Facebook's Video Strategy Is Worth $16 Billion

Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Facebook (NASDAQ: FB) has been a crowd pleaser lately. After seeing the stock advance significantly over the past couple months investors have turned their attention towards advertising within a user’s newsfeed.

Video advertising

Facebook has been hesitant to implement a video advertising strategy, but now details are starting to emerge. The company is planning to sell video commercial spots for $1 million to $2.5 million per day. The spots are set to last for about 15 seconds and will be sold on a full-day basis. The advertisement will appear once in every twenty status update.

Source: Ycharts

The company has been able to improve both its revenue and profit margin since the second half of 2012. The growth in the number of users, stronger monetization strategy in mobile, and falling costs (greater economies of scale) allowed the company to generate significant gains in profitability.

Value of video advertisements

The average user posts approximately 80 statuses in a single month, according to Facebook, and the average Facebook user had approximately 190 friends in May 2011. We’re using extremely rough numbers, but basically if we multiply the number of statuses per month that the average user makes with the total number of friends, we can find out the total number of statuses a Facebook user will have in their newsfeed within a single month. Therefore, the average Facebook user has 15,200 statuses in her newsfeed per month.

Now, if we divide that number by 20, that’s the number of video ads that will show up in a user’s newsfeed within a single month. 760 video ads will be displayed in a single month, which leads to 25 video ads within a single day.

I’m going to assume that the total number of video advertisers per day will be 25. This is the market saturation point for total videos permitted on a user’s newsfeed. The midpoint for each advertisement is $1.75 million. Assuming 25 ads per day at $1.75 million, and Facebook may generate $43.75 million in video advertisement revenue per day, or $15.96 billion in revenue per year.

Workable business model for Tumblr

Almost everyone questions Marissa Mayer’s acquisition of Tumblr and whether or not it will make any money for Yahoo! (NASDAQ: YHOO). The company reports that there are 128.2 million blogs currently on Tumblr. Assuming Tumblr will price ads at $1.75 million per day, and sells one tenth the number of ads that Facebook does, the company could rake in approximately $1.6 billion in revenue per year.

What’s really unique about Tumblr is that it can share that revenue with the bloggers. This way, blogging can lead to higher quality content and retention of a writer base.

Currently, Yahoo! generates approximately $4.8 billion in revenue on a trailing twelve month basis. A contribution of $1.6 billion in ad revenue from Tumblr could be the get out of jail card that Yahoo! has been needing. If it doesn’t monetize Tumblr the way Facebook is monetizing its newsfeed, the company can fall back on the revenue growth from its minority interest in Alibaba. Investors are anticipating an IPO of Alibaba soon. This will give Yahoo! shareholders further justification to buy the stock, as the value of Alibaba will increase significantly once it trades on a public exchange.

What about Google?

Google (NASDAQ: GOOG) is a bit of a mixed bag. For example, some of its web properties are extremely well suited to monetizing mobile. For instance, YouTube doesn’t suffer from the transition to mobile as I watch ads just fine on my Samsung Galaxy device.

Google+ may have some issues, though. Google's social network comes as an extension to a Gmail or YouTube account. The total number of active users on Google+ is 20% of total users, but how Google arrived at that statistic is pretty questionable at best.

However, it does highlight something interesting about the web--we’re starting to see grand central stations. You can use a Google log in for a certain ecosystem of web applications. Likewise, you can use Facebook as a proxy for a user account on many websites.

Even so, I see more Facebook users blogging away on their social status feeds than on Google+. Therefore, the transition to mobile could hurt Google more than it could hurt Facebook. This is because Google has an advertising network called AdSense that allows for the average advertiser to advertise across a network of websites that display ads on behalf of Google. Demand and prices for display-based advertisements are expected to fall. This is because banner advertisements don’t show up on mobile browsers. Because of this, a large component of Google’s display-driven advertising will be negatively impacted.

On the upside, YouTube, Search-based advertisements, and app store sales will continue to trend higher.

Conclusion

I think that search-based advertising will continue to thrive. However, the effectiveness of a click-through is limited, as a consumer will have difficulty making a purchase over a mobile browser.

Therefore, mobile advertising will center on short 15 second clips. Assuming that’s the case, YouTube, Facebook, and Tumblr may have effective solutions for marketers going forward. Banner ads won’t die, but they will be cheaper to buy going forward.

It's incredible to think just how much of our digital and technological lives are almost entirely shaped and molded by just a handful of companies. Find out "Who Will Win the War Between the 5 Biggest Tech Stocks?" in The Motley Fool's latest free report, which details the knock-down, drag-out battle being waged by the five kings of tech. Click here to keep reading.


Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google, and Yahoo!. The Motley Fool owns shares of Facebook and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure