Why Instagram Advertising Is So Successful

Recently came across headlines about how Instagram already has more advertisers than Twitter. I believe there are a few reasons:

1. First and foremost, Instagram as a platform is HOT. It has growth in users and engagement with ads disguised as user content.
2. Dedicated Audience - Facebook has a massive audience that most advertisers are already seeking. By incorporating Instagram into current Facebook advertising accounts, Facebook has added an additional channel with which to advertise on. The deliberate, meticulous, slow moving rollout of Instagram within Facebook as opposed to outside of Facebook was a savvy one. 
3. Ease of Setup & Refinement - The ease with which marketers can setup an advertising campaign ranging from $1 to $1,000,000 is unmatched. Whether devising advertising campaigns as Analyst or a CMO, anyone can do it.

Here are some screens taking you through the process to show you how easy it really is:

Step 1 is selecting the objective of your campaign. As you can see, Instagram is clearly called out as one of the channels that can be used to send people to a website.

Step 2 is determining your audience. If you desire, you could select the smallest town in the US with a small age range for a single gender. 

Step 3 is selecting the particular interests of the audience you are seeking. You can also exclude particular audiences.

Step 4 is determining your budget. Based upon the audience selections in steps 2 and 3, you will be shown a daily audience range. 

Step 5 is selecting the image and text you are looking to show as part of the ad.

Step 6 is a preview of the actual ad across the various channels. Once you are satisfied with the ad, you complete the order and Facebook typically approves within less than 15 minutes.

As you can see from the above, integration of Instagram within Facebook Ads Manager is seamless and screams for your attention and $. Leveraging the large network of users and advertisers within an already captive network is why ad dollars continue to shift to Facebook. Look for a similar setup once they "light up" WhatsApp and Facebook Messenger with ads. 

Retail Recap: Q4 Comp Sales

A handful of retailers have reported Q4 thus far and the overwhelming theme is almost all department stores and outlets had a difficult Q4. Declines in same store sales were reported by Dillards, Macy's and Saks while some of the outlets posted positive sales results year over year. 

Department Store / Outlet Q4 2015 Comp Sales

*Includes license businesses. Excluding license businesses, comp of -4.8%.

Sales are one part of the story. When looking at the gross margin for each sales report, it is evident that many of the retailers drove sales through aggressive price markdowns. 

Department Store / Outlet Q4 2015 Margin Comp (bps)

JC Penney and Marmaxx (TJX) are the only retailers reviewed that grew both sales and profitability on a gross margin basis. Everyone one of the calls outlined a rosier Q1 with Spring starting early. With continued pressure on spending and increased spending on big ticket items like autos and furniture, I can't see how Q1 won't lead to continued troubles for many of the aforementioned retailers. 

VR Adoption for the Masses

Samsung is hellbent on pushing the VR train:

Samsung seems intent on not letting the tech world forget about its mobile VR solution, though, announcing at Mobile World Congress Sunday that pre-orders for its new flagship Galaxy S7 and S7 Edge phones will include a free Gear VR headset.

Gaming is driving the fanatics, social will drive the next wave and mainstream will follow gaming/social. Content that intrigues the mainstream has yet to be created or even thought of. 

Discount & Outlet Trouble Ahead?

Recent Nordstrom earnings have led many in the industry to believe good times for outlet and off-price are coming to an end. In looking at the Nordstrom Rack sales, the comp was up 3.6% with .com and Hautelook driving all of the growth and making up for a decline of 3.0% in Nordstrom Rack brick & mortar stores. So is this the end of prosperity for discount and outlets? Cowen believes outlet weakness is isolated to Nordstrom Rack and is quite bullish on upcoming earnings from Ross and TJX:

Comps at Nordstrom Rack (ex-Rack.com & Hautelook) declined -3.0%, which represents a deceleration from 3Q’s -2.2% decline and the 2-year stack only marginally improved to +0.2% vs. 3Q’s run rate of -0.5%. Traffic & momentum took a negative turn in August & have yet to fully recovery for Rack. Despite the slowdown for Rack, both TJX (reporting 2/24, Outperform, $71.61) and ROST (reporting 3/1, Outperform, $54.82) did not see a similar business disruption in 3Q and we expect both likely outperformed again in 4Q given a different customer demographic than JWN’s “aspirational” customer. We continue to like the setup for ROST into 4Q and ’16 given exposure to a healthier lower-income consumer, overexposure to more normal winter weather trends on the West Coast, and positioning to benefit from maximum wage increases in California as 25% of stores located in the state.

