3Q EARNINGS: Everything Sheryl Sandberg Said About Facebook Advertising

By David Cohen 

SherylSandberg650Facebook revealed during its third-quarter earnings call Tuesday that $2.96 billion of its $3.2 billion in revenue for the three-month period came from advertising, so it’s no surprise that the bulk of the call was devoted to advertising, as well. Chief operating officer Sheryl Sandberg had much to say on the topic, and all her comments are included in this post.

Sandberg gave a general overview of advertising on Facebook during her opening comments, as well as singling out the newly reintroduced Atlas ad platform:

One of the best ways to improve relevance is to help advertisers reach the right audience with their messages. Facebook age and gender targeting is 45 percent more accurate than the digital industry average. Working with Facebook, advertisers can also target based on people’s interests. In addition, we’re continuing to build out custom audiences, which enable marketers to use their own data to segment current and prospective customers. We’re pleased with the response from clients, and we’re focused on driving deeper penetration with those existing and new clients.

We also offer lookalike audiences, which help marketers find potential new customers who are similar to their current customers. To share one recent example, earlier this year, global financial services company MetLife wanted to find new customers for life-insurance policies. Working with agency Merkle, it used lookalike audiences to find people more like its existing customers, MetLife ran ads that led people to its “get a quote” website page. Over the six-month campaign, the leads that came from Facebook resulted in new policies at a 2.4 times higher rate than MetLife’s next-best-performing channel and at one-half the cost of display ads.

We’re also making steady progress with newer ad initiatives. Throughout this quarter, we continue to enable auto-play for more video ads. We’re also continuing to roll our ads on Instagram. We think there is good opportunity with both video and Instagram ads, but we’re going to remain deliberate and slow in our approach to scaling those businesses.

We’re also making longer-term investments that we believe will be important for Facebook and the ad industry. In the third quarter, we relaunched Atlas, closed our acquisition of LiveRail and rolled out our Audience Network. So I want to spend a few minutes discussing our longer-term ad-tech strategy. We’re investing in ad-tech for a simple reason: Consumers are shifting quickly to mobile, and the advertising industry is not keeping up.

2013 was the first year that average American adults spent more time on digital media than watching TV, and that gap has continued to grow. Today the average adult in the U.S. spends nearly 25 percent of their media time on mobile, but advertisers spend only about 11 percent of their budgets there. One of the main reasons the budgets aren’t moving as quickly as consumers is that advertisers haven’t yet had an effective way to serve ads and measure their returns on mobile. Current solutions work well for person with one device, especially, a PC and for sales that happen online.

But today people often have multiple devices and still make many purchases in physical stores. Nielsen data show that the digital industry is less than 60 percent accurate in demographic targeting of ads, which means that four in 10 people are seeing the wrong ads.

Similarly, marketers are not confident that they can measure mobile ad performance. Many of the most commonly used measurement systems overemphasize the value of the last click. This does not make sense, given that studies of Facebook campaigns show that over 90 percent of ad-driven in-store sales come from people who saw an ad but didn’t click on it.

It’s clear that marketers and publishers need better tools for the mobile world. This is an industry problem that we believe we are well placed to solve. Our relaunch of Atlas last month during Advertising Week was an important early step that builds on the advancements in measurements that we have made over the past two years. The new Atlas is an ad-serving and measurement platform that we completely rebuilt. By using Facebook data, Atlas can deliver highly relevant ads, regardless of device.

Atlas is also able to provide accurate measurement by connecting online marketing to in store sales. Importantly, Atlas does all of this in a privacy-protected way. Neither Atlas nor Facebook tells marketers who you are. At Advertising Week, we had productive conversations about Atlas with many marketers and agencies. We are pleased with their interest.

She also discussed the social network’s investments in advertising technology:

We’re also investing in additional pieces of our ad-tech platform. Our Audience Network improves the relevance of ads inside mobile applications. LiveRail provides tools for publishers to enable personalized marketing at scale via their apps and websites. We believe LiveRail can build on its success in desktop video with the concrete solution for mobile publishers.

I want to emphasize that the investments we’re making in ad tech are long-term. These are large and strategic investments. The path will take time, but we think they provide a necessary foundation for the advertising industry to make the shift to mobile and for Facebook’s long-term growth. We recognize that by staffing engineers in these strategic ad-tech areas, we forego shorter-term product improvements, which would generate revenue more quickly. We believe these are the right decisions.

During the question-and-answer period of the call, JPMorgan analyst Douglas Anmuth asked:

Can you just talk, Sheryl, perhaps about what you’re seeing in terms of branded advertising, whether you’re seeing more of it as more bigger-brand CPG (consumer packaged goods) companies and automakers are coming onboard, and how you’re positioned there for the holidays?

Sandberg replied:

On brand, we’re seeing very strong growth among our brand marketer segment. We’re really excited about the engagement we’re having right now with brand marketers and agencies. We think we’re the first technology platform to offer the ability to do creativity and storytelling at scale in a personal way, and we talk a lot with our clients and partners about personal marketing at scale. You’ll find that our clients are at different parts the adoption curve. We have clients who are very early on, and they don’t want any products or think about their ongoing messages without including Facebook, and there are some for whom we’re not yet core, and we are working on that.

