Never ask a barber whether you need a haircut, the old proverb goes. An updated version, considering new information in a lawsuit against social media giant Facebook (NASDAQ:FB): Never ask Facebook whether you should advertise on Facebook.
Advertisers who turned to Facebook for the massive reach of its platform have been bamboozled by a faulty metric that executives have known about for years, according to an amended complaint filed last week in a lawsuit originally filed in 2018. The "potential reach" metric, supposed to estimate an ad's target audience, is misleading because it could include fake and duplicate accounts, according to the filings.
The filings allege the potential reach metric for certain U.S. states and demographics exceeded U.S. census figures, a clear case of inflation. For example, in every state, the true population between 18 and 34 years old was lower than the potential reach Facebook reported.
The amended lawsuit claims that Facebook was aware it was misleading customers as early as 2015. Chief Operating Office Sheryl Sandberg and Chief Financial Officer David Wehner were named in the filings, but their remarks and actions were mostly redacted.
Employees express concerns
Not redacted were some key communications from Facebook employees regarding the metric. A Facebook product manager was well aware of the issue in late 2018, writing that the inflated metric was "a lawsuit waiting to happen."
According to the filing, another employee wrote, "My question lately is: How long can we get away with the reach overestimation?"
The inflated audience metric doesn't affect how much an advertiser pays for running an ad, since it doesn't affect actual views or clicks. However, by overstating the size of the potential audience for an ad, Facebook was making its platform appear more attractive to advertisers relative to the competition.
Will any of this matter?
Facebook has had issues with inflated metrics in the past. In 2016, the company disclosed it was overestimating viewing times for video ads. Facebook settled the related lawsuit, although it blamed a calculation error and denied any wrongdoing.
While Facebook's revenue growth has slowed in recent years, it probably has more to do with its size than any negative impact from that scandal. In 2019, the company reported revenue of $70.7 billion, up 27% from 2018.
The amended lawsuit over the potential reach inflation makes a stronger case that Facebook was aware of the problem, but it also seems unlikely to drive advertisers away.
There is one wild card in all of this: The global novel coronavirus pandemic. With heavy advertisers like the travel industry in tatters, Facebook and all advertising platforms will probably see lower demand from certain advertisers in the coming weeks and months. With Facebook needing to fight for advertising dollars amid a global recession, its questionable actions could come back to bite it.
It now seems clear Facebook took the low road as it worked to maximize its revenue. Only time will tell whether any of this will affect its gigantic advertising empire.