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IR Fireside Chat: Advertising
Who: Rob Wilk, CVP, Microsoft Advertising
Tomer Cohen, SVP, Chief Product Officer, LinkedIn
Brett Iversen, VP, Investor Relations
Event: IR Fireside Chat: Advertising
Date: December 19, 2022
Brett Iversen: Welcome everyone. I'm Brett Iversen, Vice President of Investor Relations. This is the seventh in our series of quarterly videos focusing on strategic areas that are top of mind for our investors. Today's discussion will focus on digital advertising, including LinkedIn Marketing Solutions and Microsoft Search Ads and News Business. We brought together two of our key leaders to answer your most frequently asked questions. We have Rob Wilk, CVP of the Search Ads and News Business, and Tomer Cohen, SVP and Chief Product Officer for LinkedIn. As always, we welcome any feedback on specific topics, the format or other suggestions you might have after you view the video. Please reach out to our investor relations team directly with any feedback. With that, let's kick things off. Thank you both for being here. Maybe to help frame it, maybe we can start by talking about the digital advertising landscape and how it's evolved over time and how Microsoft fits into that. And Rob, maybe you can start us off.
Rob Wilk: Yeah, thanks a lot Brett. Appreciate it. I've been in this business a very long time and what's interesting about the digital landscape is just the constant change and evolution that you see in the business, for a business that's really truthfully only about 25 to 30 years old. And with those changes always comes new ideas, new innovations, new surface areas for digital advertising. But maybe just for the most relevant part, I think for all the folks here is what's happening recently, let's call it the last few years. And what we've seen is the continued shift of advertising dollars going more and more digital, that continues to grow. Especially when we've been through the scenario that we've been through over the last few years with a global pandemic and some uncertain economic times. You have that kind of trend that's happening. Then on the other side of that, you have increased scrutiny and increased regulation, more and more calls for consumer privacy.
Advertisers have to manage all of that and we are a huge part of helping to shepherd them along the way. If you think about it from all the regulatory areas like GDPR and CPRA, changes around how cookies are used, all of those things quite honestly I think will help the digital industry change for the better. But it does start to make people think about how they're going to have to reorganize, reshift, rethink their strategy. How do you react to changes like what Apple came out with, their ATT, which asks consumers to say, "Hey, do you want us to track you from app to app?" Because of that you've got consumer behaviors that's also changing, where they buy, how they buy, what are their sources of information in order to make those purchasing decisions? And one of the things that we like to say is that a lot of consumers have gone from going shopping to almost always shopping.
Surfing retail apps and websites is almost like a form of content consumption now. Then you've got the rise of connected TV including what they call AVOD or advertising video on demand, SVOD, which is subscription video on demand. Those are booming right now and the opportunities for advertisers will only grow over the next few years. And last thing I would say is one of the huge trends that we've seen recently is this idea of what we call retail media or basically retailers using their inventory to sell advertising. It's most commonly known right now, if you go to a company like Amazon and you search for a product, you'll see that that product is actually sponsored. Advertisers are sort of battling for what we would call the digital shelf space all over the internet. For us, we look at all of those trends and we think about how our investments need to go and capture some of those trends and some of the other areas that we're investing in, we'll talk about later on. But we're trying to look at those trends and make sure that we're way ahead of them.
Brett Iversen: Yeah. The always shopping reference definitely resonates in my household. Tomer, what can you add to that for us?
Tomer Cohen: Yeah, so taking a step back, we're really at an inflection point right now. As Rob mentioned, digital advertising has gone through substantial changes over the last few years and this has been especially true in B2B advertising, which traditionally has been slower to adapt to the market, but that's no longer the case. The role of marketing identity, greater focus on privacy, rise of AI technologies that are getting stronger and stronger. That really allows for personalized experience, that’s accelerated the need for B2B advertisers to think a lot more digitally for them to stay competitive. Now this goes well beyond ad spend. When we talk about B2B marketers using both organic and paid offerings, they build relationships with buyers in a sustainable personalized way over time.
They're adapting their strategies to focus on the needs of the B2B buyer who basically has a very different buying journey than your classic B2C buyer. When you take a look at Microsoft with its massive professional network on LinkedIn, it's well positioned to capitalize on those changes. We provide marketers with the ability to reach over 875 million professionals on LinkedIn and then they can actually start building strong communities of customers and prospects for those tools. They're able to reach, engage them in the right professional context, which is critical for B2B in a safe and trusted platform.
Brett Iversen: Thank you both. With this evolution of the digital advertising industry, how do you think about the total market opportunity? Our investor crowd's always curious about that, and Microsoft's role in the future of digital advertising. Rob, maybe you could help us with this one.
