People watch 4 billion videos per day on Facebook (NASDAQ:FB), according to the company's latest update. The announcement came after Facebook reported first-quarter results during management's conference call with analysts.
But that 4 billion number was about the only detail Facebook's management would provide on its still-nascent video business. Even when analysts pressed Mark Zuckerberg, Sheryl Sandberg, and Dave Wehner for details, the best they received was a repeat of the CEO's prepared remarks -- "We're very pleased with our growth." But the growing number of video plays on Facebook represent a huge opportunity for Facebook, as video ads typically carry a premium over static display ads.
Let's take a look at some of the questions management dodged, and why Facebook doesn't want to focus on the details of its monetization efforts in video.
Some questions about video with no answers
During the call, analysts asked quite a few questions about video content on Facebook and received non-specific answers from management:
Are more TV advertisers buying Facebook video ads? "We're seeing good progress."
Will Facebook invest more in professional video content? "We're excited about people sharing all different kinds of content."
Will it break out video into a separate app? "We're going to keep on doing more [experiences], but we're happy with where we are now."
Could you discuss the video advertising ramp? "The fact that there's so much consumer video, that gives us the opportunity to do more marketing video as well."
What percentage of videos are ads? "We're not breaking that out."
Any plans to generate revenue from longer-form embedded video? "We're basically focused primarily on video on our own site and service."
While these single-sentence excerpts don't provide the whole picture of what management had to say about video, it shows just how dodgy management was around questions about monetizing its video content. And that may be because of one question to which analysts got a fairly straightforward answer.
How does video ad pricing compare to other formats?
CFO Dave Wehner schooled some analysts on how Facebook's advertising platform works after one analyst asked how pricing compares for video versus other formats [emphasis mine]:
Video is just a format that is bid into the auction, so video is effectively winning in the auction if it's higher-priced. So, if somebody's willing to pay more for a video, it's going to get served before another kind of format ad, but there's not really a price differential.
So, that pricing premium that many have expected to boost ad revenue isn't materializing suddenly with the growth in video plays and corresponding video ads. In fact, ad pricing might look very similar even without the video format because video posts are "boosted" -- to use Facebook's language -- using the same bidding system used to promote pictures and web links.
But investors shouldn't worry too much
The long-term impact of video ads should provide incremental revenue over static ads. That's because videos are capable of producing more conversions than a static ad, which inherently makes them more valuable. At some point, the market will reach an equilibrium where video ads are fairly priced.
But with 2 million advertisers, the vast majority of which are small businesses, static display ads will remain in the ad mix. That could depress ad prices, or otherwise cause those small businesses to find less expensive means of promotion. This problem is still well down the road for Facebook management, but it could eventually result in the separation of video ad bidding from static ads in order to maximize ad revenue.
For now, the booming number of video views on Facebook hasn't had a significant impact on Facebook's ad revenue opportunity. Ad revenue increased 46% last quarter year over year, a deceleration from the 82% increase the company saw last year. Part of that decline was due to changes in ad formats and the shift to mobile, which saw ad impressions decline 62%. A steady increase in the number of bidders for ads ensured that Facebook's average ad price increased 285%. But the effect of the video format on ad price (at least for now) was minimal.