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Facebook Watch Doesn't Need to Be a YouTube Replacement

Adam Levy, The Motley Fool

Facebook (NASDAQ: FB) launched its new video platform, Watch, over the summer, and it's invested heavily in the product. Not only is it paying video creators upfront for content, it's run television commercials during big live events like Monday Night Football. Facebook is currently seeding the platform with content; it plans to transition to a revenue-share model only, where the platform generates enough revenue through incentivizing creators to post videos of their own accord.

An analysis of Watch from Morgan Stanley's Brian Nowak shows the average North American user only needs to spend seven minutes per day viewing videos on Watch for Facebook to break even on its upfront investments. If Facebook expands Watch to Europe, that number falls to three minutes per day. That's far less than the average hour per day that users of YouTube, the Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) subsidiary, watch on mobile. (Nowak expects North American users to spend an average of 20 minutes per day viewing videos on Watch next year.)

Even if Facebook only captures 10% of the engagement of YouTube, it'll still be operating at breakeven on its content investments.

Screenshots from Facebook's Watch platform

Image source: Facebook.

Monetizing video

On Facebook's third-quarter earnings call, CEO Mark Zuckerberg told investors, "Over the next three years, the biggest trend in our products will be the growth of video." Since the company launched autoplay videos in 2014, video views have grown signficantly as a percentage of time spent on Facebook. The company no longer breaks out how many hours of video views it gets per day, but management continues to say video is growing. In fact, the growth of video may be to partly blame for the sluggish growth in ad impressions last quarter.

Facebook remains challenged to grow its ability to monetize video directly. So far, mid-roll video ads -- the only ad format available in Watch -- are doing relatively well. More than 70% of mid-roll ads are viewed to completion, most with the sound on, according to Zuckerberg.

Facebook is also starting to test pre-roll ads like those on YouTube. Facebook has so far avoided them because most video views take place in its news feed, where users passively consume video. Users actively seeking out videos on Watch are more apt to sit through a pre-roll ad before watching a video. YouTube is proof that the model can be extremely successful.

There's a good amount of advertiser demand for Watch videos, especially pre-roll advertisements, according to a report from Digiday. There's also interest in buying ads differently than for ads in the news feed, such as buying the inventory of select publishers instead of targeting users by interest. Advertisers are likely interested in Watch as a way to diversify their ad-buying in the news feed and on Instagram, which are becoming increasingly crowded.

Getting the engagement

Facebook has plenty of advertisers willing to spend money on Watch, but it needs to get users engaged on the platform. An early survey of Watch videos found their average view time was just 23 seconds. While that's better than for videos in the news feed, it still falls short of YouTube's average watch time. YouTube doesn't even count a video view until the 30-second mark.

That said, there may be a big deviation between users and publishers. Some publishers are seeing average views of over a minute, and many users are sticking around much longer than 23 seconds. Considering that Facebook requires 20 seconds before publishers can insert a mid-roll ad, and Zuckerberg says most users watch mid-roll ads to completion, there's clearly a wide skew between those who are engaged on Watch and those who aren't.

But getting average engagement up to seven minutes might be a tougher task than Morgan Stanley's Nowak estimates. Facebook has already signed major content deals with sports leagues and creators, but it needs to shift user behavior.

Doing things like unbundling Watch into a new app and pushing users to download it from the flagship app is certainly something worth exploring. Taking up real estate in the app launcher has been a successful strategy for Facebook in the past, and it's certainly worked for Google.

Facebook is investing a lot of money in video; it's something management is thinking about a lot. The company has successfully changed its users' behavior in the past, and it's a good bet it'll figure out how once again. Considering the relatively low threshold for success with video (thanks to Facebook's monetization capabilities and its huge built-in audience), Facebook is taking a smart risk with its investments.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adam Levy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Facebook. The Motley Fool has a disclosure policy.