From Bloomberg Gadfly:
Facebook has a tortured but financially advantageous relationship with its suppliers -- that is, the people and companies that keep the social network stocked with posts, photos and videos. Those people and companies make Facebook an entertaining hangout. And Facebook essentially keeps all the money generated there.
But that is about to change.
Facebook will start to test slotting commercials into the middle of videos that media and entertainment companies publish on the social network, tech news publication Recode reported on Monday. And the company has agreed to let the video creators keep 55 percent 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.
Profit PowerhouseOut of nearly 200 U.S. companies with at least $15 billion in yearly sales, only five have wider operating profit margins than Facebook
Facebook has become -- surprisingly -- the perfect business for the smartphone age, and a big reason is it has spent essentially nothing to keep users enthralled. For the most part, companies that publish political articles or cooking videos on Facebook don't make money directly from that material,
although they use those items to assemble a big fan base and then point those people to websites and apps where the companies make money selling ads or subscriptions....MORE
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 percent 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 semiprofessional video stars who have attracted television-sized audiences on YouTube.)...
Related: Yesterday's "Media: Was the Facebook Ad Economy All A Dream? (FB)".