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Why Facebook Wanted a Video Advertising Intermediary

NEW YORK (TheStreet) -- Fresh off of playing mad scientist with your emotions, Facebook (FB - Get Report) is delving deeper into the online advertising racket in its purchase of LiveRail, a company specializing in video advertising. It's little wonder Facebook wanted LiveRail as the company boasts an impressive client list the likes of ABC Family, Gannett, Dailymotion and Major League Baseball.

The startup acts as something of a middleman, its video supply-side platform (SSP) helping to connect video publishers with suitable and relevant advertising material. The company currently facilitates seven billion video advertisements to online audiences each month.

Facebook could not be reached for comment for this story.

The crown jewel of a LiveRail acquisition is its bidding network, a real-time solution for marketers to seek relevant open spots for their content on sites at the lowest price-point. It achieves this through programmatic means (read: low overheads), similar to how Facebook already uses algorithms to determine what advertising content is relevant to its users.

"Our platform sits at the heart of the video advertising ecosystem," said LiveRail cofounder Mark Trefgarne in a statement.

"We believe that LiveRail, Facebook and the premium publishers it serves have an opportunity to make video ads better and more relevant for the hundreds of millions of people who watch digital video every month," Facebook VP of ads product marketing Brian Boland added in a blog post.

It's those hundreds of millions of people Facebook is eager to connect with. Video advertising is one of the fastest-growing and lucrative market on the web; it's expected to increase 41.9% in the U.S. this year, amounting to a $5.96 billion industry, according to estimates from research firm eMarketer.

Facebook already holds a massive chunk of total ad revenue but as online video becomes increasingly prevalent, the social network needs to protect its claim. Throughout 2013, Facebook accounted for 5.8% of total global digital ad revenues, up from 4.1% the year earlier. EMarketer projects the company to continue to expand that stake with an estimated 7.8% share by end-2014 of an approximate $137.53 billion industry.

With 802 million daily active users (context: a userbase more than double the U.S. population), Facebook has been facing a quandary of how to monetize its most important commodity: your data. Last year, the social network launched auto-play video advertising in News Feeds, focusing on matching relevant sponsored content with the information it had already mined from user's interactions with Facebook.

This, then, is a different route to greater revenue. Buying the technology solution that connects marketers with online real estate, though, means Facebook can move beyond simply hosting advertising and instead move towards controlling the very online advertising space itself.

Details of the proposed acquisition have not been disclosed and the deal has yet to receive regulatory approval.

--Written by Keris Alison Lahiff in New York.

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