Facebook Gifts: Boom or Bust?

It was bound to happen. Facing mounting pressure to find new ways to monetize against its massive base of over a billion users, Facebook announced in September that it would be launching Facebook Gifts, a new service that allows users to send physical gifts and gift cards to their friends through Facebook. Starbucks, Warby Parker, 1-800 Flowers, Brookstone, Hulu, Robert Mondavi, and Gap represent just a sample of the hundreds of retail partners that Facebook has lined up as part of its initial launch. But Facebook promises that it’s just getting started.
 
While dozens of startups – Wrapp, Giftly, YouGift, and Giftivo to name a few – have battled for dominance in the growing, multi-billion dollar sector of eCommerce (as a point of reference, the gift card industry is $100B a year in the US alone) known as “social gifting,” Facebook’s entry represents – by far – the largest foray into this space that any major tech company has made. Despite its share of critics (we are talking about Facebook, after all), I’m quite bullish on Facebook’s latest move. Here’s why:

We’re talking a billion users.
Let’s say Facebook can convert even just 1% of its users to use its gifting service (a conservative estimate given ~5% of Facebook’s users have already paid for third party apps that run on the Facebook platform). If each of these users spends $50 a year on Facebook gifts (that’s just two average-priced gifts per year) and if Facebook collects 15% royalties on each gift purchased, that’s already $750M in additional revenue for the tech giant. Even if just 0.5% of users or 0.1% of users end up buying into Gifts, the revenue potential – based on Facebook’s scale alone – is enormous.

Facebook knows what we want better than anyone else – including ourselves.
Through our status updates, check-ins, photo uploads, “likes,” and wall posts, Facebook has amassed an unparalleled amount of data on all of us. It knows which brands we interact with, the lifestyles we likely lead, and thus, I will argue, which gifts we’d likely want for our birthdays. No other eCommerce website understands our social profile nearly as well as Facebook does to recommend the gifts that are most relevant to us – and thus the ones that we are most likely to buy. Talk about the perfect curated gift experience – Facebook’s got that covered.

It strengthens Facebook’s mobile play.
As more and more of its users migrate from desktop computers to iPhones and tablets, Facebook is under an immense amount of pressure to build and monetize a mobile audience. And while mobile ad revenue has increased steadily, investors are still not satisfied. By integrating Facebook Gifts’ full functionality onto its mobile application, Facebook hopes to increase overall mobile engagement and find new ways to generate revenue via its mobile users.

It’s a natural extension of what people use Facebook for already.
Logging onto Facebook to wish our friends “happy birthday” has become a common social norm. In fact, analysts estimate that approximately 50 million “happy birthday” messages are posted on Facebook each day. Facebook Gifts is a natural way to monetize on this phenomenon, one that is designed to enhance the greeting experience by taking it one step further. Such behavior may be particularly attractive to last-minute “impulse” shoppers. According to SF Gate, “Facebook could be easing members into a more comfortable level of trust, starting with small, inexpensive “impulse” gifts that “don’t require a lot of planning or a lot of research,” Chiagouris said. “Small-ticket apparel items, like scarves and gloves, can be a big hit for Christmas,” he said. “Little by little, they’ll be more comfortable doing it for bigger ticket items.”

It’s all about the data.
According to Wedbush Securities, Gifts will help strengthen Facebook’s core business – advertising. “When you buy your friend a gift, you’re giving Facebook information about yourself and your friend. Suddenly, the person who received a subscription to Bon Appetit could see cooking-related ads. It’s all part of Facebook’s effort to sell the most targeted ads on the Internet — for now that means on Facebook, but potentially it could extend across sites everywhere on the Internet.” Furthermore, Gifts gives Facebook access to one of the last valuable pieces of data it might not yet have already: our credit card information. The more payments data Facebook has on its users, the easier it will be for users to buy physical and virtual goods through Facebook, further expanding the company’s eCommerce platform.

Retailers and advertisers are on board.
Facebook has already signed up over a hundred retailers – nearly all of whom are also Facebook advertisers – and hundreds more are in the queue. Initial reactions from retailers suggest that they are enthusiastic about the brand exposure to hundreds of millions of users that its products are getting from simply being on the Gifts platform.  Furthermore, after a Gift is purchased, users can opt to share that Gift on his or her timeline, further promoting the brand within a more social, and thus less intrusive context.

Facebook doesn’t want you to leave.
By launching into eCommerce, Facebook gives its users one more reason to stay on its site rather than to divert to an Amazon or an eBay. The longer you stay on Facebook, the more ads you see. And the more ads you see, the more money goes into Facebook’s already deep pockets.

A final word.
As you can tell, I am quite optimistic about Facebook’s foray into eCommerce. However, only time will tell how Gifts fares among a growing number of risks and concerns that have emerged: privacy concerns over data security (especially as it relates to payment and shipping info), dissatisfaction with an increasing share of commercial content on Facebook’s site, and potential competitive reactions from more established eCommerce players like Amazon and eBay as they consider entering the social gifting space.

Wired says, “It’s a smart approach. If anyone is better positioned than Amazon to recommend products to people, it’s Facebook, and the company is off to an auspicious start.”

