What Video Ads Could Mean for Facebook

At this time last year, there was a lot of concern about Facebook's ability to generate enough ad revenue to justify its high valuation. Now, with shares at their all-time high, the question of ad revenue seems to have been answered. In fact, the company recently announced plans to begin incorporating video ads into its members' news feeds.

This is an extremely significant move, as it means that the company can target not only the $118 billion (and growing) spent on Internet advertising annually, but it can also go after a chunk of the estimated $68.5 billion that will be spent on television advertising in the U.S. in the next year. 

The digital-video-ad market: current and future
The statistics tell the story on what a growing segment of the advertising industry this has been, without the added impact of Facebook. According to research firm eMarketer, digital-video-ad spending in the U.S. is expected to jump from $4.1 billion this year to $5.8 billion in 2014, an increase of almost 40%. In fact, by 2017, digital-video-ad spending is expected to more than double to more than $9 billion.

Potential impact on Facebook's bottom line
Facebook says that the ads will be shown on both the desktop and mobile versions of its website, which also helps answer the question, "Has Facebook figured out how to monetize mobile advertising?"  The ads shouldn't be too obnoxious for the site's users, as they will begin to play without sound until the user un-mutes the ad.

Facebook is also very mindful of not overwhelming users with too many ads, and in fact the company made a point to say during the third-quarter earnings call that the number of ads it could show had reached capacity. Limiting the number of video ads on a user's news feed could serve to create a "bidding war" and raise the company's revenue per ad.

According to eMarketer, Facebook is expected to have obtained a 15.8% market share in worldwide mobile ads but just a 5.4% share of total digital ads for about $6.4 billion in total ad revenue. If Facebook can capture even the same share as it has of mobile ads (a number which I think is conservative, as far fewer companies use video ads), this would mean an additional $915 million in ad revenue next year, or a 14% boost in overall ad revenue, due to video ads alone. By 2017, the video-ad contribution would soar to $1.4 billion, assuming the same market share. As you can see, this has the potential to be a massive revenue booster for Facebook.

Who could get hurt here?
While the inclusion of video ads is a major positive catalyst for Facebook, there are some companies that could suffer as a result. Pretty much any company that depends on TV ad budgets to run its business should be monitoring Facebook's success in this new venture. Cable companies such as Comcast  and Time Warner, as well as satellite providers such as DirecTV depend heavily on ad revenues.

While DirecTV is very tight-lipped about how much of its revenue comes from advertising sales, Comcast provides a good picture of how dependent on ad revenue these companies are. 

Comcast generates about half a billion dollars each quarter in ad revenue, or about $2 billion per year, and although this represents around 5% of Comcast's cable division's revenue, it is still a very significant source of income. These companies generally operate at small profit margins, and with Comcast's projected $2.50 per share in earnings this year, it is easy to see how losing ad revenue could easily cut into its $6.5 billion in annual earnings.

How to trade it
As far as Facebook goes, the company has just begun to scratch the surface of the full potential of its advertisement options. If video ads are as successful in the next couple of years as the experts project, they could add an entirely new source of profit that isn't yet factored into the company's share price. 

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The article What Video Ads Could Mean for Facebook originally appeared on Fool.com.

Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends DirecTV and Facebook. The Motley Fool owns shares of 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.

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