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Facebook May Spend Billions For Ad-Tech Analytics; Google In Crosshairs

This article is more than 9 years old.

On Facebook’s earnings call this week, management stunned investors with plans to ramp spending as much as 75% in 2015, more than double the 35% jump that analysts were already expecting. That's a big leap and means $3-5 billion more spending for operations in 2015 than in 2014. Facebook is on track to spend $7 billion by the end of this year. In 2015, operating expenses could jump to $10-12 billion by the end of the year.

What are they funding? A year ago, Facebook decided to expand its product line from one core blue app to a vast collection of apps, and many of the new apps perform one single function. Young users want to download the newest hottest apps and manage circles of friends by separating them into different apps. They want a lot of apps and constant innovation. Facebook wants to deliver.

One common thread in Facebook’s transition from a core app to a multitude of them is Atlas, Facebook’s new advertising platform. Atlas measures the effectiveness of ads on the Facebook apps that have sponsors, like Newsfeed and Instagram, and also works with Facebook's publishing partners, like BuzzFeed.

Atlas can search demographic data for individuals or it can connect to a look-alike group, and then serve up ads. Atlas looks for key characteristics, like age and gender or even location for mobile users -- maybe someone lives near the street corner of  pizza parlor, how about a coupon? The platform matches ad views to purchases by brand to connect the dots.

A big chunk of the $3-5 billion of new spending may be earmarked for R&D in ad tech. Facebook is staffing engineers to develop algorithms, functions and user interfaces.

Facebook believes users may see an ad for a product online, but purchase it in a store. Atlas analytics monitor purchases post ad-view. The social giant wants to get credit for the sale if the ad was involved, even if the purchase is offline in a store. Facebook may generate $17 billion in revenues in 2015, up from $12 billion this year, and the vast majority of revenues may be advertising. Facebook believes ad tech can drive even more advertising revenues.

5 billion here…5 billion there….

The bear case on Facebook is  CEO Mark Zuckerberg may want to match the soaring ambitions of Amazon’s CEO Jeff Bezos. Both CEOs upped R&D sharply, investing in new product development to expand. Amazon's  aggressive moves led to an earnings disappointment in last week's third-quarter report, with a net loss of $437 million, deeper than the year-ago loss of $41 million.

Facebook is on-track to earn $3 billion in net profits this year and next year, so has more breathing room than Amazon. Going forward, Facebook may have to dial back spending to avoid a stumble. Even at the current trading level of $74, the stock seems pricy. The PE is 37 times next year’s earnings of $2.00, which may be lofty considering earnings growth of 25% next year. The PEG may move closer to one, at least in the short run. The PE could expand again with greater growth.

Facebook can be a roller coaster ride. Two years ago, the social media giant transitioned to mobile from the desktop. Zuckerberg spent two years fighting off criticism that Facebook couldn’t to make money on mobile phones. In the third quarter earnings report, Facebook generated two-thirds of its $3 billion in advertising revenue from mobile.

Facebook’s Atlas

Facebook is investing billions in Atlas, the advertising server and measurement platform that tracks users online, and can follow them offline. Facebook's new exchange may challenge Google.

Facebook re-launched Atlas last month, a system it bought from Microsoft in early 2013. Microsoft built Atlas in response to Google’s Double Click acquisition and expected online players to pile on to public advertising platform. But they wanted proprietary ones. So, Microsoft sold Atlas to Facebook.

Atlas has a tracking mechanism that follows users who are logged in across their computing devices. The ID has basic information about the user and keeps count of the ads they see. Advertiser, say Nike, want to verify the purchaser had ad impression before the sale. Atlas uses cookies and a Facebook ID to identify users on websites. On mobile, it uses the Facebook ID, Apple ID or Android ID. Users who login to Facebook on an app are tagged. Atlas matches ad histories to a purchase transaction.

Facebook's investment in Atlas and acquisition of LiveRail, a video ad tech company, indicates it wants to expand beyond the core Facebook app and Instagram. Facebook wants to lead the shift to "people-based" measurement and may launch an exchange platform. But Facebook is not going to let advertisers take the cross-device tracking information out of the Facebook walled garden for privacy reasons. With the translation layer, outside players could match other audience pools and access information inside the Atlas walls, something the social giant wants to avoid, according to Atlas leader David Jakubowski in AdExchanger.

Facebook wants to move out from under Google’s long shadow in online advertising. The Atlas suite combined with data from Nielsen and Datalogix can evaluate the performance of Facebook against competitors. Corporations, like Pepsi and Intel are testing Atlas with launch partner, the Omnicom Group and perhaps social ads will win the contest.