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Facebook Forging Ahead With Digital Video Ads

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Facebook (NASDAQ: FB  ) has surged into the No. 2 spot for selling online ads in the 2013, behind only Google (NASDAQ: GOOGL  ) in the category, according to eMarketer. The company jumped from No. 4 in 2012, leapfrogging Yahoo! and Microsoft.

The social networking site is projected to generate approximately $3.17 billion in the U.S. for the year -- 7.4% of the U.S. digital ad market. Google remains far out in front, projected to take in close to $17 billion, or 40% of the digital ad market in the U.S.

Facebook ads
There was some skepticism in the past when Facebook CEO Mark Zuckerberg said he saw mobile being the top revenue generator at the company . People aren't mocking or disbelieving any longer, as about half of the revenue already comes from mobile , and that will grow higher in the years ahead.

As for the third quarter of 2013, ad revenue jumped to $1.8 billion, with 49% of that coming from mobile, according to Facebook's earnings report. Chief Operating Officer Sheryl Sandberg, citing eMarketer, added that consumers are now using digital services longer than they're watching TV, with people spending 5.25 hours per day on digital, while spending 4.5 hours watching TV. It has to be assumed some of that is  overlap, but it does show that mobile consumption is growing. This is a positive for Facebook.

Online video ad views
More good news for Facebook is that the numbers at this time don't reflect video ads, which the company has been experimenting with and now starting to roll out.Since digital video ads generate the most money per online ad, it is considered the most desirable segment of the digital ad market, one that must be watched closely going forward.

According to comScore Video Metrix , the total number of digital video ads viewed in the U.S. was almost 26.8 billion. At this time, AOL (UNKNOWN: AOL.DL  ) is the leader in that area, with people viewing 4 billion video ads served on its content in November. Next was Google Sites, serving up 3.6 billion ads for the month.

With the number of users on Facebook, it is easy to see how it will benefit from entering into the video ad space, moving from very little presence into almost certainly one of the market leaders. That will benefit its shareholders as it grows out the business.

General video ads
Investors need to be aware that there is a difference in value in general video views and the number of video ads viewed. For example, Google is easily the leader in the number of videos viewed, with 163.5 million unique viewers in November 2013. AOL, on the other hand, had 73 million viewers. Yet AOL has by far, at this time, the most valuable videos based upon revenue, because it is able to monetize them.

Google, via its popular YouTube franchise, has a lot of video views, but much of it is user-generated content that doesn't have advertising placed against it. So when looking at the value per video, be sure to look at the number of video ads viewed, not the number of videos viewed.

Since AOL has fewer views but more ads viewed, in that area it's more profitable because Google must still pay for the costs of the video content on its properties, whether it is being monetized or not. AOL doesn't have that same challenge to deal with.

Looking ahead
In the digital market, mobile and video are leading the way. Put them together and you have the future of online advertising.

If Facebook can successfully navigate these waters, it will have a powerful catalyst to generate revenue in the future. AOL already is doing well there, but its continual obsession with the old business mode is concerning. It should focus instead on boosting its web video business. Google will have to improve its premium YouTube channels to overtake AOL, which is definitely doable.

Since Facebook is starting almost from scratch on Web video ads, it has the biggest potential impact on the bottom line. Either way, on the digital revenue side, the areas to watch are mobile and video, with video being the main revenue driver, because it commands the best prices per ad.

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