It was just a short six months ago that videos of people dumping buckets of ice water on their heads was a thing on Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR). Since then, video has become an even larger part of these leading social media networks.
Facebook reported that its users view 3 billion videos every day. Twitter, meanwhile, has made it easier for users to capture and upload videos directly in its app. But while Facebook has stand-alone video ads, and Twitter allows brands to "amplify" their videos, neither has a way to monetize the content generated by their hundreds of millions of users.
That's the main reason Twitter is spending an estimated $50 million on Niche -- a company that connects social media personalities with brands.
The challenge of monetizing native video
Video on social networks works a bit differently than videos on video sharing sites such as YouTube. On YouTube, a user is asking to watch a specific video. On Facebook and Twitter, the platform is asking if this is a video the user wants to watch. The former model allows for pre-roll advertisements, as it's very likely the user will wait through the ad to see the video.
Native videos don't offer the same benefits -- they must prove their worth. That's why Facebook opted for post-roll advertisements in its experiment with NFL highlight videos last month. The results of that experiment are unclear, but it's not a great sign that we haven't seen anything indicating Facebook plans to move forward with post-roll ads.
Native video does have its benefits. It keeps users on social networks instead of sending them away. That increases the likelihood users will spend more time on the website or app. That's extremely important to Twitter, which notoriously suffers from low average engagement.
But if users are spending all that time watching videos, it's hard to capitalize on the increased engagement.
Niche provides a solution
Niche's solution to monetizing video isn't elegant or groundbreaking. The company simply matches up advertisers with social media celebrities -- it's essentially a talent agency. Its most popular platform is Twitter-owned Vine. This isn't a solution that scales, as more talent under management requires more management.
Niche's current revenue generation won't make a dent in Twitter's business, either. Last June, the company was on track to bring in $4 million for the year. For comparison, Twitter generated $1.4 billion. That $4 million from Niche would have been a rounding error. Notably, though, Niche is reportedly profitable.
But while Niche doesn't provide an immediate impact on Twitter, not many other companies are better positioned to capitalize on Niche's groundwork. Twitter instantly provides Niche with a competitive advantage in the growing market of social media talent agencies. Niche now offers something none of its competitors can claim -- control over the platform. Twitter also brings established relationships with advertisers to the table.
Native advertising was the solution for Facebook and Twitter when it came to monetizing their views on mobile. Since introducing News Feed ads in the beginning of 2012, Facebook has grown from $3.7 billion in annual revenue in 2011 to $12.5 billion last year. Twitter's revenue grew from $106 million to $1.4 billion since introducing promoted tweets in users' timelines. Clearly, that is working.
But when users stop scrolling and start watching videos, the answer might simply be more native advertising. And that's exactly what Niche provides. The video becomes the advertisement, and people are willing to watch because they actively watch things with those Internet celebrities.
Again, Niche isn't a great solution, but it's the best so far. At the very least it provides a profitable revenue stream for Twitter. At its best, it provides the main way Twitter will monetize the growing amount of video content on its platform.
Adam Levy owns shares of Apple. The Motley Fool recommends Apple, Facebook, and Twitter. The Motley Fool owns shares of Apple, Facebook, 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.