Mid-Roll Video Ads Could Be Coming to Facebook, Inc.

By Evan Niu, CFA Markets Fool.com

Image source: Facebook.

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What ever happened to Facebook's (NASDAQ: FB) scary comments that ad load wouldn't be a big part of revenue growth in 2017? Seemingly contradicting those statements is a report yesterday from Recode that says the social network is preparing to implement mid-roll video ads, which play in the middle of a video, opening up a new form of monetization for publishers that will share ad revenue with Facebook. Publishers will keep 55% of ad revenue, with the remaining 45% going to Facebook. Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) YouTube, which is the top dog in the video ad market, offers the same revenue-sharing split.

If this report is true, the move would represent a departure from CEO Mark Zuckerberg's long-standing ban on pre-roll ads, which play at the beginning of a video. That's largely why publishers have had such a hard time building video businesses on the social network, since not allowing pre-roll ads significantly hinders monetization. Yet Facebook is too large to ignore, so publishers continue to try to expand on the platform despite the challenging economics to date. The company has been experimenting and slowly rolling out new ways for publishers to make money, but a broader deployment of mid-roll ads would represent a big step in the right direction for publishers.

Keeping Facebookers engaged

The new mid-roll ads will only be presented after a user has watched at least 20 seconds of a video, and the total clip length must be at least 90 seconds. That sets a minimum threshold for engagement; Facebook wants publishers to produce engaging content that keeps people's attention in order to earn that video ad revenue. This makes sense if you go back and look through the aforementioned comments from November discussing ad load.

CFO Dave Wehner had mentioned that ad load was but one of three major factors that have been contributing to revenue growth. User growth naturally contributes quite a bit as well, spurring advertiser demand. The third factor is the growth in time spent on Facebook. Here's some additional color that Wehner provided in November:

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Just really reiterating what I said last quarter about our expectations on ad load going into mid-2017. It's been one of the key factors in terms of driving growth, along with time spent -- user growth and time spent growth and advertiser demand. So we continue to see good opportunities to grow time spent, continue to see good opportunities to grow users, and we continue to see good opportunities to grow advertiser demand.

On that latter point, really the mix of ad units is part of what we're doing, I think, really well. We're developing a number of new ad products as well as enhancing the ad products that we have out in the market today. So we're taking what is a great mobile ad product on Facebook and Instagram and making it even better. And I think the investments that we're doing there will continue to enable us to drive advertiser demand. Those key factors will continue, we believe, to drive growth next year. So what I'm specifically talking about is ad load and our anticipation that it's going to be a less significant factor as we get into mid-2017.

Overall, Facebook's ad platform continues to evolve, offering a wider range of ad formats that can accommodate a wider range of content types. The overall ad load may not increase much, so it's a good thing that video ads are incredibly lucrative.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Evan Niu, CFA owns shares of Facebook. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Facebook. The Motley Fool has a disclosure policy.