By Alexei Oreskovic
SAN FRANCISCO (Reuters) - Facebook Inc took a first step on Tuesday toward selling video ads that play automatically in newsfeeds, moving cautiously to unlock a source of revenue that could annoy users.
The world's largest social network, which had long been expected to try and grab a larger slice of the $66 billion U.S. television advertising market, will start by working with Summit Entertainment on ads for "Divergent," based on the popular series of science-fiction books.
Facebook will run video ads for Divergent on Thursday in a one-day test. The video spot, which will only be viewable by certain groups in the United States, will begin playing with the sound muted when it appears in a user's newsfeed. Facebook users can turn on the sound by clicking on the ad, similar to the non-paid auto-play videos Facebook introduced in September.
Facebook said video will improve the quality of the ads on its service.
"Marketers will be able to use this new format to tell their stories to a large number of people on Facebook in a short amount of time - with high-quality sight, sound and motion," Facebook said.
Wall Street has been counting on video ads to open up a potentially lucrative market as the company tries to sustain its rapid growth. That market is considered crucial for Facebook's market valuation, and poses a potential long-term threat to traditional TV networks.
The company's shares, which have surged roughly 30 percent since September, gained 1.4 percent to $54.57 in morning trading on Tuesday, aided by Susquehanna and Oppenheimer price-target upgrades.
"In terms of monetization, the video ads are very important," said Robert Baird & Co analyst Colin Sebastian.
"They're priced a lot higher than traditional display or text ads. And it also opens up for Facebook a larger group of advertisers."
The move could escalate competition between Facebook and Google Inc, which owns popular video website Youtube, and which is aggressively courting marketers to run video ads on its website.
Facebook's initial one-day test, which will run on PCs and smartphones, is likely to be followed by more tests in the coming months, as Facebook seeks to refine a new ad format that could be viewed as intrusive by some users.
Among the issues Facebook will examine are the amount of time people view the ad, the number of users who share the ad with others, and the number of people who turn on the sound, according to a person familiar with the matter.
The pricing model for the video ads, such as whether marketers will pay by the number of overall ad impressions or only when a user clicks to turn on the sound, is also among the items Facebook hopes to figure out based on the test results, the person said.
Facebook said on Tuesday the unpaid auto-play videos that users have been able to upload since September have resulted in a 10 percent increase in views, likes, shares and comments.
(Reporting by Sakthi Prasad in Bangalore; Editing by Supriya Kurane and Andre Grenon)