Digital ad spending, particularly video spots, are expected to explode over the next five years. Leading the way, as per a recent report, will be marketing dollars spent on social media, which is projected to grow at a compound annual growth rate (CAGR) of nearly 15% each of the next five years. Marketing departments will continue to target traditional advertising outlets like TV and radio, but at the projected pace of digital ad spending, online is the place to be and folks like Facebook (NASDAQ:FB) and its primary competitor Google (NASDAQ:GOOG) (NASDAQ:GOOGL) will lead the way.
Naturally, talk of online video – be it ads or content – brings to mind Google's wildly popular YouTube property. As is the norm for Google, revenues from the world's most popular video site are not disclosed, but estimates suggest YouTube will generate about $6 billion in sales this year. Leading YouTube's revenue charge are the display and in-stream spots embedded in its music videos, which rumor has it, is something Facebook is considering for its 1.44 billion monthly average users (MAUs).
Word on the street
As Facebook fans are well aware, it has incorporated video across the site for some time now. Video has been made available to 2 million marketing partners for their ads. As per COO Sheryl Sandberg, last quarter four billion videos were viewed each day on Facebook, and it's still a relative new-comer.
Of course, YouTube is the king, boasting billions of views daily, and 300 hours of new videos are uploaded every minute. As YouTube, and now Facebook, have proven, the online world's appetite for video – especially music videos – is seemingly insatiable. And that brings us to the rumored meetings Facebook execs have conducted with some of the recording industry's heavyweights
The deals, should they come to pass, would give the recording companies the wherewithal to select the music videos of their choice and insert them directly onto Facebook's site. Word has it, the plan is to phase in the music selections in the coming months to allow Facebook to do what Facebook always does when it comes to incorporating anything new: test results, in this case, for the balance of this year.
As measured by revenues, Facebook's $3.54 billion in Q1 sales isn't in the same ballpark as Google's $17.26 billion. The distinction is that Facebook is still in hyper-growth mode, as evidenced by its 42% jump in sales last quarter, compared to the more established Google's 12%. But as Facebook continues to tread directly on Google's turf, as a music deal to feed its site with videos certainly would do, the disparity between the two digital ads behemoths will continue to narrow.
What's in it for me?
Giving Google a little friendly competition by incorporating music videos is reason enough for Facebook to pursue the rumored service. But there are a couple of tangible, business case reasons, too. First, the ad revenue opportunities are enormous; YouTube is proof of that. The plan, so say the proverbial "unnamed sources," is to provide the music companies with a revenue-sharing plan even more attractive than YouTube.
According to industry pundits, YouTube is somewhat notorious for being fairly stingy with its royalty payments; something the music industry has grumbled about for some time. Facebook and its 1.44 billion MAUs, not to mention a bigger piece of the revenue pie, is an awfully big carrot to dangle in front of the music video providers.
Just as important as the ancillary revenues music videos would bring is the enhanced user engagement that would almost certainly come as a result. Already, nearly two-thirds of Facebook's MAUs access the site every day: that's nearly as impressive as its total user base in and of itself. Music videos would-presumably-help boost the number of daily users even higher, or at the least keep them engaged longer, which in turn would generate additional revenues from Facebook's existing advertising alternatives.
It's still early, and rumors are just rumors, but sharing the world's most popular social media site with the music industry is a no-brainer. The recording industry wins with better distribution and higher royalties than YouTube, and Facebook has yet another means of growing its topline and further engaging its users. For the benefit of Facebook investors, let's hope this rumor turns into reality.
Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google (A shares), and Google (C shares). The Motley Fool owns shares of Facebook, Google (A shares), and Google (C shares). 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.