I generally don't buy individual stocks. I prefer the risk mitigation effects of index funds. However, I just bought a bit of stock in Facebook,* something I thought I'd never do. Here's why: Performance Improvements of Ads Google soared because the ads work for advertisers. The ads work for advertisers because they are useful to consumers. Google ads provide solutions to user's problems at the moment they express need. Facebook ads, by contrast, have been likened to advertising at a party. So what has changed? A great deal. FBX allowed advertisers to target past visitors when they were on Facebook, greatly improving the targeting by incorporating recent interest data, more flexible creative, etc. FBX is not a new feature, and those ads, like the original ad format, also sat on the right rail and were largely visual noise to most FB users. In late spring Facebook opened up the News Feeds for sponsored stories. These News Feed ads are a huge opportunity for advertisers. Studies show gigantic improvement in ad engagement, and advertisers who embrace this new medium by creating custom ads designed to be engaging in the moment and highly sharable find the effectiveness of the ads to be greater still. Advertising efficacy will drive advertising dollars and that will help close the gap between Facebook's market cap and their P & L statements. Branding Investment Facebook ads are display advertising, and display advertising spend has always been heavily skewed towards brand advertisers, not direct marketers. The direct response value of display has been difficult to scale for most of the big players in the ecommerce space. Display can be efficient. Display can be huge. Display for these folks cannot be both efficient and huge simultaneously. There are always exceptions to these rules. I had a very interesting conversation with Terry Whalen of CPC Search a couple weeks back in which he was finding unbelievable scale and efficiency (significantly bigger than search) for some of his clients. These clients offered very unique products/services, which makes push advertising a far better vehicle than pull advertising. People don't search for what they don't know exists. However, these cases don't generalize to ecommerce more broadly construed. Shoe retailers, department stores, etc face a very different challenge in generating revenue at the scale of paid search through display advertising. However, the presence of eyeballs, the extended time spent, the targeting ability and the more engaging format will attract brand advertising dollars in gobs. As I argued long ago, tracking is a double edged sword. Companies with a shopping cart on their website have a hard time justifying huge branding investment when the data indicating wasted spend is so compelling and the data indicating offline influence is so sketchy and hard to come by. The big brands in CPG, Automotive, etc often don't expect conversions online, and have never had the ability to connect advertising dollars to revenue. They have much greater comfort with "engagement" as a success metric, and FB could eventually be the beneficiary of TV-like advertising spends from these types of advertisers. The above isn't news to the financial analysts and institutional buyers and I wouldn't place bets on the stock value based on that alone. I'm betting that they haven't yet grasped the potential impact of FB Conversion Tracking which also became available in 2013. Facebook Conversion Tracking Conversion tracking is already happening through ad buying platforms using FBX, but Facebook's own conversion tracking and performance reports will give FB an opportunity to paint their own picture of success with their ad platforms. We will soon see stories indicating a huge chunk of website conversions are influenced by Facebook ads and that will drive new investment. Here is how it works: Facebook ad reports will show credit for successes (orders, downloads, leads, whatever) for FB ads clicked with 1, 7, and 28 days, or ads seen within 1, 7, or 28 days of the success event. This last piece is the magic. Suppose you owned a clothing store in a very small town. The town has one and only one grocery store. You decide to buy an ad for your clothing store on the grocery store window. Were you to give credit to the grocery window ad for every person who saw that ad prior to buying from you, you'd find that that ad was the only thing between you and bankruptcy because every one of your customers saw the ad at some point before coming into your store. Now suppose there was a website where virtually all of your customers spend a few hours every week, many spending time every day. Suppose you serve display ads to your best customers...your 'fans' if you will...and suppose the person who sold you the ads tells you: "Any time someone sees one of those ads and then buys from you, my ad gets the credit..." Lo and Behold! Those ads appear to be driving a huge chunk of your business. Makes a pretty compelling case for spending more money on those ads, no? Indeed, if a salesman convinced you to buy an ad everyday to everyone who visited that site.... No small business owner would be so naive as to give credit to the grocery store ad for every order place by someone who saw it; they'd give credit only for the incremental business it seemed to drive. But the web is a tangled place, and not everyone has the sensibilities of the local haberdasher. To Facebook's credit, they report the view-through and click-through conversions in separate buckets, split out further based on the lag between the ad interaction and the conversion event. It is up to the advertiser to properly weight those conversion events. But here's the thing: advertisers with ROI constraints are dying to spend money on Facebook, they just need ROI justification to do it. Agencies and media buying platforms are dying to convince advertisers to spend money on Facebook. Facebook conversion tracking will provide justification to those so inclined. This could be the catalyst for unlocking marketing budgets to FB in ways that they haven't been to this point. Conclusion Facebook is gaining traction with advertisers through more cost effective ad formats. These formats genuinely work better for advertisers and money follows efficacy. Brand advertisers tend to be slower to adopt new advertising formats as budgets are fixed long in advance. As the Big Brands and their agencies learn to use the new FB sponsored stories wisely the purse strings to very large media budgets will work in Facebook's favor. Finally, the illusion of success created by 100% view-through credit attribution will give naive advertisers and ruthless salespeople the excuse to overspend. The combination may be game-changing for Facebook. *The author of this piece is not a professional investor, nor is he a licensed investment adviser. Indeed, he's a complete moron when it comes to investing having failed to buy GOOG when it was $85/share. Acting on this author's investment advice is akin to taking swimming lessons from someone who can't swim: ill conceived and downright dangerous.
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