Expect minimal a payoff from Facebook Gifts

Last week, Facebook received gushing reviews as it began to roll out Gifts, a mobile and web program for giving gift cards and physical goods provided by over 100 merchant partners. Hold on, everyone. Gifts won’t “transform” Facebook, disrupt ecommerce, or solve the company’s mobile monetization issues, even if the announcement seems to have boosted Facebook’s stock price.

Why Gifts won’t be a big deal

According to a spring 2012 GigaOM Pro consumer survey, 64 percent of U.S. online adults are regular online buyers but only 19 percent purchase via social commerce services like daily deals. And consider that while 46 percent of social networkers say they use social networks for photos – Facebook’s most dominant app activity other than communications – only 7 percent do so to shop. So a back-of-the envelope revenue model based on the assumption that a third of Facebook users will make multiple $20 gift purchases yearly is unsupportable.

Several other factors indicate Gifts won’t make Facebook a fortune anytime soon:

  • Social network shopping. As Chris Dixon points out, it’s difficult to get users to change modes. Besides offline/online shifting, when a person is in a social communications mindset, and he associates his social network with that kind of activity, he’s not likely to do a lot of shopping. That’s particularly true for the kind of directed shopping that characterizes ecommerce. Internet commerce has been driven by search, research, comparison, and price transparency. Facebook storefronts are still struggling to flourish by harnessing friends’ communications and recommendations and exploiting that information and experience off-network in more familiar shopping environments.
  • Affiliate fees. If you’re the company that’s supplying the gift card, that can be a reasonably high-margin business. But Facebook will likely have to live off retail affiliate fees that typically hover in single digits. I’m skeptical that Facebook will be able to command its usual virtual goods 30 percent fee with companies like Starbucks. And Target’s Facebook gift card app only attracts 6,000 monthly users. In-feed promotion and viral pass-along will help Facebook attract users, and it could conceivably try something like a multilevel marketing program where users received “recruit a friend” benefits.
  • Mobile gifting. The roots of Facebook Gifts originate with Facebook’s May $80 million acquisition of Karma with its mobile gifting app for iOS and Android. Certainly Facebook can leverage information about birthdays, anniversaries, and other events to promote users to make gift purchases. But don’t gifts feel more like a researched shopping experience than an impulse buy? And doesn’t adding a smartphone into the equation make it even more “impulsive?” I’d dial down the buy rate in that revenue model another few notches.

Outlook

It’s wiser to think of Facebook Gifts as another way for the company to get credit card numbers into its payments system. Depending on actual purchase rates, Facebook might gain some data for the purpose of customer segmentation analysis and ad-targeting. Facebook’s real business is still advertising. That’s true for its mobile app as well, though mobile advertising is going to depend more on search and couponing than the branding-oriented campaigns that will ultimately pay off for social media.

However, occasional, impulse-based gifts won’t produce the volume of shopping interest data that Groupon collects, let alone an Amazon-scale treasure trove.

Relevant Analyst
P1040724

David Card

VP Research Gigaom Research

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