Should Investors Fear Facebooks Freebooting Problem?

Source: Facebook

Social-media giant Facebook is doubling down on video and it shows. In its recently reported first-quarter conference call, CEO Mark Zuckerberg disclosed his site now boasts 4 billion daily views -- and while that still trails the video-hosting king --Google's YouTube, which reports 8 billion views daily -- Facebook's video is quickly growing, up from 1 billion video views last year.

Last year, there was a clear shift in Facebook's video experience. After years of distributing YouTube-hosted content on its site, Facebook added a native video publisher. The ability to load videos directly to Facebook hurts YouTube monetization, as the ad-related revenue for native videos flows to Facebook rather than Google. Native videos have exploded on Facebook's site, helping the company to the aforementioned 300% year-over-year video-growth rate.

More recently, however, Facebook has faced tough questions related to its native-video policies. And for many, a new word has entered the greater-tech lexicon: freebooting. For Facebook, this problem brings both challenges and opportunities.

Freebooting -- a primerAs reported by Slate's Will Oremus in an excellent read, freebooting was coined by a filmmaker to describe "taking someone's YouTube video and uploading to a different platform for your own benefit." See, by taking the original creator's video from YouTube, then uploading it to Facebook's native publisher while removing any trace of the original author, not only do you cut YouTube out of ad dollars,you also cut out the creator (and, naturally, the legal rights owner) out of the video-value-capture process (a term that denotes both ad money and increased notoriety). And while Facebook isn't running ads for these videos, it is worth mentioning the company has a perverse incentive to look the other way as a highly trafficked video contributes to the aforementioned 4 billion views a day total.

To be fair to Facebook, these are not direct actions the company is taking, but rather it's the actions of some of its members within its rather large community that totals nearly 1.5 billion users. In addition, Facebook is not really directly monetizing these videos (yet). But if these defenses seem eerily familiar, it's because they are similar to Napster's defenses for its peer-to-peer music-sharing site when sued by the greater recording industry in 2001. Napster lost that case, changed its business model to a subscription-based one, and watched its popularity erode. Eventually, the service was purchased by subscription-based music service Rhapsody.

Challenges and opportunitiesInterestingly enough, as Oremus reports, pre-Google YouTube faced many of these same issues before instituting a rather comprehensive software solution to quickly identify copyrighted content quickly after it's posted. It should not be incredibly difficult for Facebook to design a similar system. And that's important: If Facebook wants to truly take on YouTube in the video market --as it appears to be the company's ultimate goal-- it will need buy-ins from content creators with assurances they can make money for their property on Facebook's site. Facebook's in the nascent stages of working with content creators to pay them for their videos, but few will want to ditch YouTube unless Facebook can guarantee their content won't be stolen.

On the other hand, there are huge opportunities. Facebook has 1.5 billion sets of eyeballs, with built-in, trusted relationships -- these are great conditions for videos to go viral quicklyand amass likes and shares. An example given is YouTube star Grant Thompson (The King of Random) posted a YouTube video that received 600,000 views on the site -- but a freebooted version on Facebook is approaching 10 million views. The problem for YouTube in this battle is it's easier to replicate a video-hosting site rather than 1.5 billion users -- so, yes, freebooting is a problem for Facebook, but not an unsolvable one.

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Jamal Carnette 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.

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