How Facebook Could Ruin YouTube's Party

For the first time in years, Google's video business is facing a competitor its own size

YouTube’s presentation on Wednesday will be one of the most closely watched at the NewFronts, the annual two-week-long event in New York where digital video companies pitch their wares to advertisers. But when YouTube rents out the Theater at Madison Square Garden for its annual dog-and-pony show Wednesday night, there will be a Facebook-shaped cloud hanging over the proceedings. 

Facebook isn’t formally taking part in the NewFronts, opting instead for the classic trade-show power move where you hold your own private event to show up everyone from afar. Earlier this month, the company invited advertisers to its New York offices to present a program to hook them up with media companies to make Facebook-specific video ad campaigns. Last week the company said that users are watching more than 4 billion videos on Facebook every day, and it recently launched an embedded player that allows people to watch Facebook videos on other sites. 

It’s not just Facebook. Companies such as Vessel have launched YouTube competitors, and the multichannel networks that build their audiences through popular YouTube videos have been infused with old media money that affords them increasing independence. “A year ago, YouTube certainly had competition, and they saw the writing on the wall with some of the things that were coming,” says Paul Verna of market research firm EMarketer. “Now they’re here — Facebook is by far the biggest.” 

YouTube has already been working to shore up its advertising business. One of its traditional weaknesses has been that a lot of the videos that end up there aren’t a great fit for advertising, an issue it attempted to address last year with Google Preferred, which allows advertisers to buy space next to only top-tier content. It has also been working hard to tighten its relationships with creators who have gained prominence on YouTube. On Tuesday, YouTube announced a partnership with AwesomenessTV to create feature-length films with YouTube stars that will premiere exclusively on YouTube. 

Luckily for everyone involved, the fight here is over a pie that just keeps getting bigger. EMarketer predicts that YouTube will lose market share — dropping to 17.7 percent of the digital video advertising market by 2017, down from 20 percent this year — while actually making more money. Advertisers are expected to spend $7.8 billion on digital video ads in 2015, a 34 percent increase from last year. Those numbers only sound big if you don’t look at them next to the massive $70 billion market for television advertisements. Despite the constant talk of disruption, the TV ad market is expected to grow over $2 billion this year. In pure dollar terms, this means TV is growing faster than digital video. 

So there’s room enough for everyone. But Facebook means a level of competition that YouTube hasn’t yet faced. As a result, a company that has already struggled to turn a profit from its huge audience will have to work harder to court both advertisers and video creators. There’s evidence both groups are excited for something new.

A recent survey of U.S. advertising executives conducted by ad software company Mixpo found that 87 percent planned to run a video ad campaign on Facebook in the coming year, more than the 82 percent who planned to use YouTube. No other social media site drew interest from over half of respondents. 

Advertisers aren’t monogamous by nature, of course. “I think we’ll use both, for sure,” says Carmen Graf, a senior vice president at GSD&M, an advertising agency based in Austin, Texas. But the prospect of making use of all the data Facebook has gathered about its users makes it seem like a new toy. Because users generally link their real identities to their activity on the site, Facebook can offer targeting at a deeper level than YouTube, where many viewers aren’t logged in at all. “The targeting capabilities they’ll have on Facebook are going to be huge,” says Graf. 

Facebook still has to build a real business around its video operation. Unlike YouTube, it doesn’t sell ads that run before its videos start playing. The day it does so will be when the real battle with YouTube begins. But before Facebook does that, it will have to come up with a way to deal with copyright infringement, and a systematic way to pay people who create videos for the social network. That will be a big shift for a company that has always relied on getting its content from people free of charge. 

It could also spark changes at YouTube that many of its partners have been after for years. Andrew Graham, a talent manager at Big Frame who works with YouTube personalities Connor Franta and Ricky Dillon, says his clients are usually skeptical of companies pitching themselves as YouTube alternatives, but Facebook is different because of its massive scale. "It also doesn't hurt that a good number of YouTube-based influencers already have active fans on Facebook, so to a creator it doesn't feel like starting from ground zero," he says in an e-mail. 

A lot of this will come down to money. YouTube's general practice is to take 45 percent of the revenue from ads and give the remaining 55 percent to video creators. This has been the subject of controversy for years, but creators have had little leverage because YouTube has been the only game in town. Gian LaVecchia, a managing partner at MEC, part of the advertising firm WPP, thinks the change in this relationship could be one of the biggest impacts of Facebook’s video business. “They’re not indentured servants,” he says of YouTube’s creators. “As YouTube looks down the road 12, 18, or 24 months, there probably needs to be a pivot of some sort, one that reimagines the way they compensate creators. " 

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