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Evidence that Facebook Ads are Less Effective Coincides with Congressional Hearings and Changes to Data Access




10-30-2017

LEDE
We have collected first hand data on the record, that several multi-million dollar advertising budgets, in the largest digital ad spending market in the United States, dedicated to Facebook Inc (NASDAQ:FB) are being trimmed or entirely cut due to markedly dropping advertising efficacy on the platform.

These ad budget cuts coincide with our previous analysis that the congressional oversight hearings that involve Facebook may have caused a pre-emptive change in the way the firm exposes granular user data and if the case, could have a dramatic downward impact on Facebook's dominant position in the advertising world.

STORY
I have been made privy to data from a senior marketing executive in the retail space that allocated upwards of $4 million a year on Facebook ads. Let's call him John (as in John Doe). Within the confines of this access, I have also seen, first hand, the conversations other marketing executives in the same space have had that in total account for tens of millions of dollars a year on Facebook ad spends.

On the record, John told me that the cost per acquisition (CPA) on Facebook has taken a turn for the worse in the recent months, so much so that for the first-time ad dollars are coming out of Facebook and are now up for grabs, with tests being run on Twitter, Google, Pinterest and various other sources. John noted that this was industry wide, not particular to his company.

We note that both Twitter Inc (NYSE:TWTR) and Alphabet Inc (NASDAQ:GOOGL) reported better than expected results in the recent earnings announcements.

Further, I have seen firsthand that the other marketing executives in John's space are now openly communicating the same issues, with some going even further to note that they are pulling their entire ad budgets from the social medium. Phrases like "the greenfield is over," pepper the communication channel between these executives.

THE INDUSTRY
The industry we're focusing on is retail, one which will invest $15.09 billion in paid online and mobile media advertising in 2016 according to eMarketer.

For yet more context, we get this statistic from the same source:

[R]etail will remain the largest ad spender among US industry sectors tracked by eMarketer through at least 2020.


WHAT'S GOING ON
There are four possibilities as to what's going on, and we cover each below with a simple heading "Explanation". But, first we must get into the guts of the Facebook marvel -- that is, they how and why Facebook has become so dominant, beyond scale.

TOO GRANULAR
In our previous story Facebook May Be in Serious Trouble, we noted the impact that Facebook's uniquely granular data may have had on the U.S. presidential election.

John told me, months ago, before any of the changes to the effectiveness of Facebook ads had reared its head:

[i]n short, [Facebook is] most powerful direct response advertising network this generation has ever seen.

Facebook will unleash a machine learning algorithm (almost like bloodhounds with a scent) to identify [your market] and only serve ads to those individuals.


This was Facebook's secret weapon. For the large ad buyers on the social medium that took their time, incomparable data granularity made advertising remarkably effective relative to other platforms, well beyond that which could be attributed to just scale.

ProPublica blew the doors off the hinges with its lightning rod story Facebook Enabled Advertisers to Reach 'Jew Haters'.

The broader point in the expose was that people list so much detail in their Facebook profiles, and reveal even more in their posts and actions on the platform, that anything, even a specific kind of racist, can be found, and targeted.

On the heels of that story, the Washington Post penned Russians took a page from corporate America by using Facebook tool to ID and influence voters. From that story we got this (our emphasis is added):

In addition to Custom Audiences, Russian operatives used other Facebook tools to target groups by demographics, geography, gender and interests, according to the people familiar with the investigation. The Custom Audiences tool differs because it allows advertisers to feed into Facebook's systems a specific list of users they want to target.

The conclusions of investigators fit those of several independent researchers, who say that the Russian disinformation campaign exploited the core advertising and tracking technologies that Silicon Valley has honed over a decade to serve corporate America.


REACTION
In reaction to the ProPublica story, On September 15th, 2017, BusinessInsider noted that "[Facebook] said it was removing self-reported targeting fields until it could ensure that targeting wouldn't be used for discriminatory purposes."

This is the beginning of an examination of the granularity of data that Facebook not only holds, but exposes for advertisers to benefit. And while removing racist categories is hardly a chink in the Facebook armor, a systematic destruction of its unbelievably detailed profile building is possibly, if not likely, already under way.

EXPLANATION #1
* Less granular data makes Facebook less unique and less valuable to advertisers.

The worst-case scenario here seems semi-probable -- Facebook will be forced to hide some of its prized data points collected per person -- that very data that allows advertisers to find the small group of people that want to buy a pink and silver bicycle with yellow tassels, white handle bars and a blue elephant license plate, or, more nefariously, the people that want to kill others based on race.

If the trifecta of stories from ProPublica, Wapo and Business Insider are an indication of more than just a fight on discrimination, then a dampening or even muting of some granular data could be to blame for the drop in effectiveness of ads.

Given that Facebook is set to testify to the U.S. Congress on Russia and the 2016 presidential election this week, it's possible that a pre-emptive move was made with broad strokes to suppress the granular user data.

An argument could be made that without the data, that is, without the special and unique data that Facebook can offer advertisers that other platforms (read Twitter, Snapchat, Pinterest) cannot, Facebook is not worth 40 times Twitter even though it is at 6.5 times scale with multiple properties (Facebook Proper, Instagram, WhatsApp, Facebook Messenger).

