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Facebook goes “video first” in search of TV ad dollars
Wed, 10th Aug 2016
FYI, this story is more than a year old

Facebook's recently confirmed shift to video follows its successful pivot in 2012 to become a mobile-first company. As Mark Zuckerberg put it last week, “We see a world that is video first, with video at the heart of all of our apps and services.” But although consumers' appetite for watching video on Facebook continues to grow, generating revenue from video remains the biggest challenge – and opportunity – for the social media giant.

Despite denying that it is a media company, Facebook dominates the digital advertising sphere by attracting users with content then selling those audiences to advertisers (or being a media company, as some would claim). Now Facebook is positioning itself to tempt advertisers' dollars away from the much more lucrative TV market.

For example, it is now paying for content. Like Google, Facebook has generally never paid for the content that underpins its proposition, relying instead on users to create and gather that content. But if that is now changing – with Facebook spending up to $50m on attracting digital creators – where will it stop? Will it, for example, seek to acquire the kind of immersive content that viewers and advertisers really value (e.g. sport, movies, and drama)?

The thought of Facebook trying to compete using a 20th century media business model may seem unlikely, but consider that the platform is also experimenting with inserting mid-roll ads into its live video streams. In other words, it sees a version of the interruptive TV ad model – so often derided by Silicon Valley – as being the future of live video, although viewers and advertisers have yet to agree.

Mid-roll ads in live video streams are risky. Advertisers don't like unknown quantities, and certain events that make for compelling video, such as breaking news stories, are not always ideal for nervous advertisers. Of course Facebook could stick to live streams of events with a known audience, defined periods of activity, and built-in breaks (like sports, for example). But if Facebook wants to bid for live sports rights, the $50m it's allocated to acquiring video content won't buy much, as any TV executive could wistfully point out.

Video may be the future for Facebook and its 1.7 billion users, and the idea of poaching TV ad dollars is clearly at the forefront of its mind, but as Facebook toys with the idea of being a grown-up media company, let's consider the magnitude of the challenge it faces.

Facebook's active users are spread across the globe. In 2015 it generated revenues of just under $18bn, with an ARPU of around $11. There is no figure for its spend on content, but let's assume it is under $100m.

Sky, by comparison, is a media company that operates across five markets in Europe, with 21 million customers. Even factoring in a post-Brexit exchange rate, it generated around $15bn in revenues in 2015, with an ARPU of $715. To generate that revenue it spent $6.5bn on content.

Facebook has had almost unprecedented success as a social platform that attracts and engages users. But if wants to be a proper media company and attract those TV dollars, it would need to spend serious money. For consumers, content creators, and competitors alike, this could get interesting.