Facebook: LiveRail Acquisition Is A Small Part Of A Bigger Trend

Jul. 3.14 | About: Facebook (FB)

Summary

Facebook has recently announced the acquisition of LiveRail for reportedly between $400mn and $500Mn.

LiveRail is one of the biggest players in the online video space that offers its unique real time bidding platform ecosystem.

This is part of a bigger trend fueled by the growth in advertising spending on online videos, as pointed out by online video research analyst Paul Ritter.

On Wednesday, Facebook (NASDAQ:FB) announced that it has decided to acquire a seven-year-old video-ad company LiveRail in an effort to increase its foothold in the video ad business. Facebook did not disclose the terms of the deal but according to TechCrunch, the start-up came with a price tag of between $400 million and $500 million.

LiveRail calls itself the "leading monetization platform for publishers." The company helps its clients in selling their video ad inventory. Some of its leading customers include Univision, Major League Baseball (mlb.com), PBS, Condé Nast Digital, CBS Interactive and ABC Family.

Overall, the company has hundreds of customers and delivers more than 7 billion video ads per month. According to ComScore, in May 2014, LiveRail's video ads reached out to 37.2% of Americans, making LiveRail the third biggest player in the industry, ahead of AOL (NYSE:AOL) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and behind BrightRoll and Specific Media.

LiveRail's biggest strength is its real time bidding platform ecosystem through, which it selects the best-priced ads for marketers from the video ad inventory of its publishers. The company also offers video inventory management service and a CheckPoint service that allows its clients to block inappropriate ads.

Click to enlarge

Image source: LiveRail.com

LiveRail is a fast growing company in the video ad technology space. About two years ago, the company disclosed that its year-over-year growth rate was 300% and that it was targeting annual revenues of around $100 million.

LiveRail is reportedly on track to achieve $200 million in gross revenues and $30 million in earnings before interest, taxes, depreciation and amortization in the current year.

LiveRail will enhance Facebook's video ad offering. Facebook has already launched the 15-second video ads. Through LiveRail, Facebook can make these ads more effective by using the valuable user data. Instead of other websites that display boring video ads, Facebook can start showing trailers of movies on genres that users actually enjoy, using their history of likes.

Facebook's purchase has come on the back of the growing online video ads market. In an email received a few days ago, online video analyst Paul Ritter, the chief research officer at Interactive Media Strategies, predicted that we are going to see more than 50% growth in ad spending on online and mobile video advertising from last year.

Currently, the online video industry is too small to pose any major threat to television's dominance. Analysts have said that the size of the U.S. online video advertising industry could grow to $8.1 billion by 2018. Television, on the other hand, attracted more than eight times as much advertising dollars last year.

That being said, Ritter thinks that the online video ad market will remain "a high-growth sector" for "many years to come" and will easily outpace its larger television rival.

As a result, we are seeing increasing mergers and acquisition activity in the online video space. Last year, AOL acquired Adap.tv for $405 million, which also offered programmatic video ad services. Then earlier in June 2014, Google launched its programmatic video ad exchange called Google Partner Select, which allowed publishers to sell their inventory. A few days later, Google announced the acquisition of online video ad tech startup mDialog as it looked to strengthen its display ad-focused DoubleClick.

Bottom Line

Facebook's acquisition of a key player in the online video ad market will strengthen its foothold in this booming marketplace. The social media giant has largely focused on utilizing its properties to make more money from ads but following this new acquisition, Facebook can also start offering its services to other media companies. By doing this, it would be following in the footsteps of Google, which has been offering its services to other businesses for years.

Meanwhile, with the growth of the online video industry, Ritter thinks that companies such as YuMe (NYSE:YUME), Tremor Video (NYSE:TRMR) and FreeWheel will continue to play a crucial role.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.