News that Facebook (FB) plans to soon launch Suggested Videos to directly take on Google’s (GOOG)(GOOGL) massively popular YouTube has hardly been causing waves in investment circles, ostensibly because YouTube has never turned a profit, despite attracting more than 1 billion unique users each month.
Suggested Videos will use algorithms to recommend new videos for viewers that are closely related to the ones they have just watched. The new tool will borrow a few plays from YouTube, including YouTube’s 55:45 revenue-sharing plan that gives content creators a 55% cut of revenue generated.
Facebook recently began offering advertisers the option to only pay for videos that get watched for at least 10 seconds, and management is considering integrating this new feature into the Suggested Videos, essentially matching YouTube’s skippable ads.
No Profit for YouTube
YouTube has little trouble attracting viewers and earning real dollars from marketers. In 2014, YouTube brought in $4 billion for Google, or about 6% of the search giant’s overall revenue, representing 33.3% year-over-year growth, much more significant than Google’s corporate growth. But, after paying for content and various video tools, YouTube only managed to break even.
The biggest reason Google has trouble making profits with YouTube lies in the kind of audience it targets and the difficulty it faces targeting that audience with the right kind of ads. YouTube’s core audience is made up of young viewers. While some ad buyers covet these young viewers as they try to build brand affinities, many advertisers feel that this leaves out older audiences who have real money to spend on the stuff they advertise. For these types of advertisers, traditional media channels such as TV offer a better ROI.
The second problem that Google faces with YouTube ads is targeting the right kinds of people. YouTube mainly relies on tracking cookies that are deployed by non-Google websites on its DoubleClick feature to track user preferences.
Moreover, Google cannot share the data it collects across different devices, which means it cannot use data collected from mobile for use on desktop, and vice-versa (which is partly the reason Google’s mobile ad growth has not been as rapid as initially anticipated). Google is, of course, unable to track its user preferences directly due to past issues with government regulators.
The kind of video content available on YouTube is also nothing to write home about. YouTube forked out hundreds of millions of dollars to content creators in 2012 in a bid to create TV-like channels and improve the quality of its content.
The experiment, however, was a flop and YouTube went back to being a free-for-all platform where anybody can post their videos as long as the meet certain minimum thresholds. Many marketers, naturally, don’t care to place their ads on a platform filled with junk content.
With this kind of backdrop, it’s rather hard to convince marketers to part with more money to keep their ads running on the platform. Low CPM rates make it hard to generate meaningful profits.
Facebook’s Natural Advantages
Facebook, however, does not face the kind of limitations Google faces. Facebook caters to a much more varied demographic than YouTube. In fact, Facebook’s problem is how to retain younger folks, who have been exiting in droves to competing social sites such as Instagram.
Facebook also has little trouble targeting the right kind of audiences. FB freely uses the massive cache of social data at its disposal to target users with highly relevant ads. Facebook uses cookies that collect large volumes of data with minimal limitations, courtesy of its very nature. The ability to target audiences with the right kind of ads gives marketers a better ROI for their ad spend and makes FB a top destination for marketers.
Yet, despite its popularity with marketers, Facebook has been playing a careful balancing act to avoid cluttering the platform with too many ads. The company is using Facebook’s platform for high-quality ads with higher CPM rates, and using Instagram for low-quality, run-of-the-mill ads that fetch low CPM rates.
This is the main reason management could afford to jack up CPM rates for Facebook ads by a hefty 285% during the last quarter. In other words, Facebook has plenty of pricing power and can afford to charge higher CPM rates for its videos ads.
But, perhaps the most compelling piece of evidence that Suggested Videos might hit the ground running, lies in the immense popularity of Facebook’s autoplay videos. Autoplay videos garner more than 3 billion views every day, and many high-profile publishers use the platform to share their videos and engage with FB users. Some of these publishers are already working with the beta version of Suggested Videos.
Bottom Line
FB faces fewer limitations than Google when trying to monetize videos. The platform’s nature as a social networking site gives it plenty of leeway to use the data at its disposal for ad targeting, which offers marketers a better ROI. The revenue implications for Facebook could, perhaps, become meaningful in less than two years and give Facebook stock a big boost.
As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.
