Ads Within Videos: Will This Drive Revenues For Facebook?
Reports suggest that Facebook (NASDAQ:FB) is testing a new “mid-roll” ad format which will give its video publishers the option to insert ads into their video clips, after the video has played for at least 20 seconds. The company will share 55% of the revenues generated from these ads with the publishers – similar to the model followed by YouTube. This arrangement will allow video publishers to generate revenues from their videos posted on Facebook and should increase the volume of videos on its platform, driving revenues for Facebook. However, given that these advertisements can be inserted only in videos which are at least 90 seconds in length and after the viewer has watched the first 20 seconds, it needs engaging content to drive revenues. We believe quality of content will be the most critical factor to keep the users engaged and thereby drive revenues from this format.
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Greater Investment In Videos Can Drive Advertising Revenues
eMarketer estimates that the US digital video ad spending will see double digit growth annually through 2020. U.S. digital video ad spending is expected to reach nearly $17 billion by 2020. We expect Facebook’s advertising revenues from the U.S. and Canada to reach around $ 22 billion by 2020. If the company is able to capture a significant share in the digital video advertising market, these revenues can increase at a faster pace, impacting the valuation of the company positively.
However, mid roll ads can also impact user engagement and drive away users who are looking for “ad-free” content. Users could potentially stop the video when the ad starts playing if the content is not engaging enough. On the positive side, revenues generated from ads and the high revenue sharing arrangement can encourage publishers to publish high quality videos on Facebook’s platform.
The level of video consumption on Facebook is high and growing rapidly. However, it faces tough competition from YouTube in this area. Facebook’s mid roll ad model is very similar to YouTube and it remains to be seen if viewers and publishers will warm up to this concept on its platform. However, if the company is able to successfully launch this feature and simultaneously increase video consumption on its platform, it can accelerate advertising revenue growth for the company.
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