Google (GOOGL) Is Afraid of Facebook (FB)

By Markets Fool.com


Source: YouTube.

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Mark Zuckerberg hasn't shied away from the fact that video is a very big priority for Facebook . Over the last several months, the company has offered deals to content producers that currently use YouTube to distribute and monetize their videos.

In response, Google is offering multiyear deals to some of its top content creators for an exclusive early window for their videos. Overall, the company is investing heavily in its top content creators for the platform, offering to help fund production of new videos and even bring in Hollywood producers.

Google is scared. Facebook is one of the few companies that can rival YouTube in terms of audience size and monetization potential. So, how much is a YouTube star worth to Google or Facebook?

Keep them coming back
For YouTube, most people get to its website through links to specific videos. What keeps users coming back is when they subscribe to a specific channel, usually from one of its top content creators. In this way, YouTube is heavily reliant on these content producers to keep its audience coming back on a daily basis.

Meanwhile, Facebook is already a daily destination for most of its users. In September, the company averaged a daily audience of 864 million people.

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That huge daily audience is very attractive to content producers looking to capture as many viewers as possible. Instead of helping the platform keep users engaged like on YouTube, Facebook offers an engaged, content-hungry audience for video makers to serve.

It would make sense then that these content producers are worth more to YouTube than they are to Facebook, but that doesn't mean YouTube's offers need to be that much better. There is a risk for content makers to snub the platform that has treated them so well in the past.

Facebook still doesn't have a monetization system like YouTube, which uses pre-roll video ads and display ads to monetize the website. Last year, the video sharing site brought in approximately $5.6 billion in advertising revenue. Migrating to Facebook, or any other platform, also means creators will need to migrate their subscribers, which can be difficult and costly.

Google has the money, but so does Facebook
Google has about $65 billion in cash and investments sitting on its balance sheet. Comparatively, Facebook has around $14 billion. Additionally, Google is generating much more cash every quarter than Facebook. Google generated $3.6 billion in free cash flow last quarter, compared to $766 million for Facebook.

Google definitely has deeper pockets than Facebook, but when you're talking about pockets this deep, both can easily afford to sign up a strong lineup of Internet celebrities. With Zuckerberg's comments that video is a big priority on the company's most recent conference call, it wouldn't be surprising to see Facebook invest aggressively in video content one way or another.

But Facebook will also have to invest in video technology in order to get up to par with YouTube. Most importantly, Facebook needs to implement Content ID technology to help ensure content creators that their work won't be distributed on pages without their consent. Facebook currently has a big problem with users uploading videos that aren't their original work, which will make content acquisition more expensive until it can put a stop to that.

A change in direction
Paying for content is definitely a change in direction for both YouTube and Facebook, but Google seems well-prepared to guard one of its best investments. YouTube's decision to start offering bonuses and other perks to its top content producers may even spark more creatives to see YouTube as a legitimate platform to make money from their work.

Still, YouTube will have to continue to spend heavily to keep its competitors, like Facebook, at bay. Facebook holds a few advantages over YouTube, such as its built-in daily audience and content-sharing network, but it's not up to par just yet. YouTube is smart to lock up its talent to multiyear contracts now, while the competition looks less attractive.

The article Google (GOOGL) Is Afraid of Facebook (FB) originally appeared on Fool.com.

Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google (A shares), and Google (C shares). The Motley Fool owns shares of Facebook, Google (A shares), and Google (C shares). 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.