Did Facebook try to hide mobile problems pre-IPO?

Facebook battled with the SEC for months before revising its S-1 filing

Back in May, Facebook updated its S-1 filing to go into detail about the problems it was having as a result of its less than successful mobile platform. It seemed a little odd that the company would make such a declaration when it did, given that this update occurred less than a week before the company went public.

Today, we found out a little more about why Facebook did this when it did.

According to a report from Bloomberg Wednesday, Facebook originally tried to hide its mobile risks, resulting in months of back and forth arguing with Barbara Jacobs, an assistant director for corporation finance at the U.S. Securities and Exchange Commission.

Jacobs was immediately skeptical of the following claim, made in Facebook’s original S-1 filing:

“Social Ads. We offer tools to advertisers to display social context alongside their ads. As a result, advertisers are able to differentiate their products and complement their marketing messages with trusted recommendations from users’ friends. A recent Nielsen study of 79 advertising campaigns on Facebook demonstrated a greater than 50% increase in ad recall for Facebook ads with social context as compared to Facebook ads that did not have social context.”

In a letter written to Facebook’s Chief Financial Officer David Ebersman less than a month after the filing, Jacobs told him to either produce the Nielsen study that the social network had cited, or remove the reference entirely.

“Please provide us with the full Nielsen study clearly marked to highlight the applicable portion or section containing the statistic, and cross-reference it to the appropriate location in your prospectus. In addition, because your supplemental materials state that you commissioned the Nielsen study, please file a consent from Nielsen as an exhibit to your registration statement; alternatively, delete your reference to Nielsen,” Jacobs wrote.

In all a dozen letters were exchanged back and forth between Facebook and the SEC, including one in which Jacobs accused Facebook of counting mobile users twice.

“Given that mobile users are included in your MAUs and DAUs, please explain to us how you determined that your presentation of MAUs and DAUs by geography does not overstate, for example, Canadian users. Your response also states that multiple counting by geography is not reflected in any of the metrics presented in the registration statement.  Please explain to us how you determined that your metrics are not overstated, and disclose how a user who engages in multiple measurable actions in different geographies during the monthly or daily period is counted towards your metrics,” Jacobs wrote to Facebook in March.

Facebook eventually updated the offended paragraph in May, to say this:

“Social Ads. We offer tools to advertisers to display social context alongside their ads. As a result, advertisers are able to differentiate their products and complement their marketing messages with trusted recommendations from users’ friends. Our recent analysis of 79 advertising campaigns on Facebook demonstrated a greater than 50% increase in ad recall for Facebook ads with social context as compared to Facebook ads that did not have social context.”

Even in its original filing, it must be noted, Facebook admitted that it did "not currently directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven,” but it went into further detail in the updated S-1 form.

It said that while the mobile focus for the company has drastically slowed the pace that the company adds new users and could end up hurting the company revenue in the long run.

“If users increasingly access Facebook mobile products as a substitute for access through personal computers, and if we are unable to successfully implement monetization strategies for our mobile users, or if we incur excessive expenses in this effort, our financial performance and ability to grow revenue would be negatively affected,” Facebook said.

In the update, Facebook painted a picture of a company trying to modernize, but unable to due to forces out of its control.

“There is no guarantee that popular mobile devices will continue to feature Facebook, or that mobile device users will continue to use Facebook rather than competing products. We are dependent on the interoperability of Facebook with popular mobile operating systems that we do not control, such as Android and iOS, and any changes in such systems that degrade our products’ functionality or give preferential treatment to competitive products could adversely affect Facebook usage on mobile devices,” it said.

“We may not be successful in developing relationships with key participants in the mobile industry or in developing products that operate effectively with these technologies, systems, networks, or standards.”

Of course, Facebook seems to have finally gotten the hang of mobile since then, and has gone into full mobile mode, as Mark Zuckerberg said last month.

It recently teamed up with electronic payment service Bango will be powering Facebook’s mobile Web carrier billing.

Facebook also announced that it would be creating a its own mobile advertising network, which would use data it has collected on its users to advertise on third-party apps and websites.

The social media giant has also seen its mobile MAU’s go up dramatically in the past year.

In June of this year alone, 102 million Facebook users accessed the site exclusively through the mobile app or mobile website, a 23% increased from the 83 million who did the same during March.

The 102 million accounts for nearly 20% of the 543 million MAUs Facebook had in June. The other 441 million, the document says, accessed from both a personal PC and a mobile device.

Facebook saw its mobile monthly active users (MAUs) increase by 67% in the year from June 30, 2011 to June 30, 2012, according to a document filed with the Securities and Exchange Commission.

While Facebook may have finally gotten the hang of monetizing its mobile platform, that does not excuse behavior that seems to have been designed to keep a key piece of information from those looking to invest in the company.

Facebook's stock is currently down 2.66%, to 19.68 a share.

Facebook could not be reached for comment.

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