It should be no surprise that the top two companies in digital video advertising are Facebook (NASDAQ:FB) and Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google. What might be surprising is that Facebook generates much more video ad revenue than Google, which owns YouTube. Facebook captures over 39% of digital video ad spending compared to 27% for YouTube, according to a survey of U.S. senior marketers conducted by Brand Innovators and Innovid.
Facebook's video efforts are relatively nascent. It started autoplaying videos in the news feed in 2014, and video views grew quickly. Its most recent effort, Watch, is still finding its footing as it attempts to take on YouTube. The fact that Facebook already has stellar demand for video advertising should help it resolve some of the issues facing Watch and continue growing ad revenue.
What's wrong with Watch?
Watch hasn't gained the traction right out of the gate that Facebook was likely hoping for. Users are largely uninterested in the dedicated video section of the app, with 8 in 10 users rarely opening the section if ever, according to a survey from RBC Capital Markets.
What's more, users that do visit Watch don't spend a lot of time watching videos. The average watch time is just 23 seconds. That's actually higher than within News Feed, but users are supposed to be visiting Watch with the intention of watching longer-form videos.
That poor engagement has led to some discontent among content creators. Facebook currently pays for a lot of content upfront, but it plans to shift to a revenue share model similar to YouTube in the future. Content publishers say the midroll ad breaks within Watch aren't producing much revenue at all.
These are problems Facebook is taking steps to fix. It just introduced pre-roll advertisements, a move it long resisted as it disrupted the flow of News Feed. Pre-roll ads make a lot more sense in a format like Watch, which is similar to YouTube.
Facebook is also starting to push more longer-form serialized videos within News Feed. If Facebook can increase the awareness of content available on Watch, perhaps it can increase engagement. With just 20% of users visiting the section, there's a lot of room for improvement.
If Facebook can get more people to Watch, it has the video ad demand to make it work
The good news for publishers is that Facebook is already the No. 1 source for video advertisers. What's more, Facebook's third-quarter results indicate those advertisers are willing to pay up for ad space on Facebook. Demand is outpacing supply at this point. It's just a matter of getting users to engage with Watch, and ad revenue will surely follow.
Facebook also stands to benefit in a shift of ad budgets from television to digital. YouTube has certainly been a big beneficiary, as digital video serves as an excellent analog for television ads. Watch, as an up-and-coming platform, could exhibit significantly faster growth than the more mature YouTube going forward thanks to the secular shift.
For investors, there's relatively small downside for Watch. If users begin seeing it as a longer-form video destination, Facebook has the demand to fill ad inventory. That means it can quickly transition to a revenue-share model where it doesn't have to make big capital outlays to attract content creators. The downside is that users never see Watch as a destination for videos, and Facebook quickly shutters the platform in favor of the next project.
Facebook Watch isn't off to a great start, but Facebook's dominance of video advertising means that it has a very good chance of becoming a success. Products like Watch might not always work out for Facebook, but the upside is far greater than the downside, making it a risk worth taking.
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), and Facebook. The Motley Fool has a disclosure policy.