Facebook Followed You to the Supermarket

This is a story about advertising on the Web. Specifically, it’s about ads on Facebook, a hugely popular free service that’s supported solely through advertising, yet is packed with users who are actively hostile to the idea of being marketed to on their cherished social network. Considering all of this, the best place to start is with your primary concern about Web ads. This is what I hear from readers every time I write about the online ad economy, especially ads on Facebook: “I don’t know how Facebook will ever make any money—I never click on Web ads!” And that’s not all. You’ve checked with your friends and relatives. No one you know has ever intentionally clicked on a Web ad. OK, once, years ago, a co-worker told you about a guy who knows a guy who tapped an ad on his phone. True story! But don’t worry. People close to the situation dismissed it as a one-time deal. The guy wasn’t trying to tap the ad; he just had really fat fingers. He felt really bad about it afterward, too. So, the question persists: How does Facebook expect to become a huge business if most people you know never click on ads? The answer is surprisingly obvious. It’s a fact well-known to advertisers, though it’s not always appreciated by people who use Facebook or even by folks in the Web ad business: Clicks don’t matter. Whether you know it or not—even if you consider yourself skeptical of marketing—the ads you see on Facebook are working. Sponsored messages in your feed are changing your behavior—they’re getting you and your friends to buy certain products instead of others, and that’s happening despite the fact that you’re not clicking, and even if you think you’re ignoring the ads. Advertisement This isn’t conjecture. It’s science. It’s based on a remarkable set of in-depth studies that Facebook has conducted to show whether and how its users respond to ads on the site. The studies demonstrate that Facebook ads influence purchases and that clicks don’t matter. They also shed light on Facebook’s long-term business strategy. The tech world is consumed by the war between Facebook and Google—two huge sites that are constantly battling one another for users, engineers, and advertising clients. Yet Facebook’s studies suggest that its advertising fortune won’t necessarily come at the expense of Google. Instead, the findings show that people react to ads on Facebook in the same way they respond to ads on television. If Facebook’s ad business takes off, it might be at the expense of the biggest ad-supported medium in the world. Last year, Facebook partnered with Datalogix, a firm that records the purchasing patterns of more than 100 million American households. When you stop by the supermarket to buy Tide, Rice-A-Roni, and Mountain Dew this evening, there’s a good chance you’ll hand the cashier a loyalty card to get a discount on your items. That card ties your identity to your purchases—it puts a name on your Tide, Rice-A-Roni, and Mountain Dew. After you leave the store, your sales data is sent over to a server maintained by Datalogix, which has agreements with hundreds of major retailers to procure such data. Over the past few months, Facebook and Datalogix figured out a way to match their respective data sets in a manner that maintains people’s privacy (more on that below). In other words, Facebook can now tie its users to the stuff they buy at supermarkets. Armed with this data, Facebook began running a series of analyses into the effects of advertising campaigns on its site. If, say, Procter & Gamble ran a Facebook ad for Tide, Facebook could look at Datalogix’s data to see whether people who were exposed to the ad tended to purchase more Tide in the weeks after the campaign. (Tide is just an example here; Facebook has conducted more than 60 such studies for major advertisers, and while it was willing to give me general insights about its findings, it wouldn’t discuss specific advertisers.) These general insights make a strong case for Facebook ads. First, according to the study, Facebook ads work. “Of the first 60 campaigns we looked at, 70 percent had a 3X or better return-on-investment—that means that 70 percent of advertisers got back three times as many dollars in purchases as they spent on ads,” says Sean Bruich, Facebook’s head of measurement platforms and standards. What’s more, half of the campaigns showed a 5X return—advertisers got back five times what they spent on Facebook ads. But the most interesting finding was the total lack of correlation between purchases and clicks. “On average, if you look at people who saw an ad on Facebook and later bought a product, [fewer than] 1 percent had clicked on the ad,” Bruich says. In other words, the click doesn’t matter; people who click on ads aren’t necessarily buying, and people who are buying are almost certainly not clicking. This shouldn’t surprise you, because it’s how most other ads work. There are generally two kinds of marketing messages in the world—“direct-response” and “demand-generation.” Direct ads are those that call on people to take an action more or less immediately—click to visit a site, call an 800 number, order something from a catalog. Google’s Adwords, the little text ads that show up alongside your search results, are a form of direct ads. Adwords are supremely measurable—advertisers pay Google for clicks, and they can track how many of the people who click end up buying from their site. Adwords are also extremely effective; because they’re shown to you when you’re looking to buy something (when you have “high purchase intent,” in the jargon), people who click on them frequently end up buying. Consequently, Adwords have made Google the most successful advertising company in the history of the world. Yet in the larger advertising industry, direct-response ads like Google’s are something of an anomaly—a way to sell certain products at certain opportune times, but not the way that most marketers approach their jobs. Instead, the vast majority of the advertising world is structured around “demand generation.” These ads aren’t trying to get you to take some action right away. Instead, they’re trying to plant an idea in your head—to introduce you to a new product, to get a name stuck in your head, to improve how you feel about a company. (That’s why demand-generation ads are also known as “brand advertising.”) Other than infomercials, pretty much every ad you see on TV is a demand-generation spot. That’s true of ads in print magazines, on the radio, at bus stops, on