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Facebook Watch Is Still Struggling to Attract an Audience

By Adam Levy – Aug 22, 2018 at 8:30AM

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Investors will have to be more patient with Facebook's big investments in video.

A year after its launch, Facebook's (META -4.55%) video platform, Watch, still hasn't found much of an audience. Half of all adult Facebook users in the U.S. haven't even heard of Watch, according to a recent survey from The Diffusion Group.

However, there is a small dedicated audience -- 21% of users view something on Watch at least monthly, 14% at least weekly, and 6% at least once a day, according to the survey results. Those numbers are much lower compared to the takeaway from a Morgan Stanley survey earlier this year that 40% of U.S. Facebook users click on a Watch video once a week. But considering Facebook hasn't touted any successes or released any engagement details, it's a good bet it's not entirely happy with the platform's performance thus far.

Facebook is making a lot of efforts to take on and differentiate itself from Alphabet's (GOOG 1.38%) (GOOGL 1.30%) YouTube, which recently surpassed 1.8 billion logged-in users per month. Will its investments pay off?

3 screenshots of Facebook Watch on smartphones.

Image source: Facebook.

$1 billion in content

Facebook budgeted up to $1 billion to spend on content to seed the platform during its first year. Facebook produced dozens of original shows, but none of them have really caught on. It's also spent millions on sports rights to stream soccer and baseball games, but it's been quiet about the audiences those events attract.

Facebook certainly has the cash to spend. It's currently sitting on $42 billion in cash and equivalents, as of the end of the second quarter. It produced free cash flow of nearly $8 billion through the first half of the year.

But spending on content alone isn't going to attract an audience to Watch. Facebook has tried national ad campaigns to increase awareness of its platform, which don't seem to have moved the needle. Finding an audience for Watch has been surprisingly difficult for Facebook considering it counts 2.5 billion people using its products every month.

Going back to what works

Facebook didn't grow into a 2.2-billion-user social network due to excellent marketing; it got there because it built a product that made people share it with their friends. Every successful Facebook product has benefited from the network effect.

Instagram Stories is a recent example of how Facebook took a product done well on another platform (in this case, Snap's (SNAP -3.52%) Snapchat) and made it go viral by creating features that encouraged people to share with friends. Instagram Stories now has more than twice as many users as Snapchat, and it's caused a serious setback for Snapchat's user growth over the last two years.

Facebook only recently went back to the formula that's worked for it in the past. In June, the company rolled out new features -- including polls, quizzes, and challenges -- to allow creators to make videos more interactive. Last week, it "acqui-hired" Vidpresso, a seven-person start-up specializing in creating interactive online video.

Creating more-interactive content -- content that makes people share -- could help increase awareness of Facebook Watch, which seems to be its biggest challenge, based on the Diffusion Group survey. If Facebook can attract a meaningful audience, it will attract the attention of creators as an alternative to YouTube.

Watch doesn't have to be a YouTube replacement

Facebook shouldn't be trying to displace YouTube for free online videos. It's built an audience of 1.8 billion users watching an average of one hour per day on mobile alone. If Facebook can get just 5% of that engagement across its 617 million user base in North America and Europe, it can break even on that $1 billion content budget, according to an analysis from Morgan Stanley's Brian Nowak.

Watch needs to be an alternative to YouTube, a destination for video that offers something different. Facebook started by trying to mimic YouTube, but it's starting to find a new angle to take advantage of its massive built-in user base.

For Facebook, a $1 billion investment is probably just a start. CEO Mark Zuckerberg has made it clear how important he thinks video is going to be over the next decade. The company is also investing in long-form video on Instagram. Don't expect Facebook to lie down after a couple years of limited progress in video. This is a long-term plan, and Facebook has the resources to continue investing. With a relatively low break-even point (considering the massive user base of Facebook), it won't take much for Facebook to start seeing positive returns. It might take some time, though.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Alphabet (C shares) and Facebook. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Facebook. The Motley Fool has a disclosure policy.

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