Brief:

• Facebook for the first time plans to test paid subscriptions to on-demand shows streamed through its Watch video hub, The Wall Street Journal reported. The pilot will include content from CollegeHumor, Discovery's MotorTrend, BBC and ITV's BritBox and Tastemade Plus.
• This test will be available only in the U.S. and will roll out in the coming weeks, according to The Wrap. The social network plans to charge monthly fees of $4.99 for CollegeHumor's DropOut, $6.99 for BritBox, $4.99 for MotorTrend and $2.99 for Tastemade Plus. Subscribers will have access to original content and the ability to take part in virtual watch parties where they can chat with other viewers.
• Facebook will process payments on behalf of its subscription video on-demand (SVOD) partners, Variety reported. The social network is expected to take a cut of the subscription sales, an unnamed source told the Journal.

Insight:

Paid subscriptions would open another source of revenue for Facebook, which mostly relies on the sale of mobile ads among its apps including Instagram, Messenger, WhatsApp and its core platform. Mobile advertising has been a strong business for the company, whose revenue rose 28% to $16.9 billion in Q2 from a year earlier.

However, the digital ad marketplace is getting more crowded as retailers, traditional media companies and free, ad-supported streaming TV (FAST) services vie for audience attention and ad dollars. Eventually, digital advertising will reach the limits of the broader ad market, which typically grows or shrinks in line with the global economy. Ad-dependent companies like Facebook and Google must prepare for that eventuality by developing other sources of revenue such as e-commerce and subscriptions.

Facebook has sought to build out its Watch platform with original programming to compete with Google's YouTube. Watch's professionally produced shows include Jada Pinkett Smith's "Red Table Talk" and MTV's reboot of "The Real World." The social network in June said its video audience had grown 80% to 720 million monthly users who spend at least one minute on Watch from 400 million in December. YouTube in May reported 2 billion monthly users, up from 1.9 billion last summer, per the Journal.

Growing a video subscription business won't necessarily be easy money for Facebook, amid competition from similar subscription-based video services like Netflix, Amazon Prime, HBO Max and Apple's upcoming Apple TV+. People are willing to spend only so much on subscriptions, and prefer to budget $21 a month for all their streaming services, according to a recent study by Hollywood Reporter and Morning Consult. That price cap means that new entrants into the video streaming market such as Facebook will need a compelling value proposition to lure new and lasting viewers.

Facebook has previously looked to expand Watch's programming lineup by selling subscriptions to streaming services from major cable networks like HBO, Showtime and Starz, Recode reported in December. The status of those discussions with cable programmers isn't clear.

Amazon, Apple, Roku and Hulu also "resell" subscriptions to over-the-top services. Such resales are a lucrative business for companies that collect an estimated commission of 30%. Amazon's Prime Video Channels more than doubled its revenue to $1.7 billion last year from $700 million in 2017, and likely collected $500 million from the resale of subscriptions, per a BMO Capital Markets estimate cited by Multichannel News. Prime Video Channels will generate total revenue of $3.6 billion by 2020, with Amazon keeping as much as $2.5 billion for itself, BMO forecast, pointing to the growing competition for Facebook Watch.