Facebook, alarmed by teen usage drop, left investors in the dark

[SAN FRANCISCO] In March, a group of researchers inside Facebook Inc compiled a report for one of the company's most powerful executives, chief product officer Chris Cox. The paper included a series of charts and data highlighting a troubling trend that seemed to be accelerating: Facebook was losing popularity with teens and young adults.

One colourful graphic showed that "time spent" for US teenagers on Facebook was down 16 per cent year-on-year, and that young adults in the US were spending 5 per cent less time on the social network. The number of new teen sign-ups was declining, and perhaps most concerning was a series of slides showing that young people were taking much longer to join Facebook than they had in the past. Most people born before 2000 had created a Facebook account by age 19 or 20, the research showed. Now Facebook was not expecting people born later to join the social network until they were much older, perhaps 24 or 25, if ever.

The reports also noted that users across age groups were creating fewer posts, and that many new teen accounts are duplicates, rather than unique new users.

The report is among hundreds of internal documents collected by former Facebook employee-turned-whistle-blower Frances Haugen, who went public in early October with accusations that Facebook has been prioritising profits over user safety and security.

The documents were disclosed to the US Securities and Exchange Commission (SEC) and provided to Congress in redacted form by her legal counsel. The redacted versions were obtained by a consortium of news organisations, including Bloomberg News.

Some of the documents were previously used in reports on growth, teenagers and other topics by The Wall Street Journal.

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Facebook shares fell less than 1 per cent as the market opened in New York on Monday. Taken together, the documents paint a stark picture of the years-long decline in growth metrics for key user groups like teens and young adults in the US, on the flagship Facebook app.

Despite detailed research, employees do not fully understand why these trends are happening or why product changes have failed to reverse them.

And while Facebook has spent years studying its declining popularity among young people - an erosion that threatens the company's advertising business, which has conquered an estimated 23.7 per cent of the global digital ad market - Facebook executives have been markedly less forthcoming about those concerns in public.

The company's tremendous business success has masked the persistent issues with young people. Facebook's total audience has expanded consistently for years, and revenue has risen to nearly US$30 billion per quarter. The company's market value is close to US$1 trillion.

However, those successes mean the declines among teens and young adults on Facebook have been almost invisible to outsiders. Facebook does not break down its user numbers by age group, and has evaded questions from Wall Street analysts about the main app's popularity with young people.

That discrepancy is the foundation of a formal whistleblower complaint filed by Haugen with the SEC. Among her arguments is that Facebook "has misrepresented core metrics to investors and advertisers" for years, by showing overall growth but excluding details that show slowdowns in key demographics, according to the letter outlining her complaint.

"There is a (young adult) sharing problem," reads one internal report from early 2021. "They are choosing other apps to share day-to-day moments and life moments."

Haugen suggests that Facebook has not been transparent with investors and advertising clients about its core business. She says the documents she gave to the SEC and Congress prove it.

Joe Osborne, a Facebook spokesperson, said: "All social media companies want teens to use their services. We are no different. That's why we're continuing to build new products and features that are entertaining and help teens, their friends and family stay connected to each other."

He added that the company's SEC filings include details about its challenges, including user engagement and estimates of duplicate and false accounts. Facebook is "confident that our disclosures give investors the information they need to make informed decisions," he said.

Facebook's user growth and engagement are the company's most important selling points for investors and advertisers. The more users Facebook has, the more people it can target with advertisements. The more users interact with Facebook, the more ads those users are likely to see. This makes Facebook's monthly user base of almost 3 billion people - and the promise of its consistent future growth - a major driver of a 74 per cent stock increase in the past two years.

Not all users are created equal, though. Facebook makes almost 13 times more money per user in the US and Canada than it does the Asia-Pacific region, for example. Teenagers are also important. They do not typically have established brand preferences in the way adults do, and young people often set cultural norms.

This is why Haugen believes that Facebook has violated US securities laws by failing to disclose to investors that key user cohorts - including teens and young adults - have been declining in total size and usage.

An internal chart included in Haugen's filing with the SEC shows that Facebook's teenage and young adult user bases in the US have shrunk since 2012, and more recent internal data show declines in time spent and expected user growth for both age groups.

This information could impact Facebook's advertising appeal, Haugen said in her letter to regulators. "Facebook's stock valuation is based almost entirely on predictions of future advertising growth," the letter to the SEC reads.

Federal securities laws require that companies be truthful when making statements to shareholders, and Facebook has already been accused of violating those demands in recent years. In 2019, the social media giant paid US$100 million to settle SEC allegations that it made misleading statements about the misuse of user account data by Cambridge Analytica, a consulting firm hired by former President Donald Trump's campaign.

BLOOMBERG