billboards and most of the banner ads on your favorite news websites, too. According to some estimates, demand-generation ads account for more than 80 percent of the money spent on ads. Facebook has been selling itself as an ideal venue for brand advertising for several years now. That’s not just because there’s a lot of money in brand ads; it’s also because Facebook has long seemed like a relatively poor environment for direct-response ads. People who go to Facebook do not have high purchase intent—they’re going there to catch up with their friends, not to search for something to buy. Of course, that’s true of TV, too—no one sits down to the tube expecting to find new stuff to buy. Usually we just want to goof off. There’s another way in which our Facebook use resembles how we watch TV: We spend a lot of time there. People spend about 7 hours a month on Facebook, more than on any other site. One of the only things we do more often than waste time on Facebook is watch TV. We do that a lot more often, clocking in an average of about 5 hours a day in the United States. But demand-generating advertising has been a relatively tough sell for Facebook. That’s because the online ad business is structured around measurement—around advertisers’ ability to precisely track how people are responding to their ads—and brand advertising is notoriously difficult to measure. The lack of measurement explains why some advertisers have been so skeptical of Facebook—see General Motors’ very public denunciation of the site last year. Again, though, it’s useful to compare Facebook with television. In its early days, TV also had a problem with measurement. No one knew how to tell whether commercials were really working. But in the 1970s and ’80s, advertisers and analytics firms like Nielsen came up with a variety of ways to analyze ads on the tube. Among other things, they instituted standardized measurements to compare TV to other media—like “gross ratings points”—and, after surveying consumers’ purchases, they figured out how people’s TV viewing affected their buying habits. Today, thanks to a practice known as “mix modeling,” the return on TV advertising is exquisitely measurable. Large advertisers like Procter & Gamble know exactly how much they’re getting out of it—and that’s why, despite all the many other devices that now intrude our lives, TV advertising rates remain as high as ever. Now Facebook is trying to bring to the Web same rigorous metrics that have ruled brand advertising on television. “We’re trying to create industry standards around how people advertise online,” says Brad Smallwood, the Facebook vice president in charge of its measurement and insights team. At the core of this work is Facebook’s partnership with Datalogix, though given Facebook users’ (justifiable) squeamishness about how the site uses their data, Facebook and Datalogix had to perform their analysis very carefully. Advertisement What they came up with was a Rube Goldbergian system that strips out personally identifiable information from the databases at Facebook, Datalogix, and the major retailers while still matching people and their purchases. The system works by creating three separate data sets. First, Datalogix “hashes” its database—that is, it turns the names, addresses and other personally identifiable data for each person in its logs into long strings of numbers. Facebook and retailers do the same thing to their data. Then, Datalogix compares its hashed data with Facebook’s to find matches. Each match indicates a potential test subject—someone on Facebook who is also part of Datalogix’s database. Datalogix runs a similar process with retailers’ transaction data. At the end of it all, Datalogix can compare the Facebook data and the retail data, but, importantly, none of the databases will include any personally identifiable data—so Facebook will never find out whether and when you, personally, purchased Tide, and Procter & Gamble and Kroger will never find out your Facebook profile. Then, each time a major campaign runs on Facebook, the company can see how people’s purchases were affected by ads. What’s most important is that Datalogix gives Facebook extremely large data sets, which allows for enough statistical power to draw fundamental lessons about how people respond to ads. “If 40 million people were exposed to an ad campaign, you could end up with a very high percentage of them available for the analysis,” Bruich says. “You could begin to answer questions like, ‘For this type of product, what is the optimal frequency for the campaign—how many times should people see the ad?’ And does it differ for people who buy a lot of the product versus a little? And should you show a different number to heavy users of Facebook versus other users?” Facebook has already begun to improve the effectiveness of ads on its site. One of its findings, for instance, is that for particular brands and product types, there is a “sweet spot” for ad impressions—an optimal number of times to show an ad to a user before the message becomes ineffective. By homing in on that optimal rate, Facebook was able to improve the return on investment of some campaigns by 40 percent. It also found that by customizing the frequency of an ad based on factors like how often a user purchased a certain brand or product category, the company could improve return on investment by 22 percent. Certainly that’s good for Facebook and for advertisers. But it’s also not terrible—and might be even good—for users. If Facebook’s research shows that companies were wasting money by serving some people the same ad too many times, that could mean you’ll be subjected to that kind of thing less often in the future. As Facebook’s measurement systems improve, you might even see better ads—one of the eventual goals the system, Bruich says, is to figure out what kinds of ads appeal to what kinds of users, so over time you’ll be presented with ads that are less likely to annoy you. And if, as you insist, ads really don’t work on you—that you never buy things because of marketing you see on Facebook—it’s theoretically possible that Facebook’s system would be able to figure that out, too, and maybe the site won’t show you any messages. But that’s unlikely. You may not love the ads you see—and you’ll still never click on them. But unbeknownst to you, Facebook ads still work on you. Resistance is futile. http://www.slate.com/articles/technology/technology/2013/03/facebook_advertisement_studies_their_ads_are_more_like_tv_ads_than_google.2.html