Rob Wilk: Let me start with the big picture here. Earlier this year we reported that advertising across Microsoft reached a $10 billion milestone, excluding traffic acquisition costs or what's more commonly referred to as rev ex-TAC. Outside of China, which has a little more opaque reporting, we have the world's fourth largest advertising business based on gross revenue. That's bigger than Snapchat and Pinterest combined. In fiscal 2022, LinkedIn Marketing Solutions surpassed five billion in gross advertising revenue for the first time. Beyond being a talent business, LinkedIn is also a top three player in B2B advertising, as measured by revenue. Our breadth of advertising solutions are growing, allowing us to help marketers equally well during times of economic growth, but also in times of slowdown. With investments in search, retail media, and marketplaces that power the open web through Xandr, and our partnership with Netflix, we are positioned to continue succeeding in capturing a growing share of that 600 billion plus digital advertising industry.
Brett Iversen: I like how you size the total TAM as well as our size because I think when we first put that out it's a good reminder to the audience because people were maybe a little surprised and definitely excited when they heard the size of advertising collectively across the company. Thanks for that. We've talked a little about the growth we're seeing in advertising. We've seen that specifically in both LMS and search. Could you help our audience understand what's been fueling that? Maybe I'd love to hear from both you on this, and Tomer, you can kick us off if you would.
Tomer Cohen: When it comes to LinkedIn Marketing Solutions, there are really three main factors driving that growth. First the B2B space is on fire. If you look at the 10 most successful tech IPOs in the past year, all but one was a pure B2B play. And there's so much growth in this market segment and companies are increasingly looking for creative ways to actually reach and engage their buyers. Now we're supporting that growth by offering new ad formats like conversational ads, but also other innovative solutions to help them get creative about the way they engage with buyers. Second, our focus on the B2B buying journey is also fueling a lot of growth. The B2B buying journey involves multiple stakeholders, sometimes up to 10 and what we call the B2B buying group. It takes multiple touchpoints over a longer period of time when you compare to B2C. B2C can take a day, can take half an hour to make a transaction, and B2B could be from months to quarters to even over a year.
In our unique professional data set, actually it allows us to help B2B marketers better understand buying behaviors, better understand how to target the right professionals and ultimately drive more effective campaigns. The last part is we know a lot, we hear this from marketers all the time, they need ways to show progress, how they actually measure ROI, especially in today's environment. In fact, 90% of marketing leaders, they say that making sure their CFOs understand the value and the ROI of their campaigns is key for them to secure future marketing spend. That's why we're investing in technologies like Clean Room that allows them to provide an easy-to-use secure environment for data analysis. We're launching a new tool called Revenue Attribution Report that basically ties campaign effectiveness all the way to company's revenue and growth.
Brett Iversen: As a finance guy, that marketing ROI I can definitely tell you is super important to be able to show them. I'm glad you mentioned that. Rob, what would you add on here?
Rob Wilk: There's a number of things. We've been making investments that have uniquely positioned us to be one of the few key monetization engines for the web. First, we're building on a strong and growing foundation to deliver very differentiated online experiences serving consumers wherever they are and however they spend their time regardless of the platform, the device or the experience. And Windows is key to how all of this comes together, orienting offerings around people in service of their everyday tasks. As Windows usage continues to grow, we start to see this flywheel between content consumption and commerce strengthening and enabling us to generate new opportunities for advertisers and drive growth for Microsoft. I tend to think about it like this. The more people we have using Windows, the more people we'll have using Edge, which is our browser, and the more people that use Edge tend to keep Bing as their default search engine and Microsoft Start as their personalized content feed.
The more people we have in the Microsoft ecosystem, that just gives us more opportunities for us to monetize engagement. Next we have the international expansion of our products and services. We're significantly expanding our coverage this year by over a hundred markets in this year alone for a total of 131 markets. That is 4x where we were just a year ago and that unlocks new supply and delivers better service for our clients. We also launched in Japan, which is one of the largest advertising markets in the world and actually Japan is number three in terms of e-commerce spend. There's a lot of opportunity for us to grow there. Then there's acquisitions like Xandr, combining Microsoft's technology and audience intelligence, which is how we describe how we apply machine learning to combine search and web activity with LinkedIn and demographic profiles all while following strict privacy standards.
If we do all this, combining this with Xandr's data-driven platform for advertising on the open web, we can deliver better results for advertisers as well as strength and monetization for publishers. And we're building new supply partnerships. We became the exclusive sales and technology provider for Netflix, helping them to launch their basic with add subscription offer by putting the power of Microsoft and Xandr together, something that really caught the interest of the industry and is creating this incredible halo effect for our business.
