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Facebook to Build Subscription Platform via Instant Articles

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Facebook Inc. (FB - Free Report) recently announced that in the coming weeks the company will experiment with “news subscription models in Instant Articles” that will enable news publishers to add subscribers to their platforms. Reportedly, the feature will be rolled out only on Alphabet’s (GOOGL - Free Report) Android devices.

For the test, Facebook has partnered with 10 U.S. and Europe-based publishers. These include the likes of The Washington Post, The Economist, The Telegraph, The Boston Globe, Hearst, Bild, La Repubblica, Le Parisien, der Spiegel and Tronc.

Per the blog post, the trial will provide publishers with two options – metered model and freemium model – to choose from. Through the first option, publishers will provide access to 10 free articles per month to a user while per the second option, publishers will reserve the right to choose the free articles and set up paywall for the rest.

After exhausting the facility, readers will be directed to the publisher’s website for a subscription in order to access full articles.

Impact on Publishers

In 2016, overall the newspaper industry suffered a decline which affected advertising revenues as well. Per Pew Research Center, circulation of daily newspapers in the United States declined 8% year over year in 2016. Per data from Alliance for Audited Media (AUM), the firm denotes a decline of 1% in digital circulation for weekdays and 1% increase for Sundays.

However, taking The New York Times and The Wall Street Journal (WSJ) into consideration, the figure shows an improvement of 11% in weekday digital circulation, adds Pew Research. In 2016, The New York Times’ digital subscriptions increased 47% year over year to 500k, while WSJ recorded a 23% increase to over 150K subscriptions over the same time frame.

Notably, Facebook launched Instant Articles in 2015 to allow media companies to publish their stories directly on its platform. This initiative allows media outlets to tap the vast user base of Facebook while leading to improved customer experience and engagement levels.

Instant Articles allows news publishing companies to take journalism to another level, given the tools for improved visualization and increased interaction that Facebook is now providing.

We believe the new subscription model, which publishers have been eyeing for long, is a positive. Apart from building their reader base, it will add to their subscription revenues. Reportedly, Facebook is currently offering an option to publishers to keep 100% of the subscription revenues.

However, per Recode, this decision of Facebook has led to a point of contention with Apple (AAPL - Free Report) as the tech giant claims to have a 30% share of the subscription revenues generated from “in app” sales.

We note that social media is quite active in spreading the word and this is the factor that attracts publishers to networking sites like Twitter (TWTR - Free Report) . We note that Twitter has already teamed up with various publishers for real-time updates on the micro-blogging site.

 

Focus to Increase User Engagement

Per the announcement, the company will also “remain focused on driving continual improvements in ad performance in Instant Articles. This year alone, the average revenue per page view has increased over 50%, and Instant Articles pays out more than $1 million per day to publishers via Audience Network.”

Market research firm eMarketer expects U.S. digital ad spending to grow 16% year over year to reach $83 billion this year. It anticipates Google and Facebook to take up the lion’s share of the market (63%). Further, mobile ad spending is projected to represent 70.3% of digital ad spending in 2017. The firm further expects mobile’s share in digital advertising to increase to 79.2% by 2021.

We know that Facebook’s user base continues to grow at a significant pace driven by new features and tools that improve engagement. An increase in user engagement will translate into higher advertising revenues for Facebook.

Notably, Facebook has gained 51.7% year to date, substantially outperforming the industry’s 26.6% rally.

Therefore, it remains to be seen whether the company continues with the current revenue format once this subscription model tastes success.

However, the absence of big publishers like WSJ, The New York Times and the Financial Times in the current experiment, which have a very strong presence in digital subscription is a concern, in our view.

Zacks Rank

Currently, Facebook sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.

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