Facebook Catches the Advertising Wave of the Future

What a dilemma. On one hand, Facebook (NASDAQ: FB  ) has made it clear it doesn't want to ruin the user experience by overloading its pages with an endless stream of ads. On the other hand, Facebook needs to continue growing revenue to justify its skyrocketing stock price. What is a social-media giant to do?

The answer to Facebook's predicament was revealed today with its new video ad solution. Online video advertising isn't new by any means, but it's quickly becoming the avenue of choice to reach prospective customers. Video's equivalent to traditional advertising's click-through rates are through the roof. Which is why today's news should have Facebook investors feeling awfully good.

What's the big deal?
In July alone, there were about 48 billion video ad views in the U.S. Not surprisingly, video ads are dominated by Google (NASDAQ: GOOGL  ) sites: It accounted for almost 17.7 billion of those 48 billion views. Google's YouTube, the leader in all things video, is expected to generate as much as $5.6 billion in revenue next year.

The number of video ads U.S. users viewed on Facebook was a very, very distant third at 741 million, a mere pittance of the overall video ad market. And therein lies Facebook's opportunity.

Online advertising is expected to nearly double in the next few years, accounting for more than a third of all media revenue by 2016, and that explosive growth will be led by digital ads. Why the shift to video? The answer's simple: it works.

Here are a few tidbits that have video advertisers salivating: Online consumers are 27 times more likely to click on video ads than traditional banners, more than 70% of in-stream ads (those that run automatically, like Facebook's new vids) are viewed to the  end, and nearly 80% make it at least halfway through. The list goes on, but you get the point. Advertisers will pay handsomely to get the attention of users.

Facebook began testing the much-improved auto-start videos in September as an "easier way to watch video" sent from friends. The difference is soon Facebook will be able to generate revenue from video, and the potential is enormous.

The moneymaker
The announcement today that Facebook is beginning test runs of a new auto-play video-delivery service for advertisers, in both mobile and desktop formats, is where things really get interesting. Unlike old-school-video ads -- from just last year, for example -- that required users to click on a start button, Facebook's video advertisements will automatically run when they load on the screen.

Facebook's auto-play feature virtually ensures that a prospective advertiser's audience will view at least part of its message, making it a huge selling point that Facebook can, and most certainly will, use to maximize what it charges for video ads. Some industry pundits suggest Facebook will charge north of $2 million for a day-long run of 15-second in-stream video spots. If that turns out to be even close to reality, Facebook's advertising revenue will jump exponentially, without having to inundate users with ads.

Final Foolish thoughts
Catching the auto-play video ad wave has been a long time coming, but that will quickly become a moot point when revenue jumps, without negatively impacting the Facebook experience. That's a winning combination that should appease both investors and users alike. Stealing a few of the ever-growing ad dollars from the likes of Google wouldn't be a bad thing, either.

The cost of the new ad format is just conjecture at this point, and by extension the potential on top-line growth. But with the results advertisers can expect from videos auto-playing on the world's most popular social-media site, that $2 million-a-day estimate may not be far off.

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