Brett Iversen: Yeah. My team, we definitely got a few calls when the Netflix deal was announced, so that was exciting. Even just the broader expansion, I think people get the ecosystem, but just the rate at which we're expanding technology markets, et cetera, I think may be a surprise to some people. I'm glad you're able to take us through it. It might also be helpful to our investors and analysts for each of you to break down the business model. Maybe we start with search, how should our investor audience and shareholders broadly think about the business model? Rob, let’s start with you and then Tomer can do the same.
Rob Wilk: Yeah, so Microsoft's growth and revenue strategies basically think of it as it's organized into 10 what we call customer solution areas that really define how the company does its marketing and its selling. These customer solution areas are defined in the context of a technology reality, a world made up of a few public clouds and billions of devices connecting to those clouds to create an intelligent edge. One of those is search ads and news. And together with LinkedIn Marketing Solutions, that's how we're going to go after that $600 billion advertising opportunity. To make money, we generally power ad marketplaces underpinned by advertising technology and audience intelligence that bring together demand and supply in a live auction.
These marketplaces help businesses monetize the audiences coming to their website or app and marketers connect with those audiences at massive scale. One example would be we have a marketplace to help marketers connect with audience across Microsoft's owned properties, but also across key partner sites. We also run marketplaces that help anyone on the open web buy and sell ad inventory supporting publishers and marketers alike. Then lastly, we empower retail partners to build and run their own custom ad marketplaces, creating new streams of revenue that is very high margin, while those retailers can retain ownership of their own data.
Brett Iversen: Helpful, maybe Tomer we can do the same on your end?
Tomer Cohen: Yeah. When it comes to LinkedIn Marketing Solutions, we connect our 875 million professionals with brands who want to reach them and we aim to create value on both sides. We aim to help our professionals discover new products, new services, and even new career opportunities. And at the same time, we're helping our customers find and engage the right audiences that best fit their objectives. Now this could be everything from prospecting new customers and attracting new talent to the company. All done through our LinkedIn Marketing Solutions tools. Now this could happen either on the LinkedIn app, for example, if you scroll through the feed, you'll see sponsored updates in the feed itself, or it can happen across our B2B audience networks, across the whole internet.
Our marketing solution business is driven by our ability to match our members to the right content. And in B2B it's extremely powerful in real time and ultimately deliver value to customers and we can actually measure the ROI of that impact. And as we continue to innovate in B2B marketing, we're really focused on writing a new playbook for marketers, creating great customer experiences at scale, but also expanding our partner ecosystem while always prioritizing data security and fostering trust between our members to our customers.
Brett Iversen: Got it. Thank you both. Maybe to check in where we're at, so we have two large businesses at scale within Microsoft. How do you and how do we think about integration opportunities between LMS and search? Maybe Tomer, you could help us with this one.
Tomer Cohen: Yeah, and this is an area we are excited about and we're actively investing in. The platforms and businesses complement each other really well in several ways. They operate across different surfaces from desktop to mobile, from feed consumption to search intent, and they operate across multiple customer verticals from B2C to B2B. And we're focused on integrating several key capabilities across demand of ads, supply of ads and intent signals when it comes to being very powerful with ad matching. For example, some of the solutions we're already working on, they include identity matching across Microsoft properties. It's about how we're enhancing the LinkedIn B2B audience network and we are helping our advertisers benefit for that expended scale. Today already Microsoft advertising clients can have the ability to target based on LinkedIn demographics and we're also helping LinkedIn advertisers drive better efficacy through Bing search data.
So many changes in the consumer privacy landscape as Rob walked through before, our teams are working together very closely to further improve identity matching using privacy first approaches to provide much better value for customers with enhanced signal sharing across all Microsoft properties. Overall, we're planning to continue to invest in these integrations, explore how we can expand the audience network into new formats like adding instream and connected TV, ultimately make it more available for the Xandr acquisition, also for the Netflix partnership as well.
Brett Iversen: Helpful context. Thank you so much. What unique assets or capabilities do we have at Microsoft that drives a strategic advantage in this space? And again, I'd love to hear from both you and Rob, maybe you kick us off on this one.
Rob Wilk: This is one of my favorite questions to answer because-
Brett Iversen: Nice.
