, it faces risks. Facebook assured investors and users that the erroneous data was not used to set the prices it charges advertisers. However, audience metrics are important for advertisers or companies looking to evaluate the impact of their campaigns.
Meanwhile, Facebook derives the bulk of its revenues from advertising. Thus, it has an interest in keeping advertisers happy by delivering reliable statistics.
