Facebook's inactive Active users

Andrew Ross Sorkin has been digging into the huge number of 'daily active users' on Facebook; 483 million people (out of 845 million monthly active users.)

The thing is, what an "active user" means isn't quite what you might suppose; in the IPO (on Page 44), Facebook define them as;

Monthly Active Users (MAUs). We define a monthly active user as a registered Facebook user who logged in and visited Facebook through our website or a mobile device, *or took an action to share content or activity with his or her Facebook friends or connections via a third- party website that is integrated with Facebook*, in the last 30 days as of the date of measurement. MAUs are a measure of the size of our global active user community, which has grown substantially in the past several years.

(Emphasis mine.)

In other words, someone (like John Naughton, who I saw this story via) who has their Twitter stream posting to Facebook but almost never visits the site itself is considered an "active user" – despite never seeing an ad. Barry Ritholz, Naughton and Sorkin all share the view that this highlights a flaw in Facebook's numbers; that their "active daily users" metric doesn't represent Facebook's monetisable userbase; they will never see or click on a Facebook ad.

Ritholz takes this reasoning a step further;

This helps to explain why Facebook’s annual revenue per user is so low:
Facebook – $5.02
Google $30
Netflix – $148.20

This seems like a faintly ridiculous comparison; Netflix' revenues come directly from users' subscriptions, which amounts to a few dollars per month. ust for fun - if every single Mac, iPad, iPhone and iPod sold in their last financial quarter were sold to a different person, then Apple would have 73 million 'users', $44.7 billion in revenue, giving an average quarterlyrevenue per user of $612.03. But anyway…

Google's revenue comes mainly from advertising – dominated by pay-per-click Search advertising. The range of costs per click is very wide (more about that in another post.) Facebook's revenue is also mainly from advertising (although revenues from virtual transactions – mainly through Zynga's games – is taking a surprisingly large amount of money.) But Facebook's advertising is a bit more complicated. Some of it is sold on a cost-per-click basis; some on a cost-per-thousand impressions basis. It isn't clear (as far as I know) how much is from which model, but suffice to say that its hard to judge the financial value of a click on a Facebook ad– making it a challenge for many advertisers to say how much they should be paying per click.

Or to put it another way, anyone paying any attention to the business shouldn't be surprised that Google are making more money than Facebook.

But anyway – how are Facebook monetising these non-advert-seeing users?

I think this is the wrong question.

Think about it another way; imagine if you visited Facebook.com one day. Assuming you are a reasonably average user, you will have a few friends (the median number is 100; the mean is 190 – so how many friends depends on what sort of "average" you are thinking about.) Now, imagine that over the last 24 hours or so, every single one of your friends had checked into Facebook (ie. been "active"), read their friends updates – but hadn't updated their status, uploaded any photos, 'liked' any content, or otherwise created any content on the site.

If every single one of your friends had done that one day, then no amount of advertising would help to monetise your experience. You would very quickly stop coming back.

The point is that the value of Facebook – that is, the fundamental value of 'stuff' that Facebook is turning into revenues – isn't really your attention. Its monetising your friendships – the stuff that makes you go to Facebook when you are at your computer, come back the next day when you are next at your computer, and check up on through your (currently completely un-monetised) smartphone application when you aren't. If you are actively creating, sharing or liking content on Facebook, then what you are sharing is what is making Facebook's advertising platform valuable in the first place.

As the saying (cliché?) goes, if you aren't paying for the product, then you are the product.

The old media model involved such a limited number of 'content creators' who had the power/privilege to publish that it is probably distracting us from the fact that when we create content for social networks, blogs, forums etc. for free, we are (probably) creating value for someone else to sell.