Rob Wilk: ... if you think about it, there are very few companies that can match what we offer. Tomer touched on it, we have the benefits of a very large scaled search engine, but remember that we are not a purely ad supported company. And that means that while we are very focused on growing our business, Microsoft's diversified portfolio offsets some of that risk, allowing us to make smarter decisions where we don't always have to feel like we have to rush and be the first in market because we want to make sure that if we're going to make changes that impact our clients, that we do it thoughtfully and we do it with the long-term in mind versus always fighting for short-term gain. And I think that approach has helped us build a very steadily growing, viable and durable business that for the last three quarters has actually outperformed the market leader. And that buys us a lot of credibility with our clients and all of our partners alike. And I think that whole story end-to-end is what makes us really unique.
Brett Iversen: Thanks Rob. I'm glad you highlighted the outperformance. Our audience is always asking us about that, so it's a good reminder. Tomer, maybe you could add on this topic as well.
Tomer Cohen: Yeah, so as I mentioned before, one of our core differentiators is how well we understand and know the complex B2B buying journey and how we help marketers simplify it in their campaigns. Unlike in B2C where marketers are trying to reach one buyer usually with an immediate need, when it comes to B2B marketers, we have to build a relationship with multiple decision makers. It could be from six to 10 and even more people, it's across various stages of their buying journey over what could be a long, very long period of time from months to quarters and over a year to drive strong results. And we help B2B marketers understand how, when, and where to reach their audiences. For example, we're rolling out Group Identity for B2B, basically a solution that harnesses LinkedIn's first party data so we can group members based on their shared interest like seniority and industry. Finally, it's about how we help marketers show impact. And our tools like our revenue attribution report really brings together marketing efforts and results together with CRM data to help demonstrate the impact those campaigns are having on the company's growth and success.
Brett Iversen: Privacy, it's a topic we hear about and it's a top concern I think when it comes to digital advertising. It's become much more challenging to reach our audience through digital advertising. How are we handling these shifts and what's Microsoft's overall approach to privacy? Love to hear from both of you. Tomer, maybe you could kick us off on this one.
Tomer Cohen: Yeah. When it comes to LinkedIn and across all of Microsoft, we're acutely aware of the importance of privacy and especially when it comes to digital advertising. Rob mentioned the changes in cookies and IP data and that presents challenges across the entire landscape, but it gives us the opportunity to rethink and actually start innovating our approach to reaching buyers. One of those key ways we're doing it is through what we call the Group Identity solution. It's specifically designed to preserve privacy while still addressing the needs of B2B marketing. And when it comes to the power of data, we hear that close to 90% of B2B marketing leaders across the globe share that first party data is the key one when it comes to the marketing strategy. It's a key differentiator for us and we're committed to help customers use that data effectively and responsibly. When it comes to evolving advertising capabilities such as lead gen forms and matched audience capabilities, those are designed to help customers better reach their target audience and expand the reach of their campaigns while maintaining member privacy throughout those journeys itself.
Brett Iversen: Got it. Rob?
Rob Wilk: This is another really important question and let me frame it for everyone here, which is, I mentioned that our ads business is a $10 billion per year business, but that's actually only a single digit percent of Microsoft's total revenue. Why do I tell you that? Because we don't have the luxury of paying lip service to privacy. Privacy is woven throughout everything we do at the company throughout all of our business units, whether it's Azure, Office, Windows, et cetera. That part is critical for everyone to understand. As Tomer mentioned, we certainly believe that first party data strategies and trusted direct consumer relationships will be key for brands and publishers and we're continuing to support first party data capabilities alongside scale industry ID solutions that don't rely on any type of identifier at all.
With Xandr as an example, we offer a comprehensive suite of identity and advanced data solutions. For much of our Microsoft advertising business, this has allowed us to continue to deliver incredible performance for our clients. We have a lot of audience targeting options for advertisers that quite honestly won't be affected by some of the changes as we move into more of an IDFA and cookie-less world because they're first party ID based solutions. Overall we actually think we're incredibly well positioned to not only help advertisers reach their target audiences, but do it even when signal becomes more opaque because we have such a vast first party data asset and industry leading AI capabilities.
Brett Iversen: Yeah, that's super helpful and I think the bigger thing I always think about is trust is so foundational to everything we do here and privacy is just another great example of it. We spoke a little bit about the journey at the beginning, but one of my favorite questions to ask again as we get towards the end, but talk about what's next, what are the strategic areas we're invested in, what would each of you highlight? And Rob, maybe we can start with you.
Rob Wilk: Yeah, I think I would start with we're going to continue to accelerate our investments in our retail media business. I always love to say PromoteIQ, which is the company that we acquired, that's the biggest name in retail media that many of you have never heard of because what PIQ does is they power retail media programs for some of the largest names in retail globally. Home Depot, The Otto Group, which is a huge retailer in Germany, Kroger, Sephora, and many more. Microsoft Advertising is the only business that's building an end-to-end solution in retail via the PromoteIQ retail media platform. PromoteIQ will help retailers connect all of those brands with first-party audiences, whether they're on that retailer site or across the open web. That's a big part of our strategy moving forward. Number two, I would say doubling down on what we're doing in the SMB space or the small and medium sized business.
