Facebook’s Gifts And Collection Features Can Spur E-Commerce Growth

by Trefis Team
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Facebook (NASDAQ:FB) has been placing higher priority on e-commerce with recent initiatives. The company launched its “Gifts” feature late last month, leveraging its acquisition of mobile commerce startup Karma. [1] This feature allows users to easily buy and send gifts to each other based on suggestions while Facebook keeps a share of the purchases made. In addition, the company recently started testing a feature called “collections” aimed at promoting e-commerce on Facebook. [2] With this feature, Facebook users can add items they like from certain retailers to their wishlist for purchase.

Facebook’s stock has fallen significantly since its IPO among concerns related to the company’s ability to monetize its growing user base as effectively as expected earlier. We believe, in order to address these concerns, Facebook will try to leverage its user base to push into e-commerce. This will not only help boost Facebook’s e-commerce revenues but also its advertisement revenues. The growth in e-commerce will drive users to specific pages that can be targeted with specific and effective ads.

See our complete analysis for Facebook

Improving Ad Monetization Is Critical

For now, Facebook will not take a revenue cut if its users buy items through the collection feature. However, it is likely to use this feature to direct ads based on user interest and, in the process, charge a higher amount for these targeted ads.

We estimate that the text and display advertisement business forms almost 70% of Facebook’s value. So it is critical that the company is able to increase ad monetization of its pages. However, we believe that over time as Facebook develops into a solid e-commerce platform, it will definitely want to have a share of the products sales via this feature. This will aid its social commerce (e-commerce) revenues.

Growth In E-Commerce

Direct revenues from e-commerce (revenue sharing) hold little value for Facebook (less than 10% currently). This is primarily due to a relative comparison of e-commerce with advertising business, which is huge for Facebook. Nevertheless, as mentioned above, the growth in e-commerce is not only important for the revenue sharing model, but also critical to Facebook’s advertising business.

While e-commerce through social networking sites comprised a very small portion of total online retail sales in previous years, the market is expected to grow from around $5 billion in 2011 to around $30 billion in 2015. We expect this number to continue to grow beyond 2015 as well. Over the last few years, Facebook has become the preferred choice for brands and retailers to promote their products by getting users to “Like” their brand pages and share them with their friends.

Going by this trend, selling a product on a social network will be the next logical step in the value chain for the retailers. Social shopping will, however, be a gradual process as users get more comfortable with purchasing products based on their friends’ recommendations. This would effectively translate the real-world dynamics into the virtual world where socializing with friends goes hand-in-hand with shopping.

Our price estimate for Facebook stands at $28, implying a premium of about 40% to the market price.

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Notes:
  1. Watch Out Ecommerce, Facebook Turns Karma Acquisition Into ‘Gifts’, TechCrunch, Sept 27 2012 []
  2. Augment Posts With “Want/Collect” Buttons That Save Products To Pinteresque Profile Sections, TechCrunch, