Facebook (NASDAQ:FB) has been working hard to make video a bigger part of your News Feed and a bigger source of ad revenue for the social network.
In doing so, Facebook can offer its advertisers an ever bigger reach, as well as chip away at a market controlled by the search giant. For Alphabet, the move has the potential to end its growth in a segment that's already become sluggish in that regard.
Here's what Facebook is doing, in a nutshell: The social network plans to roll out video ads across its Audience Network, or the collection of apps and websites that allow Facebook to place ads on its pages.
"More people ... more places"
The ads that generally appear on these sites are retargeted ads -- the ones that follow you around as you browse, showing you items you previously searched for, wrote about, or placed into a digital shopping cart.
Facebook is offering advertisers the opportunity to use that network to place video ads where they can market their brands and extend their ad campaigns.
"Advertisers want their videos to reach more of the right people in more places," the company wrote in a blog post announcing the changes. "Now, in addition to watching these videos on Facebook and Instagram, people will view them on the other apps and sites where they spend their time."
The company says adding the video ads to the Audience Network increases a company's return on investment. For Facebook, the move opens up two opportunities:
- It gives the social network another way to expand its video advertising revenue.
- It gives Facebook the opportunity to generate more ad revenue without further crowding your News Feed, Messenger, or Instagram apps.
The timing of this move benefits Facebook -- perhaps to the detriment of Alphabet.
Alphabet has owned desktop
Facebook is growing fast on the back of mobile computing's rise; revenue for the first quarter was up some 57% over the prior year, and mobile ad revenue was up 71%. And video represents a big part of Facebook's mobile push.
But Alphabet is still the dominant player in digital advertising, and it's not even close. The company brought in some $75 billion in revenue last year, more than four times Facebook's top line, and 30 times the revenue of the next largest social media player, Twitter.
Desktop has long been Google's turf, and although mobile is the area where the biggest growth is expected to happen, the desktop ad market is still huge. Video remains a growing part of it. In fact, a May report by industry research company eMarketer showed that nearly two-thirds of marketing and advertising companies planned to boost spending in desktop video advertising this year, roughly the same amount that plan to up mobile video spending.
Growing out their networks
The part of Alphabet's business that could potentially be most disrupted by Facebook's new ad products is called Google Network Member Websites, and it makes up about one-fifth of Google's ad business. It operates very similarly to the Facebook Audience Network. Member sites allow Alphabet to place ads on their pages, and they collect a portion of the revenue generated from those ads.
Growth in ad revenue from Google's member websites trailed that of advertising overall last quarter. Advertising from Google search and ads on its various websites and YouTube service grew by an impressive 20% over the prior year, clocking in at about $14.6 billion.
Ad revenue from the member sites, however, grew by just 3%. Hardly robust.
Alphabet investors should be concerned about Facebook's foray into the desktop space. It has the potential to bring that modest growth to a halt -- or send it in reverse -- and fast.
Fighting for share
Facebook launched its Audience Network just two years ago and has been expanding its reach ever since. The network was initially confined to mobile apps. It extended the network to mobile web sites early this year.
Although not growing as fast as mobile, desktop video advertising is expected to continue growing at a significant pace. Estimates from eMarketer have the U.S. market alone growing from less than $5 billion today to nearly $8 billion in 2019.
Facebook is positioning itself to capture a bigger share of that market. If it's successful, it could come at the expense of Alphabet.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John-Erik Koslosky owns shares of Alphabet (A shares) and Facebook. The Motley Fool owns shares of and recommends Alphabet (A and C shares, and Facebook. 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.