HBO's slogan "So Original" is becoming less and less accurate. More and more, networks are focusing on high-quality original content. From Netflix (NASDAQ:NFLX) to FX, top-notch original programming is becoming a necessity for attracting audiences -- who are spending less time watching television, and more time watching videos on YouTube (which falls under the Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) umbrella) or browsing any number of content feeds supplied by Facebook (NASDAQ:FB).
But Facebook CEO Mark Zuckerberg appears eager to push things to the next level, increasing the time users spend watching videos on Facebook instead of on TV or some other platform. In order to attract viewership, his company is reportedly willing to spend as much as $1 billion on original content for its recently launched Watch platform. For reference, HBO (a subsidiary of Time Warner) spent $1.1 billion on originals and sports rights last year.
Seeding the ecosystem
Last year, Facebook talked about seeding the video ecosystem by investing in original content. It started with a $50 million investment in live video, paid to celebrities and media outlets for streaming a certain amount throughout the year. It's since moved onto bigger-budget productions and sports rights. It struck a deal with Major League Baseball earlier this year, and it's already started streaming its first originals like Ball in the Family and Returning the Favor.
"We want people to think of Facebook as a place for interesting and relevant video content from professional creators, as well as their friends," Zuckerberg said on Facebook's fourth-quarter earnings call. "Last year we started to invest in more original video content to help seed the ecosystem, and we're planning to do more in 2017." Ultimately, however, Facebook intends to move away from upfront payments, relying on an ad-revenue-sharing model like YouTube.
But even YouTube isn't able to attract the kind of content that can compete with Netflix and HBO without ponying up some money for creators. Over the next year, the Google division plans to spend hundreds of millions on original content for its ad-supported site and its paid-subscription YouTube Red service.
Becoming a destination for videos
To be sure, if Facebook wants to become a destination for videos, it needs to spend heavily. Facebook is looking to produce both short-form (five- to 15-minute) low-budget shows, similar to YouTube's videos, and big-budget productions, on the scale of HBO's Game of Thrones and Netflix's House of Cards. Unlike all three of those competitors, Facebook has no subscription options.
Hulu found it too difficult to sustain an ad-only business and didn't start ramping up its original productions until it switched exclusively to a subscription-plus-ads model. Selling subscriptions doesn't fit into Facebook's business, though, which is all about scale. But it will have to attract a huge number of viewers to its bigger-budget productions in order for them to pay off and eventually move to a revenue-sharing model.
And that's going to be extremely difficult. Facebook is competing with ingrained habits and mindshare. Online streaming video is the domain of YouTube and Netflix. Great original television is why people pay a premium for HBO. Other companies have tried to enter the streaming video space with big budgets and built-in audiences, and have failed. Facebook has quite a challenge ahead of it.
If one company is good at changing people's habits, though, it's Facebook. Though it seems to continually annoy people with changes to its platforms, the changes usually end up paying off in the long run. And considering users spend nearly an hour every day using Facebook's various apps, there's a lot of opportunity for Facebook to shift how users...view its product.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Adam Levy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Facebook, and Netflix. The Motley Fool recommends Time Warner. The Motley Fool has a disclosure policy.