Asia’s $1 trillion infrastructure opportunity

Despite bright economic prospects, most emerging Asian countries—China, India, and the Association of Southeast Asian Nations (ASEAN)—continue to suffer from underdeveloped infrastructure. In India, for example, electricity generation is 16 percent to 20 percent short of what is needed to meet peak demand, thanks to persistent underinvestment and poor maintenance. In Indonesia, infrastructure investments dropped from 5 percent to 6 percent of GDP in the early 1990s to 2 percent to 3 percent of GDP for much of the last ten years. We estimate that the consequent deterioration in energy, transport, housing, communications, and water facilities has restrained economic growth by 3 to 4 percentage points of GDP.
We believe that situation is about to change. Across the Asian region as a whole, we calculate that around $8 trillion will be committed to infrastructure projects over the next decade to remedy historical underinvestment and accommodate the explosion in demand.
Traditionally, most Asian infrastructure projects have been funded by governments or domestic banks. Foreign investors were mostly excluded. Those that were allowed to participate faced severe restrictions, including complex regulatory and legal regimes, uneven workforce quality, and occasional political interference.
In the wake of the financial crisis, however, we have started to see signs that global private capital is increasingly welcome. The combined effects of increased stimulus spending and reduced tax receipts have increased deficits, with the result that restrictions on foreign investment are easing and a growing number of projects are being carried out under public–private partnerships (PPP). We estimate that over the next ten years fully $1 trillion of the $8 trillion of projected infrastructure projects will be open to private investors under PPPs.
The questions for owners of global capital are how to identify the opportunities, how to mitigate the main risks, and how to develop appropriate entry strategies.

Growing demand for outside capital

More than 80 percent of the demand for infrastructure investment in emerging Asia over the next ten years will come from energy and transport, the sectors most critical to supporting heightened economic activity. Exhibit 1 shows the full breakdown.

Our analysis suggests that much of this new investment will be in advanced technologies. For example, Asia may leapfrog developed economies in its adoption of clean-energy technologies, thanks to falling costs and improving effectiveness.
Several countries, such as China and Malaysia, have sufficient financial depth in their domestic private-capital markets to meet their infrastructure funding requirements (Exhibit 2). Foreign investors should therefore focus on countries such as India, Indonesia, Thailand, Vietnam, and the Philippines, where the financial markets have less capacity.

 Although the environment is changing, even in these countries the bulk of infrastructure investments will likely remain effectively closed to private investment. The obstacles are varied. Many governments, for instance, have ill-defined PPP policies that, because of their vagueness, inhibit private participation, while capital controls frequently deter investors who worry that they may not be able to repatriate their cash flow. Weak regulatory or legal systems intensify the risk, and while shallow or illiquid capital markets make private investment necessary, they also complicate exit strategies. Exhibit 3 calculates the effect of restrictions on foreign direct investment in India, Indonesia, the Philippines, Thailand, and Vietnam.