With all of this, we know we need to go client by client, and we’re especially focused on measurement because measurement is so key for this segment. A lot of the products that brand marketers are selling are bought in-store, and so showing that online and mobile ads lead to in store purchases is a hugely important part of our strategy going forward, as I talked about, and video is really exciting, as well.

When you think about the holiday season, the fourth quarter is a really important time for our clients, and that makes it a really important time for us. And I think people are increasingly recognizing that mobile is important. 65 percent of people use their phones while they are out shopping, and people are recognizing that opportunity.

From an earnings perspective, last fourth quarter was a great quarter, both because our business was growing, but also because that was when we rolled out ads fully into News Feed, and so it’s worth keeping that in mind when you think about how you think about our business going forward.

Measurement came up often. In response to a question from Goldman Sachs analyst Heather Bellini, Sandberg said:

We think measurement really, really needs to evolve for the world we’re in today in many ways. One of those is overemphasizing the last click, and the percentages by which that’s done really varies, but we think substantially, across the industry, they are overemphasized. But there are also other problems. The current measurement systems don’t work on mobile, because they are largely cookie-based. They are not accurate, and we think they are only 59 percent accurate in even the most basic demographic targeting — they just go offline to online. They really work well for one person with one device, usually a PC, thus making online purchases. The world we live in today, I bet you everyone on this phone call has multiple devices, and people look at ads online and then purchase offline, as well as deserve more relevant ads and better targeting. So, as we relaunch Atlas, as we think about investing in ad tech, we’re looking to solve all of these problems, and we think our relaunch is the first step in doing that.

And in response to a query from Nomura Securities analyst Anthony DiClemente about first-party data versus third-party data and the potential need for a third-party measurement source, such as Nielsen, she added:

Data is really important for both measurement and targeting. And when you think about first-party and third-party data, you have to think about both of those. Certainly with measurement, third-party verification of that data can be very important. A lot of our largest clients and agencies also build their own data systems, which are a very important part of measuring and kind of certifying everything we do with them. So we’re using a combination of first-party and third-party.

I think where this really gets interesting is around relevance. And as I spoke about, that’s a major theme for us, because we think one of the best things we can do to drive more value for marketers and improve the consumer experience on Facebook is improve relevance, and data is a great way of doing that.

So for example with custom audiences, custom audiences is a combination of our clients using the data they have on their client base, combined with the data we have that we can target. Let’s say target one ad to existing customers to get them to engage more and buy more, and one add to brand-new customers. And you could see how your different ads for people who have never bought your product and a different ad for people who are currently buying your product would make a lot of sense. And then you look at something like lookalike audiences, where we’re looking to map customers who share characteristics, age, demos, likes, interests with current customers. And all of this takes a combination of first-party and third-party data, all of which we do in a very privacy-protected way.

UBS analyst Eric Sheridan asked:

With the ad-tech acquisitions and moves you’ve made over the past year or two, I wanted to know when you think we should be looking at ad tech being fully deployed in the marketplace, and what sort of returns that might generate for Facebook?

She replied:

On ad tech, I think we’re in the middle of what is a very fundamental shift from marketing that is cookie-based on a PC, one desktop, to people-based marketing on multiple devices, to marketing that is primarily for online sales, to marketing that affects those online and offline sales on mobile. So I think we’re right now in a pretty big shift, and we’re not close to fully deployed there. We have a lot of pieces to do. Our Atlas relaunch is new. We’re first growing our client base, and we’re pleased with our progress there, and we’re putting these other pieces in place on Audience Network and LiveRail. So I think we’re pretty far from being fully deployed on even this big shift. But I think that in our industry, nothing ever fully deployed — as soon as we catch up here, there is going to be another movement and something else that happens that we have to react to and build the technology for. And so we remain — we’re a long-term company run by a founder with a long-run vision, and we want to keep our eyes ahead on these changes and technology and keep deploying against them.

Finally, Credit Suisse analyst Stephen Ju asked about the pace of Facebook’s rollout of and delivery of its advertising products, and Sandberg said:

I think the usual way we do things is that we roll out products slowly and then we iterate. So one example is custom audiences: We roll out custom audiences, then we add on website custom audiences to target ads to people visiting websites, or mobile app custom audiences, ads to people who have visited mobile apps. And one is building on the next, building on the next.

Similarly, earlier this month, we launched local awareness targeting. It’s a new option that allows local businesses to reach nearby customers. And what you saw that — it wasn’t a massive launch. It was a small launch where we enabled this targeting, get people to use it and we’ll develop it. Then there are the exceptions such as Atlas. Atlas was one big launch that we’re still in the process of doing, and that’s really because of the product that we’ve bought and needed to rebuild. But for the most part, our product development tends to be very iterative, and that’s what you can expect from us going forward.

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