Look Out, Alphabet Inc.: Facebook Inc. Is Testing a Potential YouTube Killer

Facebook (FB 0.01%) recently started testing a dedicated video channel that will appear as a separate tab on its home page. The channel will be customized for each user, featuring videos from their friends and the accounts that they follow, and will recommend videos based on what they've previously viewed. Users can also save videos from their news feeds.

Source: Facebook.

This move is likely to irritate Alphabet's (GOOG +0.00%) (GOOGL +0.00%) Google. Over the past year, Facebook has been beefing up its video platform to compete against Google's YouTube. It lets users embed Facebook videos on third-party sites, started sharing ad revenues with content creators, added a new feature called Suggested Videos, let celebrity users live-stream to their followers, and added 360-degree videos to counter YouTube's 360 videos. Given all that, Facebook's introduction of a dedicated video channel shouldn't come as much of a surprise.

A growing threat
With more than 1 billion users, YouTube still delivers more video views than Facebook. However, Facebook actually surpassed YouTube in total U.S. desktop video views in August 2014, according to comScore. At the time, Facebook was serving 1 billion video views per day. This April, Facebook claimed that it was playing 4 billion videos daily, placing it within striking distance of YouTube's 7 billion daily views.

Research firm Ampere Analysis estimates that Facebook could deliver two-thirds as many video views as YouTube by the end of this year. However, critics have criticized Facebook's figures, since the company defines a muted auto-play video viewed for three seconds as a "view," compared to the 30 seconds YouTube requires before it will count a video play as a "view."

Moreover, Facebook charges most advertisers for an impression as soon as an ad starts rolling. By comparison, YouTube only charges advertisers after 30 seconds or after an entire ad has been viewed, whichever comes first. To address those criticisms, Facebook recently introduced new options that let advertisers pay either per impression or only when the ads are viewed for 10 seconds or more.

But should Google worry?
With nearly 1.5 billion monthly active users, Facebook has an audience of people who expose themselves to video ads within their news feeds. Advertisers might prefer that approach to YouTube's scattershot strategy of display ads, clickable overlay ads, and skippable/non-skippable pre-roll ads.

YouTube. Source: Google Play.

But Facebook's videos also aren't as strong as initial numbers suggest. According to social media analytics site Locowise, nearly half of Facebook's pages didn't upload any videos in June, while a third of all active video pages only uploaded a single video during the month. Twelve brands posted 47% of all the videos across the site, and the average person only watched a third of a Facebook video before moving on.

Nonetheless, the more time people spend watching videos on Facebook, the less time they'll spend on YouTube or other Google sites. This means that Google displays fewer video ads, earns less ad revenue, and accumulates less user data for targeted ads. Enders Analysis analyst Ian Maude recently told BBC News that Facebook "already accounts for about 20% of the time people spend online."

The massive amount of user data which Facebook has accumulated also improves its ability to display targeted ads and videos that have a high chance of engagement. Videos frequently go viral on Facebook, which means that uploading a video ad to Facebook could be a more direct way to reach more people than buying pre-roll ads on YouTube.

Is there room for both?
Video ads, which cost more than traditional display ads, are widely considered the next frontier for advertisers and companies like Facebook and Google. However, there might be enough room for both Facebook and Google to grow without stomping on each others' toes.

Google's U.K. chief, Eileen Naughton, told CNBC that Google was "very comfortable" with its position in the video advertising market. Facebook's three-second views offered a "very different proposition for an advertiser" compared to YouTube's longer ads, she said. She also emphasized that YouTube sent plenty of videos to Facebook and vice versa, and that the back-and-forth traffic was "a good thing."

It's unlikely that Facebook's videos will completely displace YouTube, but it's certainly possible that Facebook's video ecosystem could become a top alternative to YouTube.

YouTube shouldn't grow complacent
Nonetheless, investors should be aware that interest in Facebook's video ads is soaring, and it probably won't slow down anytime soon. In December 2014, eMarketer surveyed U.S. marketing executives and found that 77.8% had run a campaign on YouTube in the previous year, versus 63% who ran one on Facebook. However, a whopping 87% of those execs planned to run a Facebook campaign in 2015, compared to 81.5% who wanted to buy YouTube ads.

That soaring interest suggests that YouTube will need to keep a close eye on Facebook's video expansion strategy. If advertisers decide that Facebook's platform is more effective, YouTube could eventually become a second-tier target for video advertisers.