We have a bunch of differentiated products and solutions that are going to help them grow their business on our network, but also beyond. Just this past September we launched a new product targeted at these small and medium businesses called Smart Campaigns with multi-platform. Simply put, this allows small and medium sized businesses who we know don't have a lot of time. They can manage their campaigns with us with very little work, but it also allows them to syndicate those campaigns to other channels like Google, Facebook, Instagram and all. We basically have AI that does all the work for the advertiser so that they can focus on where they want to be focused, which is to run their business.
Last thing I would say is we're going to continue to invest and strengthen our offerings in video and connected TV. As I mentioned earlier, Netflix chose Microsoft as its exclusive advertising technology and sales partner to support their new tier, basic with ads. But Xandr also has a robust supply side platform and demand side platform and we've recently announced a bunch of new video products and capabilities that we know advertisers want. Combined we think we can create a very compelling video offer, one that we know the market wants and needs. And all of these investments over the last few years really have uniquely positioned us to be one of the few monetization engines of significant new experiences, even in areas like the Metaverse, which we know is early innings, and certainly in the gaming sector as well.
Brett Iversen: Love it. And within your list, I'm really glad you mentioned AI, that's a general space across the company. I know Satya is super excited about, he's been talking a lot about lately and I'm glad that it to hear more about its role here. Tomer, same question to you?
Tomer Cohen: Yeah, I mentioned before we have over 875 million professionals on the platform and that's growing really fast and all of those are prospective buyers. What I haven't mentioned is we have over 61 million companies using LinkedIn pages today to organically build their brand. They continue to use the platform, they're cultivating community, they're building meaningful discussions and they're promoting their products and services as well as openings in their company from a talent perspective. It basically builds a sustainable personalized way for them to build their audiences on LinkedIn. And our goal is to bolster that performance both organically and through advertising itself. There's three strategic areas we're investing in, creativity, identity and measurement. They're specifically powerful when it comes to B2B. On the creativity side, we're investing in new ad formats that really help them connect with buyers in innovative ways. You can think about how you can see an ad in your feed but then directly go into a conversation and a message back and forth between the buyer and the seller or the marketer.
In the case of identity, as I mentioned before, we are working to make it easier for B2B marketers to reach their target audience using professional data across multiple buying groups so they can identify key behaviors and interests. And lastly with measurement, which is so key in B2B, we're working to help marketers measure performance more accurately and actually making sure they're empowered to share those results back to stakeholders. This is technologies like Clean Room technology that better basically connects their CRM data with their own first company data, with their own LinkedIn data as well as revenue attribution report that integrates with major measures CRMs, including Microsoft Dynamics as well.
Brett Iversen: Love it. Thank you. Well, so as we close out, and I'm sure some of these things each of you have probably mentioned along the way, but any final thoughts or takeaways that you'd want our investor community to really walk away from this with? And Rob, maybe you could start.
Rob Wilk: Yeah, I mean, look, we love the advertising business for many reasons, but one of them is that it continues to grow pretty rapidly. And hopefully you've all heard this from listening to earnings reports, Satya has been very open and very kind of forward-leaning that Microsoft is going to continue to invest and go all in on advertising. And that's music to my ears certainly, but hopefully it's music to yours. And just the idea that, look, we're going to continue to double down on all of the things that you've seen us do this year. New partnerships, new products, new investments, new markets. We're going to continue to be aggressive in this market because we think there's a huge amount of growth opportunity for Microsoft.
Brett Iversen: Tomer?
Tomer Cohen: Yeah, just to build on Rob's point, I think we're in a unique and exciting position in the digital advertising space right now. From B2C marketing to B2B marketing, it's evolving rapidly. We are leading the way when it comes to helping our customers navigate this transformation and we're excited to be leading this journey for them and being a partner for our customers to help them engage with buyers in a creative way that can build authentic, sustainable relationships, ultimately showcasing measurable ROI back to their company and driving growth.
Brett Iversen: I'm excited. I know our folks are going to be excited too. They're hearing massive TAM, strong growth, exciting innovation, all over a foundation of trust. I appreciate and thank you both for taking the time today to offer your insights and spend a little time with us. I do appreciate it. And we thank everyone for watching. As you can tell we're excited about the digital advertising space and the opportunities that lie ahead and we're glad we had some time to talk with you about it today. Thank you, and until the next one.
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