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Facebook Offers Videos on Instagram

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Reportedly, Facebook’s (FB - Free Report) Instagram application will now feature videos as well. Instagram users will be able to record and post 15-second videos through their smartphones that are powered by Apple’s (AAPL - Free Report) iOS and Google’s Android operating systems.

Facebook bought Instagram in August last year for more than $700 million and has continued to run the application separately. The app was previously used for photo capture and sharing.

In the current video feature, Instagram users can apply filters to videos. They also have the option of editing the video clip before uploading. Moreover, a new tab called "cinema" is being added to the video feature that helps to stabilize any shaky amateur video shots.

In a way, these features are a step ahead of the newly introduced video feature from Twitter named Vine. Launched in January, Vine lets users upload and share 6-second video clips. Moreover, Instagram has a massive user base of 130 million, or ten times more than the users of Vine.

Though Facebook is yet to monetize Instagram, as it has not introduced ads on the service, it is only a matter of time. Facebook in its last-reported quarter has hinted that ads on Instagram could offer new avenues and greater customer engagement rates.

According to eMarketer, the U.S. digital video advertising market is expected to grow by 41% in 2013 to $4.1 billion from $2.9 billion in 2012. Moreover, eMarketer predicts that the mobile video market is expected to double this year, touching $518 million. We believe that Facebook’s massive user database and investments in the new products could be the prime contender for grabbing a chunk of the ad revenues.

Additionally, Facebook has launched several new advertising products (Lookalike Audiences, Managed Custom Audiences and Partner Categories) for marketers, as advertising comprises a significant portion of revenues for the company.

These initiatives have yielded positive results for the company as its advertising revenues have soared 43.1% year over year in the first quarter of 2013. Moreover, Facebook’s mobile ad revenues now comprise 30% (1Q13) of the total ad revenue as against none in the year-ago period.

However, increase in investments related to infrastructure development may hurt Facebook’s near term profitability. Nonetheless, the continued investments should improve the quality, engagement and value of its ads, which will further boost advertiser demand in 2013.

Facebook’s massive user base and its ability to track personal details over time make it a formidable force in the online ad market. Moreover, the company’s expansion in the mobile segment is noteworthy.

However, a volatile macroeconomic environment and competition from Google and LinkedIn remain headwinds for the company in the near term.

Currently, Facebook has a Zacks Rank #2 (Buy).

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