Measurement is really complicated for Facebook (NASDAQ:FB). After discovering it had been overstating how much time users spent watching videos on its platform, it conducted a broad review of all of its site measurements. The company found a few more areas where its calculations were wrong, including measures of a page's audience and how much time users spent reading Instant Articles.
Facebook page owners will see their 28-day reach fall by an average of 55% because the company had been double-counting daily visitors. Instant Article publishers have been seeing time-spent numbers 7% to 8% higher than the actual amount of time users spend reading them. Not all of Facebook's missteps overstated measurements. Publishers should see an increase in the number of reported video viewers that watched an entire video.
Either way, the measurement mistakes are bad for Facebook and its customers -- i.e., potential ad buyers. Inaccurate data from Facebook could lead many of Facebook's 4 million advertisers to make misinformed decisions about how to spend their ad dollars. If they can't trust Facebook's data, they might take their ad dollars elsewhere, though Facebook's size and reach make an exodus seem unlikely.
Small businesses get hit the hardest
Facebook has 4 million businesses actively advertising on its platform. It has over 55 million more businesses with active pages, serving as a pipeline for Facebook to convert into more advertisers. The vast majority of those businesses are small businesses with limited ad budgets.
That means most of them are relying on Facebook's internal measurements to track the effectiveness of their advertisements or how well their posts convert into website visitors. If Facebook isn't measuring things accurately, those businesses won't be able to trust that they're using their budgets most effectively.
That could lead them to search out alternatives like Google or other social media platforms. Many businesses already diversify their advertising, so shifting ad budgets away from Facebook wouldn't be too difficult, although Facebook does offer an outstanding pool of potential customers.
While Facebook has taken steps to integrate with third-party measurement tools, and is looking to add more in the future, those tools are inaccessible for smaller businesses with limited budgets. While none of them individually spend a lot of money on Facebook ads, don't underestimate the aggregate value of the long tail of small advertisers to Facebook.
Facebook's management certainly understands the importance of being trustworthy, and it deserves credit for being relatively forthcoming with its findings.
"We are very much striving to be known as a listening organization," Carolyn Everson, Facebook's vice president of global marketing solutions, said in an interview with Bloomberg. "We hope to learn every single day about how we can improve the way we service our clients."
To be sure, Facebook's mistakes aren't irreparable. Importantly, none of the misstated metrics impacted customer billings. And working with customers to help them get the most out of their ad dollars seems to be a top priority for Facebook -- as it should be. Improving the value of ads will lead to higher ad prices, which is a must for Facebook as it faces saturating its News Feed with ads.
Where else could advertisers go?
Facebook's biggest competitive advantage, and what allowed it to draw 4 million active advertisers, is that it has more people spending more time on its app and website than practically anywhere else on the web. The average user spends 50 minutes per day between Facebook, Instagram, and Messenger, according to the company.
Almost the only digital advertising company that can rival Facebook is Google, which offers an equally broad and engaged audience through its search engine, web services, ad network, and YouTube. Google has brought in nearly $57 billion in advertising revenue through the first nine months of the year. For comparison, Facebook, the second-largest digital advertiser in the world, has only brought in about $18.5 billion in 2016.
But ultimately, Facebook's size and engagement will prevent advertisers from abandoning it. Working with advertisers is the best path to repair the damage it has done by misstating engagement and other metrics. Focusing on its customers' bottom line is what's best for Facebook's bottom line.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A and C shares), and Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.