Facebook (FB, Financial) has an insatiable appetite to keep increasing its global reach and user engagement. The company constantly keeps pushing the boundaries to increase the value it offers to its customers. But so far, Facebook has found the going hard on the video front, especially when you compare it against its rival YouTube’s performance in the last few years.
In a recent article for 1redDrop, I wrote about how each platform was growing, and the level of user engagement that each enjoyed:
“During the third quarter 2017 earnings call, Google CEO Sundar Pichai told analysts that YouTube had 1.5 million monthly viewers spending an average of 60 minutes a day. Growth has been phenomenal for YouTube, and the race from 1 billion to 1.5 billion took just four short years.
In comparison, Facebook took three years to move from one billion to 1.5 billion, from the third quarter of 2012 to the third quarter of 2015.”
We can clearly see that YouTube is growing, and it's growing fast. There are two shifts that are currently happening in the technology world: global consumers are shifting fast towards smartphones, and video seems to be the preferred form of content consumption.
As the world’s largest social network, Facebook knows full well that nearly 85% of its revenue is coming from mobile advertising. According to Cisco’s Visual Networking Index, video traffic accounted for 60% of mobile data traffic in 2016, and is expected to reach 78% by the end of 2021.
We are already spending a lot of time watching videos on our smartphones, and that time is expected to further increase from here. Facebook knows this move to mobile/video is already well underway, and does not want to left behind. The nearly sixty minutes of time spent on YouTube is, in itself, a testimony to the power of video, while the success of Netflix all over the world is further validation that video is, indeed, the future.
This is the reason Facebook is becoming more aggressive in developing its video capabilities. The company seems to be more than willing to spend hundreds of millions of dollars towards original content and sports streaming rights.
Facebook recently made a $600 billion bid to acquire digital telecast rights for a cricket league in the India, and The Verge reported last week that the company is planning to spend close to a billion dollars on original video content. The company has recently launched its Watch video streaming service on its platform, and is currently rolling it out in the United States, presumably ahead of a much wider rollout.
All these efforts will have an impact on Facebook’s overall margins, even if it’s just minor, because building a body of original video content will require sustained investment in the order of billions over the next several years. But Facebook sees this as a necessary investment in light of competition from YouTube and Netflix over the long term.
Mark Zuckerberg has already categorically stated that video is the future of Facebook, and the wheels have already been set in motion. The level of success they achieve over time will depend on several factors, not the least of which is how they’re able to attract the best creative talent for original program production.
Nevertheless, we’re going to see some heavy investments from Facebook in the video space over the next several years, so expect margins to take a slight hit, but also expect user engagement to grow in a meaningful way. This is not a solid upside by any means, but you can look at it as more of an indicator of user base stability and loyalty as Facebook enters a more mature growth phase on the user base and revenue fronts.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