While Q4 may meet expectations, one can't argue that in a country already over-retailed, the rate at which TJX, Ross, Nordstrom Rack and Saks Off Fifth are adding stores can't go on forever. Ironically, some of these retailers are "shifting share" from their own department stores. Next week's earnings from Ross and TJX will hopefully provide clarity as to how much longer this rate of expansion can continue.

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Sling's 600K Subscribers

Dish believes their 600K subscribers are predominantly cord-cutters or subscribers who have never paid for traditional cable bundles:

“Either they have never had pay-TV because they are 25 years old and it never crossed their mind to have pay-TV,” Mr. Lynch said. “Or, they cut the cord some time in the last one, two, three, four, five years.”

But how is Sling any different than the traditional cable bundles? Yes, Sling is streamed, but the service offering is still a bundle of channels. Let's also not forget that Sling is owned by Dish, a major "traditional satellite/cable operator."

Amazon Is Bigger Than You Think It Is

A recent post on Motley Fool highlighted that most analysts have yet to realize the actual amount of sales Amazon drives:

Remember, while Amazon dominates e-commerce, its sales pale in comparison to brick-and-mortar operations like Wal-Mart (NYSE:WMT) which logged more than four times the revenue that Amazon did last year. Even Costco Wholesale (NASDAQ:COST) tallied more annual revenue than Amazon, yet the e-commerce giant managed to outgrow all its competitors in the U.S. combined. For an industry with such low barriers to entry, that is not an easy feat.

Comparing Wal-Mart sales to Amazon sales is apples to oranges. Amazon has two typses of sales: 1) first-party - sales of products they purchase and inventory themselves; 2) third-party - products sold and/or fulfilled via Amazon properties. Amazon only reports the first-party sales and the commissions earned on third-party sales. The third-party commissions range from 10-15% of the actual sale price on-site. Therefore, Amazon is reporting a number well below the actual sales driven on their various platforms. 

If I was to estimate the actual sales number, it would be closer to $200-$250 billion annually. That would mean Wal-Mart is about two times the size of Amazon in sales. Anything above $116 billion (Costco) would make Amazon the 2nd largest retailer in the world. 

January Retail Sales

January sales met expectations with total sales up +0.2% to December and up 3.4% to January 2015. Additionally, the December retail sales were revised from down 0.2% to up +0.1%. This continues to lead me to believe sales are nowhere near as dire as the media would lead you to believe. Headlines would lead you to believe that the warmer winter, strong dollar and glut of stores is leading to the death of retail. In reality, retail sales remain positive with the recurring trends intact: online up, big ticket (auto, furniture) up and restaurants up. Don't listen to the headlines largely driven by department stores that continue to see weakness as wallet share shifts to discount and online. A few highlights from January:

• Sporting, non-store (online) remain strong year over year with 9.1% and 8.7% growth respectively
• Restaurants passed grocery months ago and haven't looked back
• The Electronics vacuum of sales to online continues with an accelerated decline of 4.2%
• Department Stores multi-decade decline continues with a drop of 3.8% year over year

December Retail Sales can be found here.

Amazon Books Store Review

Recently visited Amazon Books in Seattle. Took a quick video of store and point of sale that is shown below. Overall impressions: 

• Looks and feels like your typical bookstore
• Wood and outdoor theme is very different than that of Apple stores steel/glass modern feel
• All price discovery is completed via Amazon app, there are no price tags in the store
• Strong use of Amazon and Goodreads reviews throughout store to drive purchases
• Electronics own the most valuable piece of real estate in-store
• Believe the electronics showcase is a preview of what future stores will look like; small format stores with demos driving hardware sales to fuel content sales
• Surprised there was no use of beacons or tech to welcome me to store via app or provide recommendations on what to potentially purchase
• Surprised there was no use of mobile payments, you were forced to use cash register for checkout

Delivery Services Consolidation

A number of delivery startups are now facing pressure to show profitable growth and are struggling to do so. I still believe there is room for a few and profits (if any) are only possible in the highly dense markets. The providers who can piggyback existing shipments will survive and those playing in niches won't. For every DoorDash, there is a Seamless, for every Postmates there is an Uber, for every Instacart there is an Amazon. EBay Now realized this quickly and shutoff to stem losses. Others will realize this soon, consolidation is close.

