With the launch of "Watch", Facebook Inc is challenging Alphabet Inc's (GOOG) dominance in internet videos.
To mitigate the impending revenue slowdown due to 'ad load' saturation in the "news feed", Facebook Inc (NASDAQ:FB) management is increasingly looking towards video content. Improving bandwidth and content delivery technology has been driving internet video consumption higher. Mark Zuckerberg has repeatedly said that "video is the trend" and the company will be moving in that direction. "Video" will make up 82 percent of all internet traffic in 2021, according to forecasts released by Cisco. "Video" is also the place where the money will be.
Facebook Inc launches new video tab.
Facebook has already made a foray into video content by enabling live streaming through its app last year. The company had also launched a dedicated video tab in its app. The company is doubling down on its video strategy. During the conference call, Facebook CEO Mark Zuckerberg said that "We've talked about how video will continue to be a big focus and area of investment for us. It's growing quickly, and we're introducing new features to make the video experience even better." Delivering on its promise, the social media giant recently launched "Watch", a new subsection on its website for viewing videos. "Watch" will contain a wide gamut of programs, from live event coverage (including Major League Baseball games) to reality TV to scripted programs. The company is planning to launch this feature on a pilot basis to select users in the U.S.
"Watch" will appear as a new tab and will encourage users to subscribe to their favorite shows, see what their friends are watching, and find new shows that might match their interests. Watch is essentially a personalized hub for video content that Facebook will curate and recommend based on the massive interactions that happen daily on the platform. The company describes Watch as "a platform for all creators and publishers to find an audience, build a community of passionate fans, and earn money for their work." Facebook will give 55% of the revenues to the content creators and will keep the rest.
Is "Watch" a threat to YouTube?
Many analysts are considering "Watch' to be a direct competition to Google's YouTube. YouTube has a massive "early bird" advantage over Facebook. It is the "go to" place for videos. 1.5 billion logged-in users visit the site every month. On an average, one billion hours of content is watched daily on the site. YouTube has expanded into 88 countries and has content available in more than 70 different languages. The company has strong traction on mobile devices. Over half its visitors come from mobile. Logged-in users spend an average of more than one hour per day watching YouTube just on mobile devices.
While YouTube has billions of hours of user uploaded content available for free, the company is also focusing on original shows. It has enlisted several talents for its original programming. Ryan Seacrest, Ellen DeGeneres, Kevin Hart, and Demi Lovato are some of the big names that will be behind new original shows. The diversified talent of big celebrities, social media influencers, and homegrown stars will make YouTube’s original content appealing to broad audiences. YouTube has spoken with partners about creating shows that cost between $3 million to $6 million per hour.
The original programs are available to YouTube Red subscribers. Last year, YouTube funded close to 30 programs for Red. YouTube aims to invest hundreds of million of dollars into more than 40 original shows and films over the next year. Given YouTube's massive scale and popularity, YouTube is likely to remain dominant in the internet video space. Advertisers also find YouTube to be the best place for online video ads.
However, Facebook Inc could still gain from its video content strategy given the growth potential of digital videos and the company's success in delivering personalized content. Digital video ad spending will continue to grow at double digit rates going into 2020, according to a report from eMarketer. Digital video ad spending has already surpassed ad spending on linear TV. Social videos and search ads will continue to drive the growth in this space. Social video ad spend is expected to double again in 2017 to over $4 billion dollars, accounting for a third of US digital video ad sales, and 20% of social media ad sales.
Short term pain, long term gain.
The management has said that video will be the key part of Facebook Inc's mobile strategy. If successful, videos could provide a strong source of revenue for Facebook in the medium term. However, in the short term, it is likely to weigh on the company's bottom line. "We also expect that our video content investments will contribute to operating expense growth in the second half of 2017." management had warned during the second quarter conference call. Facebook paid creators to make some of the shows that will appear in the Watch tab. It has described "funding the production" as an effort to seed the app with original content for the launch. Facebook stock is part of our top stock picks from the tech sector which have outperformed the Nasdaq Composite by over 135%.