Facebook (NASDAQ:FB) recently acquired video processing start-up QuickFire Networks, which uses its transcoding technology to compress video files without degrading their quality. The acquisition is expected to reduce buffering in Facebook videos. Buying QuickFire complements Facebook's acquisition of video-advertising company LiveRail in July, which connects marketers to web and mobile publishers.
Facebook recently revealed that its number of video posts per user rose 75% YOY globally last year, with 94% growth in the U.S. alone. Facebook also averages over 1 billion video views per day. By comparison, Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) YouTube videos reported 4 billion views daily back in 2012.
To understand why Facebook's surging video consumption rates and the acquisitions of QuickFire and LiveRail matter, we should take a look at how Facebook monetizes these videos, and how it compares to Google's strategy.
Why Facebook needs videos
Video ads matter to Facebook because they cost more than traditional display ads. According to eMarketer, U.S. spending on digital video ads could soar 115% from $5.96 billion in 2014 to $12.82 billion in 2018. During that period, spending on traditional TV ads is only expected to rise 15%, from $68.54 billion to $78.64 billion.
Facebook started letting musicians, individual accounts, and verified pages embed auto-play videos into News Feed in late 2013. Those muted clips automatically played as users scrolled through the feed, but they could be tapped for sound and switched to a full-screen view. Last March, Facebook expanded that service to advertisers with Premium Video Ads. After that launch, Facebook reported a 10% rise in users watching, liking, sharing, or commenting on auto-play videos.
Last quarter, Facebook's advertising revenue rose 64% YOY to $2.96 billion. Sixty six percent of that total came from mobile users, up from 49% a year earlier. Google generates more than twice as much mobile advertising revenue as Facebook, thanks to its search engine and text-based ads, but Facebook generates three times as much revenue as Google from graphical (static/animated images) and video ads on mobile devices.
Connecting the dots
Facebook is beating Google in mobile video ads because it tracks its users with across multiple devices by linking their accounts to various third-party apps and sites. This allows Facebook to consistently track users for longer periods of time, which generates more complete user profiles to improve targeted ads.
For example, if a user sees an ad for a product on Facebook's mobile app, then buys it later on a laptop on a third-party site linked to his or her Facebook account, it connects those dots into useful data for advertisers. By comparison, Google uses old-fashioned cookies to track users on desktop and mobile browsers, but cookies can't cross between different devices and are frequently incompatible across different ad networks, which hinder its ability to correlate ad views with purchases. However, Google has now followed Facebook's example by letting users sign in to apps and sites with a Google account, so that gap might narrow in the future.
In other words, Facebook keeps a leash on many of its 1.35 billion monthly active users as they wander across the Internet, then mines that data to display the right ads. Google, which lacks that core social muscle (Google+ had fewer than 360 million active users as of last February), should track and combine user data more aggressively across apps and sites to keep up -- but that might cause additional conflicts with privacy advocates.
Cutting YouTube out of the loop
Upgrading Facebook's video capabilities could encourage users to spend more time on Facebook and less time on YouTube.
In the past, Facebook users would uploaded videos on YouTube, then share them on Facebook. This actually generated ad revenue for Google via the pre-roll, post-roll, and static ads on the video. But if more users upload videos directly to Facebook, it cuts Google and YouTube out of the loop.
If Facebook launches a health care network, which has been rumored to be an option, a sturdier video platform could be used for telehealth purposes. If Facebook rolls out a "professional" version to rival LinkedIn, as reports suggested last November, the video network could be used for collaborative purposes between co-workers. These initiatives could help Facebook eventually disrupt major Google services like Hangouts and Drive.
Watch your back, Google
Google remains the undisputed king of Internet advertising. However, Facebook is quickly dominating video ads on mobile devices -- which will become increasingly important as data speeds improve. If Google fails to respond to Facebook's challenge in time, it could fall further behind Facebook in video ads just as it did in social networking.
Leo Sun owns shares of Facebook. 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.