Both Facebook and Google, along with a host of other online digital advertising alternatives, continue to grow revenues in large part because of their ability to capture, analyze, and ultimately utilize consumer data to support their respective advertising efforts. If you've ever conducted an online travel search, for example, you've seen the results of tracking consumer's online behavior. By the next day, it seems every site you visit online is "mysteriously" populated with travel-related advertising. Turns out, consumers don't seem to mind.
Never too much data
For digital advertisers, tracking online usage is about being able to target the right ad, to the right person, at just the right time: and they're getting very, very good at it.
The reason Facebook was able to charge its select marketing partners as much as $1 million per day during its video ad testing phase was as much about the social media king's ad targeting capabilities as it was about consumer's appetite for video. And make no mistake, Facebook is continuing to pour money into infrastructure to further its data collection and analysis capabilities.
Last quarter's jump in Facebook's expenses raised more than a few eyebrows. On a GAAP basis (including one-time expenses), Facebook generated income from operations virtually identical to the 2013's Q4 despite growing revenues nearly 60%. The culprit was a whopping 87% increase in costs and expenses, and according to CFO David Wehner, investors can expect more of the same when Facebook announces Q2 earnings on April 22.
According to Facebook COO Sheryl Sandberg, a sizable chunk of last quarters $2.72 billion in expenses went toward user analytics and the on-going development of tools for advertisers to determine which ad should be used for which consumer, and when. Scary? Apparently not, according to recent data from IPG Media Lab and Yahoo!.
Big Brother? Big deal
IPG and Yahoo! surveyed over 5,000 Internet users over the age of 16 to determine their ad preferences, and the effectiveness of the many alternatives -- including social media and search ads. As it happens, consumers not only positively respond to targeted advertising based on Internet usage and behavior, they're much more likely to purchase after encountering them: which is great news for Facebook and Google marketing partners.
One of the most targeted forms of digital advertising is location based ads, which integrate the location of mobile users -- in a particular store, for example -- and pushes appropriate ads out in real-time. Though the "favorability" of location-based spots beat those of consumers on Facebook or users conducting a search on Google -- a whopping 55% of the survey respondents said location spots improved a brand's favorability -- they are less likely to lead to a purchase than an ad spot on Facebook or Google.
Over half of the consumers using social media sites like Facebook said personalized ads improved brand favorability, and an even more impressive 49% said targeted ads based on online behavioral monitoring increased their purchase intent. That compares to just 41% for location ads. For consumers using search engines like Google just over half said they thought favorably of advertiser's brands, though, just 41% of personalized search ad recipients said the spots would positively influence their buying decisions.
And that's good news for both Facebook and Google investors, because as tools like predictive analytics become more prevalent, consumer data collection and analysis will improve, and that translates to ever-increasing advertising sales.
Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google (A shares), Google (C shares), and Yahoo. The Motley Fool owns shares of Facebook, Google (A shares), Google (C shares), and Yahoo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.