Add user trust issues, and all of a sudden people will start to realize that every little 'quiz' game they see on Facebook that users fill out to figure out which house in Harry Potter they would be, or which celebrity they would be, is just a ruse. These are not fun quiz games, they are data collection facilities designed for one reason -- take your data, store it, sell it, and use it for advertising.

I discussed this possibility with the great Peter Armstrong of CBC.


IT'S WORSE THAN YOU MAY THINK
While, in the United States, our cognition is now high from the U.S. presidential election, we are hardly unique.

The NY Times, just today, published a story Forget Washington. Facebook's Problems Abroad Are Far More Disturbing.

It will take time for Wall Street to digest the reporting done by author Kevin Roose, the findings are troubling on one hand, and perhaps more than troubling on the other. While describing Facebook in "crisis mode," we start with the same ringing of the same bell:

The company has mounted an all-out defense campaign ahead of this week's congressional hearings on election interference in 2016, hiring three outside communications firms, taking out full-page newspaper ads, and mobilizing top executives, including Mark Zuckerberg and Sheryl Sandberg, to beat back accusations that it failed to prevent Russia from manipulating the outcome of the election.

No other predicament in Facebook's 13-year history has generated this kind of four-alarm response. But while the focus on Russia is understandable, Facebook has been much less vocal about the abuse of its services in other parts of the world, where the stakes can be much higher than an election.


But the times quickly unburied the lede, which is far more troubling:

This past week, my colleagues at The Times reported on the ethnic cleansing of Rohingya Muslims, an ethnic minority in Myanmar that has been subjected to brutal violence and mass displacement.

Violence against the Rohingya has been fueled, in part, by misinformation and anti-Rohingya propaganda spread on Facebook, which is used as a primary news source by many people in the country. Doctored photos and unfounded rumors have gone viral on Facebook, including many shared by official government and military accounts.


The Times' story goes further to call out Facebook's messaging service WhatsApp usage in India, claiming it "has been inundated with rumors hoaxes and false stories."

THE PROBLEM IS A PROBLEM
In simplest terms, this new cognition we have found is not based on an one-time event in the U.S. presidential election, but rather was simply the same problem that apparently exists in many regions, but this time with the spotlight of the United States media.

A FIX?
As the cacophony has grown surrounding the topic of dis-information and data collection, Facebook has been hiring thousands of people to sift through content, and likely ads, by hand. Back in May, we got this from ABC news: Facebook to hire 3,000 more workers to monitor content amid surge of violent videos.

Then in October we found out Facebook is hiring another 1,000 people to review and remove ads.

It's true, or possibly true, that if Facebook hires enough people to monitor ads that the company can, again, expose its famed granular data to advertisers and regain its unique and dominant position. It's also true that 1,00 people will not be enough.

While the future seems bleak, this is potentially correctable to a large degree, and unless the United States Congress explicitly forbids usage of certain data, Facebook may have an end around. Oddly, the worst-case scenario is the much less sexy explanation #2.

EXPLANATION #2
* Ad efficacy on Facebook is dropping due to normal, albeit disruptive, crowding.

Let's recall that Facebook's CFO, David M. Wehner, on the latest earnings call back in late July of 2017 said this:

[W]e continue to expect that our ad revenue growth rates will come down as the year progresses.


Facebook has been throwing cold water on analyst expectations noting that revenue growth is finally going to slow -- and while several reasons were noted, none of them surrounded a change in the access to user data.

Without looking for a story and in fact just reporting it, Facebook's revenue growth will slow and its advertising effectiveness could decline simply due to overcrowding. We reprise one comment a marketing executive made, "the greenfield is over."

Maybe the greenfield is over because of saturation. While this has a far less nefarious starting point, the end is equally disruptive to Facebook's business and this time, there is no obvious fix.

EXPLANATION #3
* In a world that hurries to conclude based on speculation, it's possible there is no story at all.

Perhaps there is nothing to explain. Perhaps a look at the inside tract of Facebook's business will reveal no change at all and we have stumbled across a few disenfranchised marketers. After all, tens of millions of dollars are less than rounding error for Facebook and we haven't seen an all-out blitz from the real marketing giants like Magna Global, which represents $37 billion of adverting spend.

EXPLANATION #4
* Something else

Finally, we have to give light to the possibility that all of this, from soup to nuts, is due to something else, beyond the scope of this article and the intellect of this author.

CONCLUSION
Of the six mega techs that lead the world's in market cap -- Apple, Alphabet, Microsoft, Amazon, Alibaba, and Facebook, only one sits precariously in the realm of network and only network. History has shown us, with the one-time high fliers AOL and Yahoo, that network only businesses do face a unique kind of risk that comes not just with competition, but need for its services, want by its advertisers and trust of its users.

Facebook is due to release quarterly earnings on 11-1-2017. Our take is that the prior quarter will reveal little evidence of this growing discontent, but rather that from here on out, Facebook could see a worsening of its business.

Dropping ad effectiveness, user trust issues and the potential for several different government interventions could all rear their ugly heads at the same time, for the same reason.

Alternatively, Facebook could brush it all away, and sail higher as the bull market rages and mega tech leads the way.

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As always, control risk, size appropriately and use your own judgment, aside from anyone else's subjective views, including my own.

Thanks for reading, friends.

The author does own put options on Facebook at the time of this writing which means he will earn a profit if the stock drops a lot in the relatively near future.

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