F8 Conference Highlights Facebook’s Potential in Online Video Marketing

Submitted by George Ronan as part of our contributors program.

F8 Conference Highlights Facebook’s Potential in Online Video Marketing

On the 24th and the 25th March this year, Facebook (FB) founder and CEO Mark Zuckerberg took the stage at the 2015 F8 conference. The conference is an annual conference held by Facebook, targeted at developers and entrepreneurs that build products and services on top the infrastructure offered by the company. While the primary focus is the technology and technological developments at the company’s core, the conference can also offer insight into how the company intends to leverage its current user base going forward, and how it is likely to respond to its competitors in the space.

This year, one of the primary focus points of the conference was user activity, with a focus on how individuals share and interact with each other across each of Facebook’s platforms. Mark Zuckerberg outlined his expectations for the coming decade, highlighting that five years ago, the primary method of sharing was text-based, that currently it is image-based, that in five years it will be video-based, and that five years beyond that, augmented reality. The company’s recognition of the shift to video-based sharing looks to position it as set to benefit from a corresponding shift in the digital advertising landscape, a shift towards native — and in particular, video-based — advertising.

At the beginning of this month, eMarketer reported that US digital video ad spend will reach $7.77 billion this year, and rise to $40.38 billion by 2019. The image below illustrates this forecast.

Image 1: eMarketer.com US Digital Ad Spend

So far, Facebook has been relatively inactive in the online video space, but — as announced at the recent conference — this is set to change. Wall Street research firm Nomura reported last month that it expects Facebook to generate $3.8 billion in revenues from video advertising by 2017 — more than three times that expected this year.

At the conference, Facebook platform director Deborah Liu expanded on how the company expects to drive this revenue growth — one example being LiveRail. Facebook acquired LiveRail in July last year, and is now incorporating LiveRail capabilities into its mobile application in order to increase the efficacy of native advertising on the platform.

So how else is Facebook likely to monetize its video content? There are a number of ways the company can do this.

Currently, Facebook monetizes its video content through the sale of sponsored video display. For example, a company like Rosetta Stone pays Facebook to target its video content (more often than not a 30 seconds segment) to its users. At the conference, Facebook used the Rosetta Stone example, and revealed that Rosetta Stone had experienced a 40% increase in conversion from targeted video display when compared to traditional banner advertising.

In addition to this in-feed video display, Facebook can also take advantage of the method currently used by Google (GOOG) with YouTube — pre-roll ads. Google currently offers three types of pre-roll: a five second skippable segment for which the advertiser is only charged if a user does not skip, a five second skippable segment for which the advertiser is charged whether a user skips or not, and a 30 second, non-skippable advertisement. Whether Facebook will actually implement pre-roll ads into its platform is uncertain, with reports conflicting at present, but one thing is certain — if Facebook does implement this strategy, it will have a distinct advantage over YouTube. The advantage is twofold. First, Facebook requires users to login in order to access their feeds. This means that Facebook knows who is viewing a video, and is therefore able to target a pre-roll with a higher accuracy than Google. Second, since Facebook knows who is viewing the video, it can incorporate the huge amount of data Facebook holds about each of its users into the targeting. This, once again, amplifies the accuracy with which Facebook can serve its pre-roll ads, and increase the likelihood of a user both watching a full pre-roll and converting to a click.

So, how does all this fit in with Facebook’s current financial data and user metrics? The following is a snapshot of the company’s current situation taken from its fourth quarter 2014 and full year report released earlier this year. The Facebook mobile application has 745 million daily users, an increase of 34% year over year. The company’s messenger application has 526 million monthly users. Monthly mobile users increased 26% to reach 1.2 billion during 2014 (this is a key metric as it suggests that more than 90% of Facebook users access the platform via mobile at least some of the time). As a whole, the Facebook platform attracts 1.4 billion monthly users on the desktop, 890 million of which access the site daily. Mobile revenue accounted for 69% of the company’s ad sales — reported at 2.5 billion during Q4 2014, an increase from 66% of total ad sales during the previous quarter. Profits during 2015 reached $2.9 billion on annual revenues of $4 billion, with revenues up from $1 billion 24 months earlier.

There are, of course, a number of risks associated with investment in Facebook. The first is the possibility of a shift in social trends. While Facebook has to-date stayed relevant, partly through the acquisition of increasingly popular platforms such as Instagram and WhatsApp, social preferences and trends in the tech space move quickly. MySpace dominated the sector for a number of years in the early 2000’s, and while it never achieved Facebook’s global reach, shortly after its peak, other networks very quickly took its place. If Facebook fails to maintain its attraction, we may see other social networks overtake the company in the future.

Another risk is that Facebook is heavily reliant on advertising. The company generates the vast majority of its revenues through online advertising, and there have been a number of developments in the space over the last few years that might affect Facebook’s ability to achieve its target revenue growth going forward. One example is an increase in the aggregation of sponsored sharing through platforms such as IZEA-X, a system offered by native advertising agency IZEA (IZEA). The IZEA-X platform allows publishers and advertisers to orchestrate advertising campaigns across the full range of social media platforms, and — as illustrated by the company’s rapid growth over the last few years — is becoming increasingly attractive to advertisers. While it is still too early to predict the impact network aggregation services such as that offered by IZEA and its IZEA-X platform will have on the ability of social media platforms such as Facebook to maintain revenue growth, investors must take such developments into consideration.

To sum up, native advertising — in particular video display — is going to be one of the fastest growing areas of online advertising during the next five years. At its latest developer conference, Facebook highlighted a number of ways in which the company is positioning itself to take advantage from this growth, and this makes Facebook an attractive investment prospect for those looking to take a position in the online advertising space. As with all investments, however, there is risk associated with the stock. In this instance, through the potential for changes in social trends and the possible redirection of Facebook’s revenues towards potentially more convenient advertising campaign tools such as that offered by companies like IZEA.