Is Facebook Falsely Advertising Its Active User Base?

Facebook’s (FB) prospectus which was released for the company’s impending IPO offers some staggering figures. The 44 page document says that the website has 845 million “monthly active users” and 483 million “daily active users.” After a little digging, DealBook’s Andrew Ross Sorkin took issue with the company’s definition of “active user.”

According to the fine print, Facebook defines an active user as anyone who “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 laymen’s terms, that basically means that if you “like” or share something through the Facebook link on another website, say for instance my personal favorite, People.com, Facebook considers you an active user. Facebook offered no comment on their definition due to a “quiet period” preceding their public offering, but they do admit in the prospectus that their user estimations “will differ from estimates published by third parties due to differences in methodology.”

Some critics feel that this loose definition of “active user” is a form of false advertising. DealBook quoted Barry Ritholtz, the chief executive and director for equity research for Fusion IQ, who said, “Think of what this means in terms of monetizing their ‘daily users’. 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.”

But Facebook certainly isn’t the only website padding its numbers. Groupon’s creative accounting raised questions with the Securities and Exchange Commission last year and Google has also been criticized for releasing only the number of registered users for Google+, not actual active users. DealBook’s Ross Sorkin sums up the issue nicely as he wrote, “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.”

To contact the reporter on this story: Ashley Cloninger at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com