Facebook risks breaking its business model

Facebook is mulling slotting ads in videos and has agreed to let the video creators keep 55% of the money from those video ads, just as YouTube does

Facebook CEO Mark Zuckerberg. Photo: Bloomberg
Facebook CEO Mark Zuckerberg. Photo: Bloomberg

Facebook has a tortured but financially advantageous relationship with the people and firms that keep it stocked with posts, photos and videos. They make Facebook an entertaining hangout. And it essentially keeps all the money. But that’s about to change.

Profit powerhouse

Facebook will start to test slotting commercials into the middle of videos that media and entertainment companies publish on the social network, tech news site Recode reported on Monday. And the company has agreed to let the video creators keep 55% of the money from those video ads, just as YouTube does.

Facebook executives until now haven’t been wild about slotting in ads before or within videos. People will fixate on Facebook’s flip-flop, but the much, much bigger deal is the compensation change for the media and entertainment companies that helped Facebook become the place where the world spends a huge share of its leisure hours. And the shift could damage the best business model in technology.

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All those articles and cooking videos keep users hanging out on Facebook, and the company keeps all the money it makes from selling advertisements that fill in gaps between those posts and videos they paid nothing to publish. It may not be fair, but it has made for a wildly successful and profitable business.

If Facebook is now willing to give 55% of ad dollars from those video ads, that means cracks are emerging in Facebook’s free ride with its army of content suppliers. (Facebook also has experimented with splitting ad dollars with semi-professional video stars who have attracted TV-sized audiences on YouTube.)

Not head of class

Compared with other ad-dependent web businesses, YouTube this year will likely generate far less average per user (Arpu) than Twitter, Facebook or Google, which includes YouTube.

Sharing money is more equitable but could damage Facebook’s finances. Consider Alphabet Inc.’s YouTube. The video website makes roughly one-third of the money Facebook generates from each user. It’s not clear exactly why. Facebook may be doing a better job stuffing ads into every spot it can. Surely part of the gap is explained by Facebook paying almost nothing to stock the social network with posts, photos and video, while YouTube hands off 55 cents of every dollar it generates to the creators of popular videos.

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Facebook may be wagering that even if it must start giving away a cut of advertising money it’s worth it if companies have more financial incentives to create video for Facebook, which in turn will keep users coming back and staying for longer stretches. Facebook is an expert at making money from users’ attention.

It may also be that Facebook had no choice. Some media and entertainment companies have started to complain about their inability to make money directly from videos and stories published on Facebook. It could be that Facebook is getting worried it will be left with too few cooking videos and Trump stories to keep users interested for hours.

In any case, this could be the point in Facebook’s development that helps it endure as the biggest and most valuable attention hog on the internet. Or it may be the step that helps Facebook stay popular but at too high a price.

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