How much to buy one of everything on Amazon?

Apparently just under $13 billion USD. Agree or disagree with methodology?

Phablets Are the New Black

Was catching up on last week's news and came across the Flurry blog post on 2015 app and mobile trends. Some are quite obvious like mobile growing at triple digit rates but was surprised to see the rate by which phablets are driving the usage:

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Flurry goes on to project that phablets will drive 59% of sessions/use by 2017 (see below). Quite a rosy picture for the iPhone 7 Plus and the Samsung Galaxy Note 5.

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January Earnings Snippets: Facebook, Amazon, eBay, Apple, Netflix, Alibaba, PayPal

Access October Earnings Snippets here.

Earnings season is underway with a few more next week. In no particular order, snippets on some of the top names:

Facebook: Stunning quarter in all respects. Strong user growth, strong growth in average revenue per user, greater leverage on expenses. The majority of legacy media is losing advertising dollars to Facebook and so are Google click ads. Facebook and its' properties of Instagram and Whatsapp have lots of runway.

Amazon: More of the same. 3rd party sales grew more than 2x first party sales, AWS cloud services and Prime memberships continue to skyrocket and fund the longer term business investments. North America is on fire but international growth needs to pickup. Look for the weakness to quickly correct as this one still looks unstoppable.

eBay: Now that PayPal has split from eBay, the only real growth is evident in Stubhub. Marketplaces still has a massive presence, but is growing much slower than the competition. I don't see this changing anytime soon. 

Apple: Realizing the hardware gravy train of iPhone can't last forever, Apple eventually got serious about selling services (iCloud, Music, etc.) to vast install base of iPhones, iPads and Macbooks. Items like Beats and Apple Watch will assist to offset the lack of growth at this scale but until a high priced item like a TV, Car or VR headset comes along, top line growth will be difficult to come by. But is that really a problem given where the stock is trading with all that cash and the most ambitious stock buyback in history? No.

Netflix: 130 country launch will be costly in short term. With that said, the underlying margins for the streaming business in the US is improving and the slate of content due to come online in 2016 coupled with the ability to raise prices...this one looks unstoppable even considering the perked up competition.

Alibaba: The dominant force of China remains dominant. Strong user growth, strong merchandise growth and improved monetization. Nothing to complain about here.

PayPal: Fantastic growth as Venmo and Braintree accelerate. Strong growth, improved number of transactions per active user account and improved operating leverage. Look for continued growth on the backs of their acquisitions.

Some of the slides providing context to comments above can be found below.

Snapchat Inflection Point

It can take many years for platforms to develop and reach a true inflection point. Snapchat finally seems poised to hit that inflection point with the masses. Whether it's the mainstream success of personalities like DJ Khaled, popular outlets like Wall Street Journal outlining a how-to for Snapchat or breaking into the top 5 overall within the Google Play store:

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Publishers are jumping on the bandwagon as an alternative to furthering their dependence on Facebook or waiting for Twitter's latest strategy. Advertisers have started to take notice with Snapchat being the #1 platform ad buyers are looking to buy on in 2016:

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With 45% of the 2015 user base being within the ages of 18-24, there is plenty of room for growth. Snapchat is coming in full force with content, cool factor and intrigue which bring a larger audience and ad dollars. 

Limited Wage Growth, Higher Housing = Difficult Retail Environment

While we continue to debate whether savings due to cheaper oil is making its' way to retail, limited wage growth and higher housing is having a much bigger impact on retail sales. A few charts outlining the current environment:

Paid Newspaper Sales Two Years Later

In two short years, no city or national paper hasn't seen a drop of <19%. Only the Wall Street Journal and NY Times are >500k daily:

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It's a Streaming and Facebook World

Latest report from Sandvine shows that 70% of North America traffic is now streaming audio and video which is up from 35% five years ago:

Netflix (37.1%), YouTube (17.9%), and Amazon Video (3.1%), the top three sources of video traffic on fixed access networks in North America, all saw an increase in traffic share over the levels observed earlier in the year

That is an increase of 3% for Netflix and 2% for Amazon in the past year alone. There were also some findings related to Instagram and WhatsApp, both part of the Facebook family:

On mobile networks in the Middle East, Instagram is responsible for over 10% of total traffic. Combining Instagram with traffic from WhatsApp and Facebook, reveals that Facebook controls almost 25% of mobile traffic in the region

WhatsApp, driven by the recent addition of voice calling, now accounts for more than 10% of downstream mobile traffic in Africa

Netflix: It's Raining Content

The year 2015 brought more content. Streaming services like Netflix and Amazon are growing their content the fastest on a much smaller base but basic cable isn't too far behind in their creation.

