There's no denying that Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) YouTube is a massive success. At last count, the video-sharing website accounted for a whopping 20% of all online video advertising business, and it is expected to generate nearly $6 billion in revenue this year. YouTube ad revenue could climb as high as $8.9 billion by 2016, according to recent analyst estimates. Clearly, online video and the ad revenue that comes along with it offer a world of opportunity.
There's been a lot of talk lately about Facebook's (NASDAQ:FB) plans to incorporate video ads into its mainstream News Feed service. And why not? As YouTube demonstrates daily, video is quickly becoming the online advertising solution of choice. And folks uploading their videos to YouTube are making themselves, and Google, truckloads of ad revenue. Now, Facebook reportedly wants some of that video content and accompanying ad sales, and the social networking giant isn't being shy about going after it.
Let the courting begin
Many of YouTube's most popular videos are created by multichannel networks, or MCNs. These are the people who assist video producers with the business side of YouTube -- generating ad revenue and developing cross-promotional opportunities. And MCNs are huge: In July alone, the top 100 channels on YouTube garnered a whopping 9.46 billion views, which was more than an 80% increase from July 2013.
Now, according to some industry insiders, Facebook is working to bring a few of those MCNs over to its side of the fence. Facebook has reportedly recently hired staff with an eye toward wooing YouTube's biggest MCN stars to post their videos directly on its site, and the company is also building a new advertising unit to ensure it gets the most bang for its MCN video buck.
The testing of MCN-developed videos on Facebook has apparently been going on for about six months, and a couple of anonymous insiders said the results have been "very, very promising," and that Facebook has "seen tremendous reach."
What's in it for the YouTube stars?
Like Google, the vast majority of Facebook's revenue is derived from advertising, and that revenue is growing at a tremendous rate. Last quarter alone, Facebook generated $2.91 billion in total revenue, of which $2.68 billion came from ads. Those impressive results were a 67% jump from the same quarter a year ago, and awfully enticing for the YouTube MCNs of the world.
Perhaps most impressive about Facebook's rapid advertising revenue growth is that it isn't based on simply throwing more ads onto users' News Feed pages. Facebook has mastered the art of targeting its ads, allowing the company to charge some of the highest online advertising rates around. The ads work, and marketing departments will pony up big dollars when they're virtually assured of getting results. For video producers and MCNs, Facebook's 1.32 billion monthly average users, combined with industry-leading ad rates, is enticing, to say the least.
What's in it for Facebook?
Just as important, not having to splash ad after ad onto Facebook means users tend to stay more engaged. Logging on to Facebook is one thing, but keeping visitors there is another, and that's where incorporating YouTube-like videos comes into play.
In fact, YouTube already plays an integral role in how much video Facebook fans are viewing on the site. While YouTube consistently ranks at the top of online video viewing in the U.S. month in and month out, Facebook has often come in a distant second. How? By Facebook "friends" posting their favorite YouTube videos to their home page. The problem, at least from Facebook's perspective, is that when users post their favorite YouTube videos onto their Newsfeed, Facebook can't sell its targeted advertising to viewers of the video. But posting videos directly to Facebook? That gives Facebook the chance to target its YouTube-like videos, complete with ads, to its massive user base.
Final Foolish thoughts
As quickly as Facebook has grown, particularly in the last couple years, it remains a distant second to Google in the race for digital advertising revenue. But incorporating a YouTube-like video strategy could go a long way toward closing the gap. By nearly all accounts, video ads are the direction in which online marketing is heading, and there's no denying Google's YouTube is at the top of the heap. For now.
Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google (A shares), and Google (C shares). The Motley Fool owns shares of Facebook, Google (A shares), and Google (C shares). 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.