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Facebook Inc (FB)’s Video Strategy Is Worth $16 Billion

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Facebook Inc (NASDAQ:FB) has been a crowd pleaser lately. After seeing the stock advance significantly over the past couple months investors have turned their attention towards advertising within a user’s newsfeed.

Video advertising

Facebook Inc (NASDAQ:FB)Facebook Inc (NASDAQ:FB) has been hesitant to implement a video advertising strategy, but now details are starting to emerge. The company is planning to sell video commercial spots for $1 million to $2.5 million per day. The spots are set to last for about 15 seconds and will be sold on a full-day basis. The advertisement will appear once in every twenty status update.

Source: Ycharts

The company has been able to improve both its revenue and profit margin since the second half of 2012. The growth in the number of users, stronger monetization strategy in mobile, and falling costs (greater economies of scale) allowed the company to generate significant gains in profitability.

Value of video advertisements

The average user posts approximately 80 statuses in a single month, according to Facebook Inc (NASDAQ:FB), and the average Facebook user had approximately 190 friends in May 2011. We’re using extremely rough numbers, but basically if we multiply the number of statuses per month that the average user makes with the total number of friends, we can find out the total number of statuses a Facebook Inc (NASDAQ:FB) user will have in their newsfeed within a single month. Therefore, the average Facebook Inc (NASDAQ:FB) user has 15,200 statuses in her newsfeed per month.

Now, if we divide that number by 20, that’s the number of video ads that will show up in a user’s newsfeed within a single month. 760 video ads will be displayed in a single month, which leads to 25 video ads within a single day.

I’m going to assume that the total number of video advertisers per day will be 25. This is the market saturation point for total videos permitted on a user’s newsfeed. The midpoint for each advertisement is $1.75 million. Assuming 25 ads per day at $1.75 million, and Facebook Inc (NASDAQ:FB) may generate $43.75 million in video advertisement revenue per day, or $15.96 billion in revenue per year.

Workable business model for Tumblr

Almost everyone questions Marissa Mayer’s acquisition of Tumblr and whether or not it will make any money for Yahoo! Inc. (NASDAQ:YHOO). The company reports that there are 128.2 million blogs currently on Tumblr. Assuming Tumblr will price ads at $1.75 million per day, and sells one tenth the number of ads that Facebook does, the company could rake in approximately $1.6 billion in revenue per year.

What’s really unique about Tumblr is that it can share that revenue with the bloggers. This way, blogging can lead to higher quality content and retention of a writer base.

Currently, Yahoo! Inc. (NASDAQ:YHOO) generates approximately $4.8 billion in revenue on a trailing twelve month basis. A contribution of $1.6 billion in ad revenue from Tumblr could be the get out of jail card that Yahoo! has been needing. If it doesn’t monetize Tumblr the way Facebook is monetizing its newsfeed, the company can fall back on the revenue growth from its minority interest in Alibaba. Investors are anticipating an IPO of Alibaba soon. This will give Yahoo! shareholders further justification to buy the stock, as the value of Alibaba will increase significantly once it trades on a public exchange.

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