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Facebook Channel Checks: Investing like a hedge fund

What is a channel check you ask? It’s what an analyst does to find out if a given product is selling well or poorly. It could be checking in with Apple stores to see sell through of iPhones or it could be talking with resellers of Cisco routers. Channel checks are a piece of the puzzle that analyst use to fill out there models when they are investing, and an important one at that.

It may not be as easy as giving Apple or Cisco a call, you have to get somewhat creative. You have to call third party resellers, and even move up the supply chain and call component manufacturers. Well, it turns out that you can also do channel checks with Facebook.

First, you need to think about Facebook not as a social network but as an advertising company, one with a rich data set about every one of its users. Everything you add to your profile helps Facebook decide what might be good to show you in an ad. Our next question is, who is buying all these ads? From the laypersons perspective its big brands like Gap or Best Buy, game companies like Zynga or King trying to get you to download Candy Crush, or even Paramount Pictures showing you that they have a new movie coming out. It would be difficult to make channel checks just by calling every company that advertises on Facebook and asking them about their spending, but Facebook makes it a bit easier. Most advertisers don’t actually go directly to Facebook, they go through a Facebook partner, either a Preferred Marketing Developer (PMD) or FBX partner (http://www.facebook-pmdcenter.com/), which Facebook nicely lists on its webpage.

We have now gotten down the supply chain and know who to speak with in order to get an idea of where Facebook spend is trending. These calls could be extremely valuable as Facebook makes roughly 90% of its revenue from advertising. While analysts may be able to take calls directly with executives at these companies to get the data points they are looking for (CPCs, CPMs, total ad spend, etc…), the normal person cannot. Luckily for us many of these companies blog about what they are seeing, and putting this all together can add to our model. Below are some examples to get you started.

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