Facebook (NASDAQ:FB) executive Nicola Mendelsohn recently referenced internal company statistics indicating a year over year decline of text content. This decline is accounted for not by a corresponding decline in Facebook use or members but by a trend that can be seen elsewhere online: a preference for video over text. Mendelsohn states that the future of Facebook is an all-video platform, including 360 video and virtual reality.
The timeframe? Roughly five years. That's right: Five years from now, Facebook will have transitioned to a video-based social media platform.
Facebook has already begun the beginning phases of this transition. Users' homepages are now populated with video content selected by Facebook algorithms. Every day, 100 million hours of video are viewed on Facebook.
Facebook's revenue comes primarily from advertising:
But this transition is not without hazards. The downside is that the world already has a social media company monopolizing video: YouTube. In other words, Facebook's future is to compete directly with Google (NASDAQ:GOOG) (NASDAQ:GOOGL), a formidable opponent.
For the transition to be effective, Facebook will need its video advertising revenue compensate for the lost text and image advertising revenue. And this need can only be met by stealing market share from Google.
Remember: Facebook's customer is the advertiser, not the social media user. For an advertiser with a video campaign to consider Facebook instead of YouTube, the default, the advertiser must have a strong reason for believing that Facebook video ads provide better ROI than those on YouTube. Other factors, such as ease of use or specific targeting also play an important role in the determination of an advertising platform.
Currently, YouTube's video advertising system is hard to beat because of two major benefits. The first major benefit of the YouTube advertising platform is that it really tips the odds in the favor of the advertiser. In many cases, ads run on YouTube are free, as the advertiser is only obliged to pay if a user watches more than 30 seconds of the ad or clicks on the add; skipped ads do not eat into the advertiser's budget.
In this way, companies engage in zero-cost brand-recognition campaigns, in which advertisements are created to maximize skips within the first 30 seconds. The brand, person, or company name is still displayed to the viewer, but at no cost to the company. This sort of campaign, combined with the second benefit of YouTube advertising - video targeting - can result in monstrous ROIs.
YouTube's video targeting is particularly remarkable. Via video targeting, an advertiser can place his videos before specific videos. This effectively allows advertisers to hijack the viewers or subscribers of a competitor's channel.
An Example of YouTube's Power
In my copywriting days, I remember running campaigns specifically designed to usurp viewers of videos on specific targets. Let's say known YouTuber "X" has a popular video on real estate investing. I can create a video ad to play before that video with the goal of grabbing viewers that should have gone to YouTuber X.
In such a campaign, my video would be relevant and give the viewer clear instructions: either come to me, in which case I pay for the view, or skip the ad, in which case I pay nothing but at least have shown the viewer my personality or brand. An example introduction in such a video ad follows:
"You're about to watch a somewhat outdated method of investing in real estate by YouTuber X. If you want to continue, just click 'skip this ad below.' However, if you're interested in learning a more modern method of investing in real estate, click this video, and I'll show you how it's done."
As you can imagine, this advertising methodology funnels only the best leads to my video, while allowing those who are insistent on watching YouTuber X to skip my ad, reducing my advertising expenditure. Currently, only YouTube's platform allows for such targeted, low-cost advertisements. This is what Facebook must compete with.
Facebook's Mutually Exclusive Strengths
Nevertheless, Facebook has already mastered effective social media advertising via text and image advertising and can likely use their keys to success in the video format, opening the door competition with YouTube. Marketers know that Facebook offers tactics that other social media platforms - including Google and YouTube - do not. Many turn to Facebook as the first testing grounds for a new campaign.
Specifically, Facebook holds the status of being the most targetable online advertising platform. The ability to home in on user demographics at minute levels allows for nearly perfect accuracy in testing specific advertising theories. Demographic targets such as "life events," below, allow advertisers to ask questions such as, "Will new mothers be receptive to this product?"
This tool can be easily extended to video advertisers, giving Facebook an advantage over YouTube. Most video advertisers would at the very least test both platforms if not use both. Then, the war becomes one of ROI (for the advertiser).
Facebook vs. YouTube
It's foreseeable that Facebook takes at least half of YouTube's market share in this industry. Again, this all depends on the ROI seen by advertisers using the platforms. The most likely result is that certain industries gravitate toward one platform over the other as a result of differences in the responsiveness of Facebook users versus YouTube users.
But for now, we can ignore the Facebook vs. YouTube endgame, as the transition from text/images to video itself is enough of a catalyst to form a bullish thesis on Facebook. A shift toward video content and advertising will increase engagement for Facebook, keeping its users on the site longer and interacting with content at a higher rate. The beginning phases of the switch are user-based; attracting advertisers will come later, and much of it organically.
As Facebook transitions to video content, they will naturally solve the slowing growth problem via improved content preference, lower bounce rates, longer usage time, and stronger memories associated with use:
In addition, ad agencies are discovering that online ads work better than TV ads:
These opinions are warranted, as the statistics support online digital media as the usurper of television:
Facebook will organically draw revenue that was in the past meant for large television networks. The transition to video is the right move here, even if it brings FB into GOOG's realm. But FB's unique tools will allow it to - at the very least - take a significant market share from GOOG as it grows in the video advertising realm.
I maintain my bullish thesis on FB, but wish to extend it for the next five years. FB investors should remember to account for volatility and seasonality. But other than that, FB is a strong long-term long position.
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