YouTube has been one of the search giant's most successful acquisitions of all time and is easily one of the company's top properties in terms of traffic. Google doesn't explicitly disclose YouTube's results, but The Information reported earlier this year that the video-sharing site brought in $3.5 billion in gross revenue in 2013, which netted out to $1.5 billion after partner payouts.
That figure would represent nearly 10% of Google's $15.7 billion in advertising revenue in 2013 before deducting traffic acquisition costs and excluding Motorola Mobility revenue (which has since been sold to Lenovo). Additionally, this doesn't capture YouTube's brand strength as a household name.
Well, rivals are aggressively trying to score video-content creators, and Google is now on the defensive.
Will they stay or will they go?
The Wall Street Journal reports Google is now beginning to offer its top YouTubers special deals in an effort to bolster exclusive content. Numerous rivals have reportedly begun approaching YouTubers, most notably Facebook (NASDAQ:FB). Facebook is making a big push into video ads, and it needs video content to complement the ad format.
Currently, many users will view or share a YouTube video on Facebook's site, but YouTube is still hosting the underlying content. If Facebook is able to convince users to transition hosting their videos on Facebook itself, then it can begin selling ad inventory.
Interestingly enough, YouTube is supposedly quite worried about start-up Vessel. Former Hulu CEO Jason Killar started the company earlier this year after leaving Hulu, which is backed by Jeff Bezos and other prominent venture capitalists. The service hasn't even launched yet, but Vessel is reportedly being very aggressive in its attempts to attract both content creators and advertisers.
Google is offering a variety of deals structured in different ways to appeal to its biggest stars, and is hoping to get multiyear exclusivity. A bidding war over content creators could end up being rather pricey. For instance, one of YouTube's biggest stars, PewDiePie, now has nearly 33 million subscribers and reportedly makes $4 million per year in ad revenue.
While that money comes from advertisers, the bidding war could come in the form of higher revenue-sharing agreements for content creators, which is money that doesn't go toward the hosting site.
Video ads are one of Facebook's most promising areas of growth, which is why the social network is aggressively investing in infrastructure next year in order to build up its capacity.
The challenge will be how users respond to seeing more videos pop up in their News Feeds. Users have very specific connotations and expectations, which aren't easily changed. YouTube is for video. Facebook is for social sharing (including some videos). LinkedIn is for professionals (another area where Facebook is trying to grow its position).
Turning Facebook into a video destination is easier said than done, but considering how profitable video ads are it's an opportunity that's absolutely worth pursuing. Facebook already defeated Google in the Internet's transition to social. Now it wants to take a piece out of another space that Google dominates.
Evan Niu, CFA owns shares of Facebook and LinkedIn. Evan Niu, CFA has the following options: long January 2016 $150 calls on LinkedIn, short January 2016 $200 calls on LinkedIn, long January 2016 $125 puts on LinkedIn, and short January 2016 $140 puts on LinkedIn. The Motley Fool recommends Facebook, Google (A shares), Google (C shares), and LinkedIn. The Motley Fool owns shares of Facebook, Google (A shares), Google (C shares), and LinkedIn. 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.