As Ad Revenue Hits a New Height, Facebook Pours Money Into Watch

Facebook is spending big on its Watch video service, hoping to spark interest in the new product, but eventually wants to support the effort with ad revenue, not its own checkbook, CEO Mark Zuckerberg says.
On Wednesday, the social network released third-quarter earnings, topping $10 billion in ad sales for the first time and reporting $4.7 billion in profits. Ad revenue was up 50 percent from the prior year.
It was Facebook’s spending that most concerned Wall Street, as the company promised to pour money into better security to combat the kinds of activity that afflicted the social network during the election. Facebook reps have been in front of Congress this week discussing election meddling, illicit ad buys and fake accounts that aimed to influence the U.S. elections.
Facebook also is wracking up expenses in video. Since it introduced Watch this year, it has supported most of its shows by carrying the costs incurred by media partners to produce them.
“We’re going to continue investing heavily in video content for Watch,” Zuckerberg said during the earnings call with analysts. But the end goal is for its programming to be supported by ad revenue, to be split between programmers and Facebook.
That prompted a skeptical comment by one analyst, Rich Greenfield of BTIG. “I don’t think someone like [Steven] Spielberg is going to work for an ad revenue share,” Greenfield commented.
Spielberg recently signed a deal with Apple to produce a show that costs millions of dollars an episode. Wall Street analysts and investors wonder whether Facebook will compete in that space — or operate more like YouTube, hosting content without shelling out for it.
“The answer is we’re going to try a bunch of things,” Zuckerberg said. Facebook spending on video will total billions of dollars in 2018.
Overall expenses will grow by as much as 60 percent, the company said. In addition to video, that spending will go toward tools to combat abuse of the platform. Facebook said it plans to invest more in artificial intelligence to help guard against bad actors and double the number of people paid to help police the platform to 20,000 people from 10,000.
Facebook execs also reiterated that the social network is running out of room for more ads, dragging down revenue growth in the process. Selling ads in new video inventory could help with that challenge, even if the margins are different because Facebook shares the revenue with content creators.
Chief operating officer Sheryl Sandberg said commercial breaks in Watch videos would add an important format to the Facebook repertoire, however. Brands like Visa saw positive results testing ad breaks in Watch and News Feed, she said.
“The ad products work together,” Sandberg said.