Today’s technology heavyweights are facing a simple question: “What’s next?”
As revenue and profit growth have slowed at major tech companies, investors are searching for answers. In particular, household names such as Apple Inc. (NASDAQ:AAPL), Google Inc (NASDAQ:GOOG), and Facebook Inc (NASDAQ:FB) have fallen under the spotlight.
With a consistent history of innovation in the last 5+ years, Apple has yet to introduce a new product in 2013 that has quenched the thirst of shareholders. In April, Apple’s board of directors settled for a massive $100 billion share buyback and raised the dividend by 15%.
And Google already has a monopoly in Internet search. Investors appear confident that the search king will make a successful transition from desktop to mobile, although long-term results have yet to be seen.
Shareholders are posing similar questions at Facebook Inc (NASDAQ:FB), which has staged a moderate recovery following an ill-fated IPO. However, founder and chief executive Mark Zuckerberg appears ready to introduce the latest innovation which could generate hundreds of millions in profit for the social media giant.
The answer is surprisingly simple: Video ads. Facebook Inc (NASDAQ:FB) is rumored to be preparing for a July launch of video advertisements, borrowing the playbook from Google’s success with YouTube. Video ads are a logical transition for Facebook Inc (NASDAQ:FB), especially given the company’s recent announcement to overhaul its advertising initiatives.
Here are four reasons why Facebook Inc (NASDAQ:FB)’s advertising platform is maturing into a successful business model:
1). On Thursday, June 7, the social network giant announced it was simplifying its advertising offerings after receiving “loud and clear” feedback from its customer base. Facebook’s advertising options have grown as its suite of products expanded; it now realizes that many of its ad products can accomplish the same goals.
2). Facebook’s recent ad overhaul will take several weeks thru July, a perfect segway for the introduction of video advertisements. Competitor Google has demonstrated that video is one of the best-performing ad formats for both the advertiser and end-user.
3). Advertisers will be able to target users based on specific goals: in-store sales for brick-and-mortar companies or conversions for online retailers. The objective is for businesses to approach Facebook with their motivation, and the social network will offer a course of action.
4). Wall Street analysts believe that Facebook is poised to be the “No. 2 player” behind Google for video advertising. Two out of five views on YouTube now originate from mobile, a testament that Facebook can implement video ads on both desktop and mobile devices.
Google’s playbook for success in video
In 2006, Google Inc (NASDAQ:GOOG) purchased YouTube for $1.65 billion, the largest acquisition in the company’s history before DoubleClick and Motorola Mobility. At the time, YouTube was an unprofitable start-up with an unclear path. The role of Internet video remained uncertain, with concerns from traditional media and the threat of copyright-infringement lawsuits.
Fast-forward to present date, and Google has transformed YouTube to become highly profitable and the sole destination for Internet video. Google has achieved legitimacy by reaching license agreements with leading media companies and introducing original content. Analysts estimate the online video giant will record $5 billion in fiscal 2013 revenue alone.
In contrast to Google, Apple Inc. (NASDAQ:AAPL) has failed to gather momentum with its iAd advertising product. Since its introduction by the late Steve Jobs, iAd has failed miserably to keep up with the growth of mobile advertising. Industry research firm IDC estimates that iAd revenue rose 30% from $95 million to $125 million during 2012. However, the size of the overall advertising market nearly tripled from $630 million to $1.7 billion during the same time frame.
Apple is hoping to re-center its mobile ad initiatives with the pending launch of iRadio. The ad-supported radio service is expected to compete with the likes of Pandora and Spotify. Details are being unveiled at this week’s Worldwide Developers Conference, held in San Francisco from June 10–14.
Foolish takeaway
As Apple and Google shareholders impatiently wait for a new catalyst, Facebook has made an aggressive move that could substantially reward investors.
In its short history as a public company, Facebook appears to be finally aligning its interests with shareholders. The recent Facebook Ad overhaul serves as a huge catalyst for the second half of 2013. Fundamentals are stronger than ever in my view.
Furthermore, a video advertising launch could significantly boost the earnings power of the stock. Google has demonstrated there’s a long runway for growth in mobile and advertiser success on YouTube should translate well for Facebook.
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John Macris has no position in any stocks mentioned. The Motley Fool recommends Apple, Facebook, and Google. The Motley Fool owns shares of Apple, Facebook, and Google.
The article This Could Be Facebook’s Next Billion Dollar Business originally appeared on Fool.com and is written by John Macris.
John is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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