Why Facebook Is Releasing News Feed Video Ads

Learn the reasons behind Facebook's plan to launch video ads.

Mar 17, 2014 at 12:00PM

Facebook (NASDAQ:FB) is looking for more ways to monetize its business. In the past few years, the company has gradually introduced ads in its business model, making sure that these generate sales for advertisers and do not upset users.

Next for Facebook: video ads in its news feed, a move that has been delayed several times since 2013. These ads will play automatically without sound. Users of the social network can click on these in order to hear the audio and watch the video in full-screen. Facebook has tested this new feature multiple times and is currently looking for high-quality, relevant targeted ads that resonate with customers.

Potential for massive monetization
The news-feed video ads can be a source of massive monetization for Facebook. In its fourth quarter last year, despite the company's user growth slowing, Facebook managed to generate profit that beat Wall Street's expectations. Its revenue reached nearly $2.6 billion, a 63% increase on a year earlier. Moreover, its net income of $523 million showed a yearly increase of $64 million.

Lately, the company is aggressively monetizing its social network. It focused strongly on ads for mobile devices last year, a strategy that yielded  $1.4 billion of revenue, or about 53% of its total revenue. One of its moves was launching mobile app install ads. Many app developers choose this feature because it allows their apps to have much more visibility. Also, the social network has included an app reminder, which suggests users check the rarely used apps in their mobile devices. In addition, app developers can now pay for ads on a per-install basis instead of clicks per ad or by 1,000 ad impressions.

With the valuable demographics that Facebook provides about their users -- like age, gender, interests, etc -- many companies look forward to promoting themselves on the social network. Facebook has tested its new video ad feature multiple times in order to assure that it will not upset users. With 1.2 billion users, the company is aiming to provide a large audience for TV marketers that are looking for ways to advertise in digital platforms. It has been estimated that the video ad market in the United States will reach a $9 billion revenue by 2016, up from just $2 billion in 2011. So, Facebook's new initiative could significantly improve revenue, profit, and overall growth.

Facing a digital advertisement giant
One company that has had much success with digital advertisers is Google (NASDAQ:GOOGL). Its subsidiary business, YouTube, has more than a billion monthly unique users, and 6 billion hours of videos watched in a day. It is increasing its revenue, year after year. According to a research by eMarketer, last year, YouTube generated revenue of $5.6 billion worldwide, of which it retained $1.96 billion. The site accounts for 20.5% of the video ad market in the United States .

Google recently launched estimated total conversions, a platform that allows advertisers to know how their ads influenced the user and what device they used to purchase the ad-promoted product. This tool lets businesses know what keywords are working for them in terms of clicks and sales, which is an important need for any enterprise's digital marketing campaign.

Final Foolish takeaway
Facebook's video ads seem like a good monetization move. Only last year, the social network produced massive revenue thanks to its initiative to create new ad services, like the app install or app reminder. Now, it seems like its new video ad strategy will continue to grow its revenue and profit. However, Facebook must compete with Google, which also generates abundant revenue from advertisements.

Google's YouTube produces plenty of revenue from video ads. With its new estimated total conversions platform, Google can attract much more ad customers willing to increase sales through valuable keyword feedback. The positive side is that Facebook's continuing monetization strategies and large user base with detailed demographics make it one of the strongest contenders in this market.

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Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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