Facebook Just Unveiled Its Next Big Money Maker

Facebook (FB) bulls, its media partners, and advertisers have been waiting for it to unveil video ads, long thought to be the company's next big revenue driver. In the words of Rod Tidwell from the movie Jerry Maguire, it's time to "show me the money!"

Earlier this week, Re/code reported that Facebook will begin testing its "mid-roll" ad format, which will let publishers put a video ad into their clip after people have watched the clip for at least 20 seconds.

The opportunity here is huge, as it firmly squares Facebook in competition with YouTube, which has video ads. Unlike Facebook, YouTube has its ads run at the beginning of a video and in some cases, allows users to skip video after a few seconds.

As is the case with YouTube, Re/code said the revenue split will be 55% for publishers and 45% for Facebook. Facebook will also sell the ads on behalf of the publishers.

This is a huge opportunity not only for Facebook, but publishers as well. Since the debut of Facebook videos and more recently, Facebook Live, content creators have been creating content with the hopes of one day getting paid. In some cases, they've been paid by Facebook to create the videos or allowing videos sponsored by advertisers, but it wasn't been the huge opportunity it can now become.

We could see a new wave of content on Facebook, including short-form clips from TV shows or perhaps sports, which is seen as the holy grail of live content.

With the stock having pulled back recently, Oppenheimer analyst Jason Helfstein noted it's the research firms' "top large-cap pick for 2017," citing multiple reasons, including ad innovation.

Helfstein noted there was "significant traction" for the company's shopping ads during the holidays, a strong rise in usage before and during the U.S. presidential election and the continued growth of Instagram, which now has over 600 million monthly active users and counting.

"We attributed this acceleration to the introduction of Instagram Stories & IG Stories Live Video, which were able to attract younger users (particularly ages 18-24)," Helfstein wrote in a note to clients.

As of June 2016, research firm eMarketer found that nearly half of all marketers were going to use Facebook for video ad dollars in the next 12 months, per a study from Advertiser Perceptions. With this latest testing, it's a good possibility that number is likely to move higher, taking share away from other platforms.

Facebook has largely benefited from the explosive growth of mobile News Feed ads, either sponsored by publishers, instant articles, app install ads or other various forms of advertising. That's helped the Menlo Park, Calif. immensely, with third-quarter ad revenue at $6.82 billion, up 59% year over year. Of that $6.82 billion, 84% of that came from mobile advertising.

Video ads, along with Instagram, virtual reality and WhatsApp all represent future growth drivers for the $370 billion advertising behemoth.

In the short-run, video ads are likely to cause the next leg up in Facebook's revenue. And with the company saying its users watch more than 100 million hours of video per day, having mid-roll ads is likely to provide strong growth, perhaps even stronger than what Wall Street is forecasting.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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