Facebook (NASDAQ: FB) announced the launch of video advertisements early this week, and will soon start introducing them into users' news feeds. Although the social network has stated this is just a limited test, this move is clearly a strategic attempt to capture market share in the attractive video ads market, where Google (NASDAQ:GOOGL) and Yahoo! have important presence.
With U.S. users viewing more than 20 billion video ads per month, video advertising is certainly a hot topic among marketers, and Facebook could take advantage of this trend to improve its top line. However, this space is full of competitors as the market appears to have low barriers to entry. In this fierce context, how does Facebook plan to successfully establish itself as an important video ads platform?
Facebook's video strategy
First, Facebook will test the impact of its video ads by running video ads for Summit Entertainment's Divergent in a one day test. This video will only be viewable by certain groups in the U.S. and will measure early reception from the community. Video ads will begin to play as they appear on screen, without sound, and they will also be shown on mobile devices.
Naturally, since this is an initial test, the company is expected to continue to refine its video ads format. However, the fact that Facebook chose to show videos without sound by default is a sign that the company wants to reduce the spam-like feeling of traditional advertisement. Furthermore, the ad interface makes it very easy for a user who does not want to watch the video to scroll or swipe past it.
These initiatives should help to minimize negative reception to the introduction of video ads, which is a significant change to the newsfeed user experience.
Impact on revenue
According to Bloomberg, Facebook is hoping to charge between $1 million and $2.5 million per day for the 15-second long video ads, which may be included three times a day in users' news feeds. This projection does not seem too optimistic, if we consider that every night 88 million to 100 million people are actively using Facebook, during primetime TV hours in the U.S. alone, as Facebook's Chief Operating Officer Sheryl Sandberg mentioned last week.
Facebook will be directly competing against Google's YouTube, which is estimated to generate $5.6 billion in revenue in 2013. Unlike Facebook, YouTube is a pure video-sharing social platform with a huge content library accumulated over eight years. Content is YouTube's main asset. Over 100 hours of video are uploaded to YouTube every minute. Moreover, YouTube has a partner program active since 2007, with more than a million creators from over 30 countries making YouTube videos.
Facebook plans to fight YouTube and TV with targeting. According to Nielsen, the average online reach for narrowly targeted campaigns is 38% accurate. However, the average Facebook reach for the same type of campaigns is 89% accurate. This is because, unlike other apps, Facebook has plenty of personal, demographic, and interest data regarding its user base.
On the other hand, video is also a top priority for Yahoo!, which tried to buy video sites Hulu and Dailymotion earlier this year. The company is investing in original content for Yahoo! Screen, the company's video portal, like romance video series Burning Love. It also owns video and photo sharing app Flickr, together with microblogging platform Tumblr!
Due to the vast amount of media sites and apps Yahoo! owns, there's plenty of video potential here. Long term, the company could also become an important platform for video content, and generate meaningful revenue from streaming video ads.
Final Foolish takeaway
Despite fierce competition from YouTube and Yahoo!, Facebook's long-awaited video advertising solution should do fine. With Facebook's 1.1 billion users generating around 4.75 billion items in shared content per day -- from status messages to video uploads -- the company's huge audience and optimal targeting are strong competitive advantages.
Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google, and Yahoo!. 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.