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Many online video sites primarily source their income through advertising.   Perhaps the best example of this is YouTube, the online video viewing platform which is owned by Google (GOOG).  There are ads on the homepage, ads which are often viewed before a video can start, and even ads next to the videos.

This is not news to most people, as YouTube is a site that garners a following of well over a billion people watching videos every month.  As a matter of fact, these viewers worldwide watch over six billion hours of videos on YouTube every month.  That is a lot of advertising which results in billions of revenue made on YouTube, which goes right into Google’s pocket.  A very deep pocket, to say the least. 

As reported by latimes.com, analysts such as Jefferies analyst Brian Pitz estimated YouTube's valuation at $26 billion to $40 billion, based on Google's market cap.  This is not very surprising when you factor in the fact that emarketer.com reports that “YouTube will bring in about $5.60 billion in gross ad revenues this year (2014), according to eMarketer’s first-ever analysis of how much advertisers spend on the platform”. 

Step Aside, YouTube

YouTube’s happy revenue days could be under threat, as Facebook (FB) looks to eat into the video world that Google has successfully monetized in recent years.  In an attempt to become a bigger player in this market, Facebook has recently bought QuickFire Networks, a video transcoding service. 

Like YouTube, it allows for Facebook users to post videos directly to the website.  It differs from YouTube in key ways though.  On its website, QuickFire says that the state of the infrastructure for online video viewing as it stands today is not sufficient.  QuickFireNetworks.com says that it “solves this capacity problem via proprietary technology that dramatically reduces the bandwidth needed to view video online without degrading video quality”.

This means that Facebook has acquired a company which potentially gives it a leg up in the video battle, hitting back hard at one of YouTube's key strengths.  It also helps that Facebook now garners a following which watches over one billion videos every day, according to QuickFire’s website. 

Thus, if Facebook can leverage its latest acquisition, the company can certainly improve its advertising revenues and page views.  And with Facebook users increasing their uploads to the world’s largest social networking site to the tune of 75% last year, this has to be a huge area for FB growth in the coming years.   

The real key though is if FB can become a top destination for videos to the point that it can rival YouTube. Obviously this will be a difficult task, but the QuickFire purchase definitely pushes the company further to that goal.   

First Name Basis

The real advantage of videos on Facebook is the company's targeted ad network. After all, advertisers care about quality rather than quantity and they are looking to put their products in front of their target markets. And with the wealth of user data available to advertisers on Facebook, companies could definitely be paying a premium to get their ads on a surging FB video platform.  

For example, according to businessinsider.com, Facebook is able to “tell if someone sees an ad on Facebook’s mobile app and then buys that product on their laptop”.  Relaying critical data like this to advertisers is very important, as it identifies popular buying methods, interests, and trendy places to market for more efficient targeting and market segmentation. 

Viewers of ads on YouTube, however, are not faced with as linked nor as sophisticated an advertising strategy. This potentially makes FB a great video advertising destination should it be able to continue to grow its video upload totals and effectively compete with YouTube.   

Bottom Line

Internet ad revenue is a multi-billion dollar capital building tool which is experiencing unprecedented growth, with no end to that growth in sight.  An especially lucrative platform to display advertising is through online videos.  The primary revenue builder for this type of platform is YouTube. 

However, Facebook has recently acquired a company which allows its users to post videos at a faster rate, without compensating video quality.  This is an especially helpful pickup because the amount of videos being uploaded to Facebook by users has increased dramatically in the past year. 

The fact that Facebook has a more intricate system for helping advertisers advertise more effectively makes it a more attractive platform to them.  For this reason, they are likely willing to pay Facebook more money for video advertising than Google.  With all these positive stats complementing each other, Facebook is set to launch itself to the top by increasing its advertising revenues after this acquisition of QuickFire Networks.

Currently, FB is a Zacks Rank #3 (Hold) stock, though it has seen amazing earnings growth over the past few years. This latest purchase could really help to move the needle on video though, so we should watch earnings estimate revisions in the coming days to see if analysts believe that this latest move will keep FB going in the right direction.    

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