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The year 2016 doesn't look any different. Just take a look at Netflix:

In a recent note to investors, Nat Schindler, an analyst at Bank of America Merrill Lynch, counted all the new shows Netflix is offering this year. He tallied 31 TV series, 10 feature films, 30 children’s shows, 12 documentaries and 10 stand-up comedy specials.

“To put it into perspective, you would have to watch Netflix for 25 days straight to consume all of its new original content next year,” Mr. Schindler wrote.

As Netflix launches into 130 countries their cost leverage for content only improves and it seems as though cost increases in their top countries are justified:

Analysts also expect Netflix to begin raising its subscription fees, which are currently the most attractive in the media business. Customers streamed 12 billion hours of Netflix video during the last three months of 2015, the company says. That means customers paid around 14 cents per hour of Netflix, according to Rob Sanderson, an analyst at MKM Partners.

“Cable is between 25 and 30 cents an hour — so Netflix is basically half,” Mr. Sanderson said. “If you look at the dollars per hour of Netflix, there’s nothing even close.”

Stock price aside, one doesn't seem to need to worry about Netflix subscriber growth, additional content or potential to increase prices. Seems the only worry might be the world becoming awash in too much content. 

December Retail Sales

December retail sales were released last week showing a year over year increase of approximately 2.2%. A few takeaways from the report:

• December's sales makes 2015 the worst year for sales growth since 2009
• Big ticket purchases remain strong as autos closed out a record year in shipments and home furniture and building saw impressive year over year increases
• Non-store or internet retailers continued their assault at the expense of department stores and electronics stores
• Bars and restaurants continued to post strong increases and now contributes more sales than grocery stores

Despite the weakness, I don't believe it's nearly as dire as headlines make it out to be. We ended the year in positive territory despite headline sales being negatively impacted by higher housing costs and healthcare costs. With that said, one can't ignore the spend shifts. Departments stores, electronics and grocery continue to lose as spend shifts to non-store retailers and restaurants. Calculated Risk posted the following chart to depict 2015 relative to previous years:

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First Trailers, Then Planes, Now Ships.

Latest news on Amazon and their ventures within the transportation industry indicates the filing of paperwork to run ocean liners. Amazon's registration with the Federal Maritime Commission now allows Amazon to operate ocean liners from China into the US and other countries. Why is this news?

Two main reasons:

1. Amazon sellers of all sizes typically purchase or manufacture product overseas, ship the product to their own warehouses and then send off to Amazon for sale via Amazon Prime or Fulfill by Amazon. There are some sellers who will ship directly from their manufacturing facility but those cases are rare. With Amazon running ships from China, sellers could theoretically ship their product from overseas via Amazon and thus skip the step of their warehouse and have the product up and selling on the site much faster. 

2. Amazon has a massive hardware business with Fires and Echos. Amazon is also building a private label business named Amazon Basics that includes consumables, apparel and other sought after low cost items. A large majority of those items are likely made in China and could use a lower cost of shipping. 

Trailers and planes are for moving products from seller warehouses and between Amazon warehouses. Ocean liners are for moving product from factories/manufacturers to Amazon warehouses. The glut of shipping capacity and ocean liners is an opportunity Amazon is pouncing on as they build the most extensive and aspiration transportation network in the world.

Static Image, Rich Media or Video?

Of images, rich media and video, which is best for mobile marketing?

Schibsted removed some of this guesswork in 2015 by surveying more than 37,000 mobile visitors to its news outlet Aftonbladet about their responses to various types of ad campaigns they saw for products ranging from fast food to luxury cars. 

Aftonbladet mobile users saw over the course of a week from ten major advertisers, from Mercedes to Burger King, in three formats: a static image, interactive rich media, and video, for a total of 30 different possible campaigns, each eventually seen approximately 400,000 times. Users then received surveys based on the variety of ad campaigns they ultimately saw (the work here was carried out in partnership with Lund University in Sweden).

The study revealed that the most effective of these formats was the static image. Static banner ads had the greatest effect on a reader’s preference for a brand and intent to purchase the item advertised — and those are among the categories that matter most to advertisers who, at the end of the day, want to sell something.

Keep it simple.