It’s a small start, but then so was Facebook itself.

 

Facebook Gifts

 

Sources (all accessed November 19, 2012)

[1] http://www.forbes.com/sites/tomiogeron/2012/09/27/with-facebook-gift-giving-service-is-more-e-commerce-to-come/

[2] http://techcrunch.com/2012/09/27/facebook-gifts/

[3] http://gigaom.com/2012/11/15/facebook-recruits-retail-partners-for-big-gifts-holiday-push/

[4] http://pandodaily.com/2012/11/08/how-many-startups-will-facebook-gifts-kill/

[5] http://techcrunch.com/2012/11/15/facebook-gifts-available-to-tens-of-millions-of-users-in-time-for-holidays-fab-lindt-pandora-and-others-on-board/

[6] http://www.wired.co.uk/news/archive/2012-09/28/facebook-online-store

 


3 Comments

  1. daniel bertoli

    I agree with your bullish view on FB gifts. Another important advantage for FB is that gifts helps the company to collect even more information on users that can in turn improve advertising revenues. For example, if Lee buys Mark a restaurant voucher for Legal Sea Foods, FB and advertisers assume that Mark is into Sea Food. Thus he could be targeted more precisely with restaurant advertisements, e.g., for shrimp dinner promotions. Thus gifts opens up a completely new dimension to information on its users: preferences as perceived by one's friends.

  2. I concur that Facebook Gifts should in theory deal a boost to Facebook's monetization strategy. One one side of the platform, retailers will certainly be more than thrilled to sign on to the social networking giant and obtain unfettered access to over the billion-plus user base. However, from the user standpoint, two conditions will remain to be proven out to judge the efficacy of Facebook's new foray. For one, to what extent will Facebook effectively function as a recommendation engine? Facebook users will expect that the wealth of personalized information available at Facebook's fingertips will help the website to filter retailers and propose gift ideas that aren't merely arrows of gesture shot in the dark. Secondly, will the users appreciate another added dimension of Facebook taking over their lives (it's a more compelling case that retailers value a single point of entry to their potential consumers) or is emerging disaggregation a potential threat? Time will tell whether these two question marks are resolved by Facebook. And if this particular chess move proves a winner for Facebook, the revenue potential from extending gift services to other life events e.g., anniversaries, promotions, wedding registries, baby showers, etc. could be a game changer from a monetization standpoint. Let's wait and watch.

  3. Daniel Bodley

    I guess I'm still a skeptic. Let me be clear, I’m a big fan of Facebook, and I really like the sound of Facebook gifts. I log in once or twice a day, post pictures to the site from time to time and regularly wish my friends a happy-birthday using the service. I also agree with the vast majority of points Joe brings up about Facebook and Facebook gifts. Facebook is well placed to offer salient recommendations to gift givers and having retail partner’s on-board means one side of the platform is well established. From what I understand, the service also eliminates the main problem people have with giving small gifts to friends they aren’t in regular touch with: the address. When you give a Facebook gift, the recipient can enter the address they’d like it sent to, incredibly convenient for an increasingly mobile world. I wonder what implications that feature will have for shipping costs and is perhaps the reason the service seems to be launching on a region by region basis, rather than globally. I think that’s where I start to get worried.

    The service business case that Joe presented is 1% of a billion users at $50 per year and at 15% royalty, leading to annual revenue of about $750M. On Facebook’s base current base of around $4B in revenues, that’s a very impressive number. But is it really realistic? It might be more realistic to assume something more like $10 per year per user, since many of the gifts are small, impulse related purchases. Plus, there is the added complication of regions. It is certainly realistic to assume that Americans and Europeans will give gifts in the $25-50 range using Facebook, but what about non-western cultures? The rituals around gift-giving, particularly in Asia, might make this service feel too impersonal (though I should caveat that Japan does have an interesting holiday where people send family members gifts in the mail, which this service would ideally support). The core point is this, $750M of revenues doesn’t sound like an ‘average’ case to me, it sounds like a best case. Unfortunately, to climb from the current $22-25 per share range (the stock did have a nice boost on the Q3 earnings report), they’re going to need to have significantly more growth than that.

    It’s a tricky problem, as while diversifying revenue sources is a strategic imperative for the company, so is keeping users on the site looking at ads. The challenge then becomes how many $750 monetization opportunities does Facebook need to activate before users start to reduce their engagement? Facebook neatly dodged the “how engaged are US consumers with Facebook” question in the Q3 earnings call. It does make you wonder, with sites like Pintrest, The Fancy and Fab doing a better job of providing visually stunning material to browse, just what is happening with engagement. Finally, while Facebook does have deep pockets, they’re going to be stretched using it to launch multiple new monetization schemes while also defending the core photo-sharing aspect of the service. We saw how expensive that can be with the purchase of Instagram last spring.

    Overall, I think Facebook gift’s is an excellent service – and time will tell how much it will take. I don’t think it’s a slam-dunk per say, but it’s one of the more innovative and useful features Facebook has released thus far. I’m excited to see where they go next.