Facebook: Make You A Celebrity Overnight

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Facebook is signing celebrities and media companies to draw audience to its streaming platform.

Near term a positive and could allow FB to remain competitive against AMZN and GOOG.

Long-term focus should be on user-generated content that have a longer shelf life but places FB in direct competition against GOOG.

Twitter (NYSE:TWTR) may think machine learning might help it to retain engagement and prevent further loss on active users, Facebook (NASDAQ:FB) sticks with the old-fashioned way of signing celebrities onto its platform to keep its video viewers engaged. Wall Street Journal reported that FB is paying media companies and celebrities to create views for its live-streaming services and has signed 140 contracts worth more than $50m. The investment is not material but I believe could grow in the near term as additional high profile celebrities sign up to the platform.

While this may help FB in terms of maintaining engagement, it is unsustainable in the long term given the scarcity of celebrities and the premium they command amid a high demand environment. YouTube's (NASDAQ:GOOG) (NASDAQ:GOOGL) approach of signing its own celebrities appears to be the right strategy in the long run and is something FB should eventually gravitate to.

Not only will FB generate propriety and original content, the engagement is more sustainable due to the abundance of amateur streaming celebrities. With increasing ad dollar flowing into video ads, online video and streaming services will be a key battleground for FB, GOOG, Amazon (NASDAQ:AMZN) and TWTR. I believe FB is better positioned due to its network effect and platform stickiness and I remain bullish on the stock.

FB contracted with various media partners including CNN, NY Times, Vox Media, Tastemade, Mashable and Huffington Post, and celebrities including Kevin Hart, Gordon Ramsay and Russell Wilson. With over 1.65b MAUs, FB is clearly betting on celebrities to keep its users engaged after Twitter acquired Periscope several years ago. Given that FB missed out on the Periscope opportunity, relying on its own celebrity platform may allow it to be competitive.

There is a large delta in terms of the value of the contracts but 17 out of 140 are valued at more than $1m each. The value of the contract will grow over time if FB wants to rely on celebrities to draw engagement and this will ultimately result in a bidding war amongst media platforms on the most sought-after celebrities, thereby driving up the cost. Such a scenario is less desirable and FB should focus on harnessing its own celebrities from its MAU base similar to how YouTube developed its celebrities.

The attraction of leveraging its own celebrities allows FB to reach a broader audience and drive engagement across the platform in multiple geographies. On the cost side, amateur celebrities are likely to cost lower than that of established celebrities due to lack of an established track record, in my view.

In short, FB's partnership with celebrities and media companies highlights how the battle for ad dollars are shifting from traditional channels to online video given its potential of taking additional share from the TV space. I believe that FB is best positioned for this trend and has multiple levers to work with relative to that of its rivals. The biggest risk to FB's video streaming platform would be lack of specialization. I note that YouTube dominates user-generated videos while Amazon dominates gaming, so FB needs to find a specialization to maximize its platform's appeal to the audience.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.