Facebook (NASDAQ:FB) has made a deal with the National Football League that could pave the way for the social media site to become a major player in video.
The arrangement, which is being billed as a test, allows Facebook to show video clips from NFL games. It's similar to a deal the league tried with Twitter (NYSE:TWTR) last year and Facebook is downplaying its importance.
"This is a small video sponsorship test, and we will be evaluating how people, publishers, and marketers respond to this kind of co-branded video content on Facebook," a Facebook spokeswoman told The Wall Street Journal.
Despite the efforts to make the deal seem minor, it has the potential to allow Facebook to wedge its way into the video market and that could be a big problem for Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) YouTube brand.
Facebook has an advantage
YouTube does not have an NFL deal and the league polices game clips being posted on the site illegally (though that's an impossible battle to win). Just having an agreement however is not the way Facebook's deal with the league could change the face of online video.
Instead, it's Facebook as a delivery system that could cause headaches for YouTube. Whereas YouTube is a platform based on hunting for and discovering content, Facebook can be a platform based on delivering content it knows you want.
YouTube may have some knowledge of what its registered users like, but in most cases watching content on the site does not even require a log-in. Facebook on the other hand always requires a log-in and it knows pretty much everything about you.
The social media site, for example, knows I'm a New England Patriots fan and it knows I am almost never on Facebook on Sunday afternoons mostly because I'm avoiding finding out what happened in the game (which I usually watch via DVR late at night). When I log back in after watching, I almost always engage with fellow fans and discuss what happened.
That makes me a prime target for highlights. Facebook knows my team and it could use that knowledge to show me clips of the Patriots and highlights of other games that effect New England's playoff positioning.
Facebook's knowledge of me does not stop at what my favorite football team is. The site also knows I follow financial news, love the music of Buffalo Tom, obsess about Star Wars, and post way too many pictures of my cats. That makes me a target for all sorts of video.
If Facebook can serve you video you didn't even know you wanted, it may well stop people from going to YouTube to hunt for clips. It may start with NFL highlights, but it's easy to see how this could proliferate.
It comes down to money
The challenge for Facebook is finding a way to make money on videos that does not turn viewers off. For the NFL test, the company has made a deal with Verizon for a short video to play after the video ends. That's a nice deal for consumers, but it's a terrible model for advertisers because it's essentially asking people to voluntarily watch an ad after they have already received the content.
Facebook told The Journal it was not planning on using preroll ads -- commercials that run before the video -- and its overall effort to monetize video remains a work in progress. In general, Facebook has been willing to build audience first and figure out how to make money later. That might be fine during the test period, but if the NFL deal expands and becomes a regular offering then it's likely the social media site will have to figure out how to make it pay.
NFL deals do not come cheap and the league receives over $7 billion a year from its TV partners. Because of that it has been very protective of rights to do anything with its content that will dilute the value of those deals. So, if Facebook is to become a long-term source of NFL highlights, which puts it in direct competition with ESPN -- an NFL broadcast partner -- the dollars involved will be significant.
It's not about the NFL
While football highlights are an easy way to introduce more video into a Facebook feed in a way that adds value to users, the threat to YouTube is the practice becoming widespread beyond NFL clips. If Facebook knows you like Jimmy Fallon, it could deliver you his skits -- the same ones you have to go looking for on YouTube directly. The same applies for pretty much any other subject matter.
In the same way that Facebook disrupted the news business by putting headlines into your feed, it could disrupt YouTube by putting video in front of its billion-plus customers.
Daniel Kline owns shares of Apple and Facebook. He almost never watches online video. The Motley Fool recommends Apple, Facebook, Google (A shares), Google (C shares), Netflix, Twitter, and Verizon Communications,. The Motley Fool owns shares of Apple, Facebook, Google (A shares), Google (C shares), Netflix, and Twitter. 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.