Facebook Video

Video will become an even larger part of Facebook next year. Source: Facebook

Facebook (NASDAQ:FB) has been slow to roll out video ads since introducing them earlier this year. The social media company wants to ensure its user experience isn't tarnished by autoplay video ads as users scroll through their Newsfeed. As a result, minimum ad spends for video ads started very high, with companies required to spend at least $600,000 to distribute their video spot throughout the network.

At some point, that price will come down as users get used to seeing more videos in their Newsfeed and businesses get better at producing ad-worthy content. Both factors seem to be coming along quite well, with Facebook reporting the number of businesses uploading videos doubled year over year in September to 800,000. Combined, they uploaded 3 million videos.

Facebook's ability to turn those small and medium sized businesses into video advertisers will be key to the growth in video ads on the platform in 2015.

Facebook ad growth
Video ads still play a very small part of Facebook's ad business. In the second quarter, the company was running just a dozen or so campaigns. The company has been slow and deliberate with its rollout, so it's probably still running relatively few video ad campaigns on its website.

Comparatively, over 1.5 million different businesses advertise on Facebook using text and images. Combined, those 1.5 million advertisers spent $3 billion last quarter on ads, which means the ultra-expensive video ads purchased by those dozen or so businesses made up only 1%-2% of total ad revenue.

Facebook can certainly afford to be deliberate in its rollout of video ads. Advertising revenue grew 64% year over year on the back of higher average ad prices. As long as Facebook continues growing its average ad price, there's no pressure to roll out more video ad campaigns, which generally carry a premium over static ads.

Getting small businesses to upload more
Facebook's focus in the near-term is to get businesses used to producing and uploading videos to their Facebook Pages.

Facebook Vice President Dan Levy went on a tour this year to talk with small and medium sized businesses that make up the majority of Facebook advertisers. He noted that video is key to getting more organic exposure on the platform.

This summer, Facebook announced changes to the Newsfeed algorithm to fine tune who sees videos and how many and which videos people see. This move accomplishes several things. First, users don't become annoyed with videos. If they don't watch videos, they'll stop showing up -- if they do, they only see the most relevant ones. Second, it creates very valuable targeting data for video ads -- you don't want to advertise to someone who doesn't watch videos.

Most importantly (for now), the algorithm change allows businesses to reach its audience more easily if they upload videos. Since video uploads are less common than links, pictures, and text, they'll appear higher up on users' Newsfeeds who like videos. Thus, businesses are naturally encouraged to upload videos.

Adding LiveRail to the mix
Facebook's acquisition of LiveRail closed last quarter, but the acquisition gets even better if Facebook starts rolling out video ads to more businesses. LiveRail helps publishers monetize their video ad inventories by connecting ad buyers to videos. Facebook launched its Facebook Audience Network in May to allow publishers to incorporate Facebook ads in their own apps.

We may see Facebook Audience Network work with LiveRail in 2015 to bring targeted video ads to apps in 2015, which would be an improvement over current video ad options.

In other words, Facebook has a lot of potential inventory to fill with video ads. Its targeting data in combination with LiveRail will make it an attractive option for businesses looking to advertise with video on Facebook, the rest of the web, or other apps.

Keeping ad prices up
Last quarter, Facebook increased its average ad price 274%. While there are a few caveats pushing that number significantly higher (like bigger right-hand column ads), Facebook has been able to consistently increase its average ad price even as its user base shifts to mobile and emerging markets. In the second quarter, for example, average ad price increased 123% and it increased 118% in the first quarter.

If Facebook wants to continue growing its average ad price at such a fantastic rate, it will need to continue to roll out new ad types. The first driver was Newsfeed ads, the last year's growth was driven by app-install ads, and next year will be driven by video ads.

Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook. 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.