Facebook Inc. Video Ads: It’s About Doing It Right

The social media giant makes another acquisition, this time to ratchet up its video ad service.

Tim Brugger
Tim Brugger
Jul 7, 2014 at 12:00PM
Technology and Telecom

Patience doesn't necessarily top the list of attributes of those who delve in the world of technology, be they investors, analysts, or insiders. In an industry that seemingly changes overnight, it's not hard to understand the, "what have you done for me lately?" mentality that seems to permeate the sector. Facebook (NASDAQ:FB) aficionados know first-hand the impact short-term thinking can have on a stock's share price.

The day prior to Facebook announcing earnings results for what can only be described as an outstanding Q1, its stock was trading at $63.03 per share. After the dust settled four days later, Facebook's stock price was sitting at $56.14. What does a social media giant need to do to get some respect? Apparently, begin reaping the benefits of video ads and the monetization of Instagram, whether Facebook is ready or not. Thankfully, Chief Executive Officer Mark Zuckerberg and team are sticking to their guns, and that's going to pay dividends for investors willing and able to exercise some patience.

She said what?
Why the significant drop in Facebook's share price after announcing stellar earnings in late April? Much of the "blame" can be attributed to comments made by Chief Operating Officer Sheryl Sandberg regarding the revenue impact of Instagram and video ads. Facebook watchers expected the much-anticipated monetization of its $1 billion acquisition, Instagram, would kick in this year.

In addition to expectations that Instagram would begin paying off a little more than two years after acquiring the photo-sharing site, investors were chomping at the bit for Facebook to join the ranks of its primary digital ad competitor Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and roll out video ads to the masses. You may recall Google bought mDialog recently to bolster its video ad offerings.

According to most industry pundits, video advertising is one of, if not the, fastest growing online ad medium. Google didn't become Google by not recognizing where fast-growing revenue opportunities are, and is jumping headlong into video as a result. Already, the wildly popular YouTube is seen by more and more investors and analysts as a significant opportunity for growth.

So, when Sandberg finished up Facebook's earnings call with news that Instagram and, perhaps even more importantly, online video ads, weren't going to substantially contribute to earnings this year, investors were not amused. What's the problem? According to both Zuckerberg and Sandberg, Facebook's video advertising platform wasn't ready for widespread use. That was all short-term investors needed to hear.

Do it right, or don't do it all
The recent announcement that Facebook has acquired video tech provider LiveRail for a reported $500 million reinforces what many investors didn't seem interested in hearing a couple of months ago: Facebook isn't going to rollout video until it can be done right. Like Facebook, one of LiveRail's claims to fame is its utilization of data to better target and deliver video ads. If we know anything about Facebook, it's that it loves, and knows how to utilize, user data.

The potential of video ads to enhance revenues, as Google knows and Facebook is learning, is seemingly unlimited. As an example, Facebook began a video ad pilot program recently with a few select advertisers, at a whopping $1 million a day. And, that's a test program. Which, of course, is why Facebook investors were disappointed with the delays. But with so much riding on video ads, long-term, it's about getting it right, not just getting it done.

Final Foolish thoughts
With over $24 billion in cash and equivalents and very little debt, Facebook has cash to deploy. The reported $500 million for video ad specialist LiveRail is a sound, long-term acquisition. Google, particularly with YouTube, certainly has a jump-start in the fast-growing video ad space. But contrary to discouraged Facebook investors, that's not a reason to rush such a critical growth opportunity.