Social Advertising Stressed Throughout Facebook’s 2Q Earnings Call

A healthy portion of Facebook’s second-quarter earnings call Thursday was devoted to advertising, specifically social advertising, and the unique opportunities and challenges presented by advertising on the social network.

As Chief Operating Officer Sheryl Sandberg said during the call:

When you think about the advertising experience on Facebook, it is complicated, and that’s mainly because we’re a completely new kind of marketing. We’re not TV. We’re not search. We’re a third medium, and that presents a challenge because the messages that are aimed at consumers and other platforms need to really be adapted and changed to be more inclusive. The right ad on TV or on search is the wrong ad for Facebook. Facebook marketers need to learn how to make their ads really a two-way dialog with consumers.

We also have the measurement challenge. When you see an ad on Facebook, you don’t go and click to purchase right there, but you are more likely to search later on and buy a product or to walk into a store and buy a product. So we have the challenge of teaching marketers how to develop social marketing, and then working with them so that we can tie the consumer experience of seeing a Facebook ad, and you are acting with that brand toward a purchase that happens later on.

And outside we are still focused on the market education. With our clients who have done a lot with us, I think they are learning a lot on those trajectories and seeing very positive returns, but it took a long time for the TV market and advertising to be truly understood, and it took a long time for search, and I think we are still in that learning curve with a lot of our clients.

Below are some of the advertising-related highlights from Thursday’s conference call, from Sandberg, Co-Founder and CEO Mark Zuckerberg, Chief Financial Officer David Ebersman, and Director of Investor Relations Deborah Crawford.

Zuckerberg on social ads:

The basic idea here is that the best type of advertising is a message from a friend. Facebook wants to offer advertisers the best tools to create ads that are social. We believe that the more our advertising includes interesting content from people you care about, the more marketers will be able to create advertising that adds value to people’s experience on Facebook. Advertising on Facebook today is already delivering a compelling return on investment even though most advertising on Facebook today isn’t social. We believe the experience can be better and more social.

For example, if I like a restaurant, then my friends might see that I like that place, and that’s likely a more convincing ad than anything the restaurant would produce on its own. That’s an example of aligning social activity and ads. One important aspect of social ads is that since they are based on social activity, they appear on our news feed products on both mobile and desktop. This is important because mobile users already spend so much time reading their news feeds.

So these social ads and news feed give us a clear path to building a strong business on mobile. I mentioned earlier that we recently began to roll out our sponsored stories in both the desktop and mobile news feed. By the end of June, sponsored stories in news feed was at a run rate of $1 million per day in revenue, and about one-half of that is coming from mobile. This is an encouraging start in our effort to generate revenue from the mobile use of Facebook. We know that social ads perform much better than non-social ads, so our job over the next three years is to increase the percentage of ads that are social and engaging.

Sandberg:

Marketers have always known that a recommendation from a friend is one of the most powerful ways to sell their products. Marketing on Facebook is fundamentally different than other mediums, because messages can be shared from friend to friend. This is word-of-mouth marketing at an unprecedented scale. In an increasingly crowded world, this is essential for the world’s largest global companies, as well as the small business around the corner.

Sandberg on the challenges for local businesses when it comes to marketing on Facebook:

Local business advertising is considered by many to be the Holy Grail of Internet advertising, as the market opportunity is so great. This has proven difficult, however, because small business owners often lack the time or ability to adopt new technologies. Facebook is uniquely accessible to them, as they typically learn to use Facebook, plus having a personal feel for the timelines. They then discover the value our service can provide them as business owners. Many of the world’s approximately 60 million business owners are already Facebook users. More than 11 million businesses already have pages on Facebook. More than 7 million of these pages are actively used each and every month.

By making it easier to create a business page and run ads, we believe we can increase the number of small and local businesses using our tool. In the last quarter, we began testing simpler ads and easier purchase loads. For example, page owners can now turn a post into an ad campaign with just a few clicks.

If you look at local businesses in the U.S. — obviously, one of the more developed markets — something like more than 40 percent of them have no Web presence at all. So they don’t adapt things that really in our view might be something that we would think they would obviously adapt. This is where I think Facebook has a huge competitive advantage because those same local business owners are using Facebook as users. They probably won’t adapt something for their product — they’d set up their profiles as timelines, and when they use the product, they start to see messages from other businesses, and then they start thinking, “This could work for my business, as well.” The product we want them to use which is pages is also incredibly similar to their timeline or profile.

Ebersman on sponsored stories:

We’re very pleased by what we’ve seen in the early ramp-up of sponsored stories in news feed in both desktop and mobile, but it’s important to note that it’s early. So we have a relatively limited amount of volume that we put into the system at this point. I think the test over the second half of the year that we’re excited to see happen is working with advertisers to increase demand for sponsored stories in news feed, creating better social content that we can put in news feed without having a deleterious effect on the user experience, and seeing where that takes us in terms of clicks and prices and things along those nature. So while the early data is quite positive. It is at low volume, so we just have to be careful about extrapolating from it.

Crawford:

While we’re not commenting on pricing specifically because it’s early, it’s really worth noting that higher click-through rates lead to higher CPMs (cost per impression) over time even without pricing changes.

Fewer than one-half of our ads are social, and it’s increasing. We’re very focused on increasing the percentage of our ads that are social in nature. We knew from a large number of studies and working with advertisers that the ads that are social have higher engagement rates from users, much higher ROI for advertisers, so driving that percentage up is also really important to us. It also feeds into the sponsored stories and news feed strategy that I’ve signaled in my remarks talking about it, which is that we put things in news feed that are most relevant, so the more social context the ad has and the more relevant it is to our users, the more we’ll be able to drive up that percentage of our ads that go into news feed.

Zuckerberg:

Just to make sure that we’re communicating this clearly, a very small percentage of our ads are sponsored stories and news feed at this point. We just started with that product recently, and we’re being very careful in terms of the volume that we put into news feed because it’s such a core part of the user experience.

Sandberg:

Sponsored stories, in terms of rolling it out, what we’re doing is we’re looking at two things very carefully. We’re looking at the social context to make sure it’s really relevant. So the better stories we can generate where people are interacting with things that are monetizable, the more sponsored stories we can roll out. We’re also looking really clearly at user reaction, and the good news for us is that it’s easy for us to measure user reaction because we can see if users are sharing, clicking like, and commenting, if they are engaging with those stories. And we can look at how much they are engaging with those stories relative to others.

We’ve also been pretty careful even when both of those metrics are high and just limiting the number of stories after the rollout. We’ve been fairly cautious on only rolling out a certain amount, and we intend to be continually cautious as we really work on user demand on the user perception. We have not rolled out sponsored stories in news feed across all countries. There are certain countries where we’re still working on finishes, so it’s not entirely globally rolled out.

Zuckerberg on ensuring that users’ news feed aren’t cluttered with ads:

In terms of the methodology for building news feed — and at any given point, we have a lot of different tests and different algorithms running — we measure engagement of everything downstream from news feed and the whole system. So, obviously, clicks and engagement and feedback in news feed, how many people want to share, but also how many page views, and how much time people spend on Facebook overall, ad performance, everything, down to all of the different tweaks that we do in news feed, and user sentiment as well. So, I think, we have pretty robust systems that are built out around this, and one of the things that I think is pretty interesting in what we’ve seen is that we can put in good sponsored content that has not degraded those metrics, so that’s really what we’re trying to do. We’re rolling some of these sponsored stories out more conservatively because we want to make sure that the quality is very high, and we’re basically continuing to run those tests to make sure that we are producing the best product that we can.

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