The rapid growth of digital Internet videos has come with an increase in companies spending money to advertise against that content. From Google's YouTube to the joint venture Hulu, advertisers are eager to spend money for exposure to their audiences. In the U.S. alone this year, eMarketer expects advertisers to spend $7.77 billion on digital video ads. That number is expected to double within the next five years.
More recently, social media companies have started implementing native video content features. Facebook (NASDAQ:FB), Instagram, and Twitter all offer ad units that utilize their native video capabilities. Pinterest recently started letting select advertisers display "Cinematic Pins." But recent decisions at Facebook surrounding its video ad product may enable it to command the highest price per ad on the Internet.
The first 9.99 seconds are free
Last week, Facebook announced a new option for video advertisers on its platform. The social network said it will only charge businesses if an ad is displayed for at least 10 seconds. Previously, Facebook charged advertisers immediately upon an ad's display. Some advertisers were apparently unhappy with this previous arrangement, claiming that some impressions they were charged for were too short to have an impact on users who "viewed" the advertisement.
The shift follows a recent update from Twitter, which announced that it would follow Facebook's lead and start autoplaying videos and GIFs as they appear on user timelines. With the announcement, it changed the definition of a view from someone pressing play to the video playing for at least three seconds. Twitter says autoplay video ads produced 14% better recall, but the change from active engagement to passive display may reduce the average price per ad for Twitter.
Meanwhile, YouTube allows advertisers to opt into its TrueView product, which allows advertisers to pay only when their ad is completed or viewers watch at least 30 seconds (whichever is less). TrueView customers can allow YouTube viewers to skip their ads after several seconds, so if they watch all the way through, it was likely a conscious decision. Indeed, these ad units cost a premium compared to standard ads, but there is still a carrot for users who sit through an ad -- the video they navigated to in the first place.
On Facebook, video ad units are standalone posts inserted into user News Feeds. If a user sits through an ad, it is generally because the user is genuinely interested in the message and has no desire to move onto the next piece of content. That makes these new ad units, where advertisers only pay when a viewer expresses interest in the content, some of the most valuable on the Internet.
How will this impact Facebook ad revenue?
Facebook ad pricing is based on a bidding system, and the value of the 10-second video views versus regular video views is definitely higher. Therefore, advertisers are almost certainly going to bid more on those ad units compared to others they can buy on Facebook.
But previous video ad units generated revenue for Facebook every time a user scrolled past the video in the News Feed whether they watched it or not. With the new ad units, Facebook will need to command a premium high enough to offset the portion of users who do not watch 10 seconds of the advertisement. There are two main factors that will impact that ratio: how well Facebook can target video ads, and how engaging the content is that advertisers produce.
Facebook is working to improve on both fronts. Recently, the company announced that it would start tracking new metrics for video views in user News Feeds. It would track the videos during which users turned on the volume, watched full screen, or enabled HD. Those factors will be used to determine other videos a user might be interested in.
The company also announced new analytics tools for Page owners, which will enable businesses to find out which videos were most engaging among their audiences based on several different metrics. These tools should help businesses produce ads that are more likely to get viewers to watch for at least 10 seconds.
Facebook will rely on these two factors to produce higher overall revenue from these new ad units. With Facebook's big data and targeting capabilities, I think it is likely to be a success.
Adam Levy owns shares of Apple. The Motley Fool recommends Apple, Facebook, Google (A shares), Google (C shares), and Twitter. The Motley Fool owns shares of Apple, Facebook, Google (A shares), Google (C shares), 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.