Despite all this, Asia remains an exciting place for infrastructure investment over the next ten years. India alone is set to spend $500 billion on projects from 2007 to 2011, thereby raising its infrastructure investment from 4 percent to 8 percent of GDP per annum. Domestic capital markets will finance some but not all of this demand: as in other parts of the region, global investors will have an opportunity to fill the gap.

Key risks to be managed

Once they have decided to invest, foreign firms must overcome several risks. Thanks to political pressures, environmental considerations, and local issues, there are often long delays between planning and project approval; this can severely affect capital deployment and productivity. The Hangzhou Bay Bridge project in China, for example, was held up for 10 years, and the Bandra-Worli Sea Link in Mumbai, India, required more than 20 years before approval was finally given.
As in other parts of the world, infrastructure investors in Asia should have long investment horizons and should be prepared to have capital locked up for many years.
They need to be wary of—and ensure they make changes to—partnership agreements that are often poorly structured and drafted due to a lack of skills or experience in government departments.
They should plan for the possibility of continuing political, legal, and regulatory uncertainty with respect to foreign ownership restrictions, capital controls, and partnership terms. During the 1997 Asian financial crisis, for example, several countries suddenly imposed capital controls, which in some cases were only lifted many years later.
And global investors must find ways around capital markets that lack the full range of financial instruments for risk mitigation. For example, the foreign-exchange (FX) markets for some emerging Asian currencies might not be liquid enough to allow full hedging of a currency exposure, while local derivative instruments may be insufficient to offset particular risks.
Offshore products or structures domiciled in financial centers like Singapore and Hong Kong could be a solution when local currencies are illiquid. One example is the use of a Singaporean dollar fund (or fund of funds) that then invests in, say, Vietnamese infrastructure assets. The currency risk between Vietnamese đόng (VND) and the Singapore dollar (SGD) is mitigated by a simultaneous synthetic contract that is renewed annually. While this does not completely do away with the currency risks, it reduces the volatility significantly.
Another option is to set up a holding company in a tax-friendly jurisdiction rather than have the investment in the underlying infrastructure special-purpose vehicle (SPV), which is a domestic asset. The fund-raising entity enters into a contract outside the country, which at least partially helps to reduce the sovereign risk.
Third, partnerships between foreign players and a dominant local institution—SBI-Macquarie Fund in India and the CIMB-Principal fund in ASEAN are two examples—can help.

Selecting the right form of participation

In addition to mitigating the inherent risks, investors must choose the right participation model if they are to maximize. Exhibit 4 explains the choices, several of them suitable for use in a PPP.

Foreign investors and institutions typically follow an equity-led entry strategy in the initial years, since their local balance sheets tend to be insufficiently capitalized to support debt-led models. Domestic and regional banks, by contrast, typically use their strong local balance sheets to engage in debt financing.
In recent years, savvy financial institutions with a well-rounded suite of financial services have begun adopting integrated models for infrastructure investment. For example, besides funding the construction of an airport, an integrated player might also offer transaction banking services and insurance to the airport operator. Such cross-selling can deliver significant value, as our research suggests an estimated 40 percent of potential revenues from infrastructure projects come from nonlending sources (Exhibit 5). Even better, this extra value opportunity comes with relatively little additional risk—after all, the operation of an airport, or indeed a power plant, once up and running, is relatively straightforward compared with getting it built in the first place.

It is critical, however, to note that infrastructure investment requires significant dedication of time, organizational resources, and management focus. The example of Macquarie Group provides a good illustration of how a global infrastructure-investment business can be built. Macquarie first developed its expertise in infrastructure by capitalizing on the wave of Australian privatization of national infrastructure in the 1990s. Armed with the knowledge built up, Macquarie then launched its international expansion. Despite its expertise, however, it still took Macquarie more than six years for infrastructure to become a significant international platform. Along the way, it has developed sophisticated risk-management techniques to oversee activities in disparate markets.
Despite the challenges and risks, Asia’s infrastructure growth over the next ten years is an attractive opportunity for global investors and financial institutions. There will be more than $1 trillion of infrastructure projects open to foreign investment, and further value can be captured by offering a full range of associated financial services besides lending. To tap into this growth, global capital players must select the appropriate participation model and dedicate sufficient resources to build up their expertise and familiarity with Asian infrastructure markets.

McKinsey on Finance on iPad
https://www.mckinseyquarterly.com/Financial_Services/Banking/Asias_1_trillion_infrastructure_opportunity_2765?gp=1