Facebook Inc. (NASDAQ: FB) will hurt the value of online video ads just the way it hurt the value of display ads beginning three years ago. And the effect of Facebook’s nearly unlimited inventory will undermine Internet video rates just as large websites are using video marketing to raise revenue.

The Facebook video ad program will begin as early as July. The first of its initiatives in the sector will be via member feeds. If this works, and it will if Facebook offers low enough rates and impressive targeting, the firms that hope to dominate the business, which include Yahoo! Inc. (NASDAQ: YHOO), AOL Inc. (NYSE: AOL) and Google’s Inc. (NASDAQ: GOOG) YouTube, likely will have to drop their own rates to hold market share.

The precedent for Facebook’s undermining ad prices came when it ramped up its display effort recently. Facebook’s share of the display ad sector has been estimated as larger than Google’s, and no other Internet destination company is even close, according to eMarketer. The fact that advertising revenue is relatively flat among most large websites is a sign that they cannot keep rates as high as is required to improve earnings.

Video advertising revenue has increased as more and more sites add video content. YouTube dominates the market. Unique visitors to video content hit 153.9 million on Google sites in March, according to comScore. Yahoo! sites posted 50.3 million, followed by AOL at 40.1 million. However, unique visitors to video content at Facebook were 68.3 million, which puts the social network in second place. Because so much of the video on YouTube is posted by amateurs, the number of marketers who run video ads at the site is limited by the low quality.

Wall Street remains skeptical about YouTube’s ability to become a major player in the advertising markets, both on traditional PCs and mobile devices. Facebook’s total revenue in the first quarter was only $1.46 billion. That puts it light years behind Google, which posted revenue of $14 billion in the first quarter.

Facebook’s only option to get a much larger share of the video advertising market quickly is to buy its way in with low rates. For the social network, there would be nothing new to that approach.

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