Facebook: LiveRail Acquisition Makes A Lot Of Sense

| About: Facebook (FB)


Acquisition of LiveRail will boost the company's future video advertising revenues.

Great strategic move to acquire a leading video ad network.

Facebook can generate sales from LiveRail and jump-start its own video ads business.

Facebook's (NASDAQ:FB) decision to acquire video advertising network, LiveRail has been a great move by the company. Having a company like LiveRail in-house is not only great for growing Facebook's future video ads business, but will also give the company an opportunity to generate revenues utilizing the very popular video ad network.

LiveRail in the bag
Facebook has reportedly paid roughly $500 million to buy LiveRail recently. LiveRail is the largest monetization platform for video publishers, and it already serves hundreds of active customers with more than 7 billion video ad impressions every month for numerous online companies.

And LiveRail as an advertising technology company has a very impressive client roster including the MLB, ABC etc. who use LiveRail's programmatic platform to better serve ads on their web platforms as well as on mobile-based apps. LiveRail enables video publishers to monetize their assets by connecting advertisers with premium video inventory which generally commands higher prices.

LiveRail was reportedly preparing for an IPO and had a revenue run-rate of $100 million in 2013, but the company ended up becoming a part of Facebook. So at a price tag of roughly 5 times annualized revenues, Facebook seems to have scored LiveRail at a great price.

For Facebook, the company has been experimenting with video ads for a while after it enabled users to upload their own videos on its social media platform. And now the company will be controlling the supply side of video ads through LiveRail.

And Facebook's engaged customer base of 1.28 billion monthly users are extensively uploading videos on its website and as a result, Facebook will be better able to portray ads to its customer base. Facebook has extensive amounts of customer data with which it delivers relevant display ads to its user-base on the news feed and on the right hand rail.

With LiveRail being a part of Facebook, the company can jump-start its video advertising business and position it for long-term success. And video ads also generate higher revenue per ad compared to banner ads, so the company is on track to generate more advertising revenues in the future.

Controlling the advertising technology
Facebook's acquisition of LiveRail not only gives the company a strong foothold in terms of video advertising in the future, but will also lead to a newer source of revenues for the company. Advertising networks like LiveRail, BrightRoll etc. serve as crucial middlemen working as an intermediary between large brand advertisers and the publishing website.

The ad networks are not only utilized by large marketers but also by smaller ones who find it challenging to tailor video ads according to the quality requirements of the host website. And as a result, LiveRail will bring in newer sources of revenue for Facebook. The social media giant has already been testing 15-second video ads from select companies since March, and now Facebook will be more equipped to roll-out video ads.

In 2013, the average online video ad commanded a price point that was 2x the price of a national TV commercial, and in some cases even higher for targeted online video. According to Media Dynamics, the average price per online video ad in 2013 was priced in the $20-$23 range on a cost per thousand viewers (CPMs) basis. Thus, Facebook's acquisition of LiveRail seems very opportunistic as the company seeks out more video ad dollars.

And Facebook is not the only company trying to control ad technologies being served to the end-user. Twitter (NYSE:TWTR) acquired mobile ad exchange, MoPub in 2013 for $350 million. And as a result, Twitter has become one of the largest in-app mobile ad exchange in the world. MoPub already has significant scale with consumer reach in more than 1 billion iOS and Android devices.

As a result, Twitter also has newer revenue streams and one that has control over ad placements too, just like Facebook. Leading social media companies making strategic bets for having more control on their future ad and non-ad revenues will lead to stellar revenue growth for the firms.

The takeaway
According to comScore, LiveRail was the 3rd largest online video ad network in the U.S. reaching 37.2% of the U.S. population in May 2014. Facebook will likely be more aggressive in its push to generate revenues from video ads. The company can sell fewer ads at higher prices via video ads and still see stellar revenue growth, like it did in the last quarter. In addition, LiveRail will provide Facebook with revenues from its own ad network business too. So the acquisition fits in very nicely for Facebook's bigger picture.

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.