After taking in the latest earnings report from Facebook (NASDAQ:FB), it was made clear that the company was going to go through a period of decline in ad revenue growth rate. At the same time, it mentioned its major focus going forward would be video, with its ad strategy targeting ways to grow and improve that part of the business.
What appears to have happened is Facebook is running out of feed space to run ads without making the user experience a frustrating and negative one. Although it has other revenue streams in the works, like Messenger ads and direct sales, video is definitely the growth engine of the future, and should be what investors follow the closest.
Similar to YouTube, Facebook is going to encourage short-form video content in the near term, and will look at long-form video later.
Contrary to what I've heard some people suggest, I don't think at this time Facebook will attempt to become a television network in the near future. It wouldn't surprise me to see that happen later on, but it must get users to become more accustomed to video and engage with it before it moves in that direction.
Also important, it has to deal with a lot of low-quality content during the early part of this video growth period. To encourage a larger amount of quality video content, it is going to participate in sharing revenue with producers in order to help them pay for the costs of production, along with generating more revenue and earnings.
Having a number of contacts in the online marketing space, I interacted with them to get their outlook in using Facebook video. We'll look at the feedback they gave me later in the article.
One thing video does probably better than any other type of content is to increase user engagement. In its latest earnings report, Facebook management confirmed video was how it plans on increasing engagement on the social network.
Today, for the most part, people pull Facebook out when they have a few minutes, when they want to catch up and see what's going on in the world with their friends and in the news and everything that's going on. That's very different from saying, hey, I want to watch video content now. And that's what I think we're going to unlock with this tab."
Tab at the end of the paragraph above refers to the video tab now available for use by Facebook members.
How I see this is Facebook has been trying to increase the time users are on the site per session, and video is the obvious way it's going to do so. That also provides a way to include ads within the videos themselves without having more of them displayed visibly in the feed.
I believe that's the reason Facebook looks at ad revenue stagnating or declining in the near term. It doesn't want to interfere too much with the user experience by filling up their feeds with too many visible ads, so they'll encourage the increase of quality and compelling video to provide another source of ad revenue without making user experience negative and tedious.
Again, my view is Facebook is going to woo users to gradually increase the time they spend on the network by gradually rolling out and increasing the length of video displayed in the feed.
It's going to seed that some on its own it said, to generate some momentum, but it wants it to take on a life of its own.
The content challenge
One thing about video content that is interesting in my research, specifically referring to YouTube content, is you can have a lot of content that may not have the highest production values, but is good enough to generate millions of hits if it's decent and addresses a specific topic of interest to a lot of people.
It would surprise me if Facebook didn't reward that type of content if people wanted to view and interact with it.
In its earnings report, Mark Zuckerberg stated:
Because a lot of the best episodic content is professionally created, and those folks need to make a good amount of money in order to support their business model. So having mid-roll ads, we're committed to doing this in a way that's very good on the user experience, but that is going to enable the kind of content that I think is going to take us to the next level."
Episodic content in its various forms means serials such as House of Cards which can be binge watched, or is released on a consistent basis to maintain viewer interest and engagement. It doesn't necessarily have to be fiction, but it does have to lead from one narrative to another to keep viewer interest.
The point Zuckerberg was making is it's in the best interest of Facebook and its shareholders to provide a platform to encourage more of this type of video creation, and to do that, it will dangle the carrot of shared revenue before video producers. There is no doubt Facebook wants a lot more video content, with a significant amount of it being some version of episodic content.
That said, the company isn't ignorant or forgetful of its core mission, which is to connect people. So there will continue to be a lot of personal video uploaded to the network and shared among family and friends.
Consumer video strategy
Sheryl K. Sandberg noted in the earnings report that consumer video has been "exploding on our platform." This primarily happens in the News Feed product.
Not only is the News Feed made up of stories from large media organizations, but as many of us know, is made up of citizen video journalism as well. Many of the first looks we get at breaking news is from those on site that video it and immediately upload it to Facebook and other video platforms.
Sandberg sees this as a great opportunity to place video ads against the video content because it coincides with the type of content people are consuming at the time. This is of course something it can do quicker than its episodic strategy, which could help offset in the near term some of its slowing ad growth in other areas of the company.
There will still be some downward pressure on its performance because of the lag time needed to effectively and efficiently roll out its episodic video project. Consumer video should help to at least ease some of that pain in the near term, depending on how long Facebook takes to scale it out.
What's also interesting on the video side is Live Video, which is very appealing and compelling to some of my marketer friends.
Facebook Live Video
When seeking out my marketing friends and colleagues in regard to Facebook video, one of the most compelling elements of it is Facebook live. Other video forms are important, but they see it as maybe the best way to connect with customers or potential customers.
Among the most cited value mentioned was connectivity in real time, approachability, and for those doing it right - clarity.
Interestingly, live video is viewed differently than episodic; at least by the marketers I was in contact with. They acknowledged the need to have professional productions, but it needed to be balanced with the sense of being considered approachable by their audiences.
They see existing tools, and tools in development, as helping them to produce live shows that are as good as those provided by deep-pocketed media companies.
Video definitely boosts the perceived value of content, and those that are able to create compelling stories and provide added value, will be able to use Facebook Live to get their message out and grow their businesses. Facebook will generate a solid revenue stream from this once it catches on with more marketers committed to excellence and having the capital to spend.
Again, much of that will be funded through ad placement within the live streams, but can be accelerated by those with more CapEx.
Since Facebook Live gets preferential treatment within the feed, more and more marketers are going to use it to get their message out and engage with their customers. This will be a good growth business for the company, and will complement other video ad revenue nicely.
One thing I heard consistently from marketing professionals is they want a lot more transparency around analytics and data related to live video. Not only from Facebook, but from agencies and other businesses and people associated with the platform.
There are other parts of Facebook's business model that have a lot of potential, such as ads placed against Messenger, and selling products through its platform, but in the near and long term, video is the primary focus of Facebook, and I expect to see it spending a lot of money on getting that right.
I see it providing a lot more tools for content creators within the platform, and a move to provide a solid revenue sharing model for them. This in turn should increase engagement and socialize users into remaining on the platform longer than they do now.
Eventually that will lead to longer form video, and as some think now, probably morphing into a network on the video side of the business. That isn't going to happen soon, but it's almost surely one of its goals further out.
For now, I think Facebook will experience level or possible reduced ad spend while it continues to expand and tweak its video business. Within a couple of years, it should be a major revenue stream for the company, possibly surpassing all other revenue streams it has.
Facebook is only in a slight pause mode now as it transitions into an expanded business model. Once that foundation is laid and improved upon, video in all its forms will be a powerful growth catalyst for the company. Video, more than anything else, will be the major driver of the company in the years ahead.
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.