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GOOGLE INC (GOOGL)

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Facebook to Share Ad Revenue With Video Creators

07/01/2015 | 10:54pm US/Eastern
By Deepa Seetharaman and Jack Marshall 

Facebook Inc. users watch videos four billion times a day across the social network. Now, Facebook is getting serious about making money from that vast audience.

Facebook said it would begin sharing ad revenue with video creators, a move designed to attract more polished content and more ads. If successful, the effort will make Facebook a more serious threat to Google Inc.'s YouTube in online video.

Until now, Facebook has slotted video ads into users' news feeds. The new feature, called Suggested Videos, will include ads between professionally produced content from major media companies, much like TV advertisements.

The revenue-sharing model Facebook unveiled Wednesday is similar to YouTube's, in that Facebook will keep 45% of the revenue. Unlike YouTube, however, video producers on Facebook will have to split their share more ways, potentially leaving them with a smaller cut.

The initiative is aimed at smartphones, source of 75% of video views on Facebook, the company says. RBC Capital Markets analyst Mark Mahaney said YouTube shows a similar number of videos, but only about 50% of its video views come from phones.

YouTube has been far ahead in generating revenue, however. Mr. Mahaney estimates that YouTube generated about $4 billion in revenue in 2014; by contrast, he had been projecting Facebook to generate $1.5 billion in revenue from video ads next year.

"Facebook could now be very serious competition for YouTube," said Jan Rezab, chief executive and co-founder of Socialbakers, a social-media analytics company. "If I were Google, I would watch out."

YouTube declined to comment.

Under the new program, mobile users who view a video in their news feed will then be directed to videos that Facebook thinks they might be interested in. Video ads will be interspersed among these videos, much like TV commercials. Initial media partners include the National Basketball Association, Hearst Corp., Fox Sports, Funny or Die and Tastemade.

"There are use cases when someone wants to go into a video consumption experience," said Dan Rose, Facebook vice president of partnerships. "Scrolling through your news feed is not the most efficient way of doing that."

Early reaction from marketers was generally positive. They said they liked that their ads could potentially be shown alongside the type of high-quality content they typically align themselves with on TV, rather than inserted, potentially out-of-context, in the news feed.

Another big draw for advertisers is that the sound for their ads will be switched on by default, a welcome shift for those who have bemoaned the fact that auto-play ads on Facebook have been muted until now.

Buying video ads without sound is "wasted money," said Bob Rupczynski, vice president of media, data and customer-relationship management at Kraft Foods.

But there was skepticism as well. Mr. Rupczynski questioned how many users would go "deeper and deeper" into Facebook's video channel.

The economics will differ from YouTube. Facebook will divide the creators' 55% share of ad revenue among all the videos that appear adjacent to the ad, based on how long users watch each video.

"So if they spent one minute on a few NBA videos and two minutes in a couple videos from Funny or Die, we would take that 55% of the revenue we're sharing, we would give a third of it to the NBA and two-thirds of it to Funny or Die," Mr. Rose said.

One executive at a large media company that has been in talks with Facebook said Facebook's deal could "potentially be worse than what YouTube is offering."

Facebook also will need to address concerns about pirated video. A recent "Daily Show" segment about the Charleston shootings was uploaded by a performing artist called Rock-Solid and generated more than 23 million views. The "Daily Show" version drew fewer than two million views.

"Facebook will need to make sure that it has mechanisms to manage copyright and piracy issues as well as move advertisers beyond the traditional TV/video metrics like reach and frequency to engagement and affinity," said Aaron Goldman, chief marketing officer for 4C Insights.

Mr. Rose said Facebook was taking piracy issues seriously and plans additional moves to address piracy this summer.

During the first few months, Facebook won't charge advertisers for ads shown, so there won't be any revenue to share. Mr. Rose said Facebook will watch how users react to the feed and later set up a way to package and price the ads.

Facebook is likely to offer targeting options that are similar to what is available on its news feed, although Mr. Rose said Facebook could offer additional metrics.

Suzanne Vranica contributed to this article.

Write to Deepa Seetharaman at Deepa.Seetharaman@wsj.com and Jack Marshall at Jack.Marshall@wsj.com

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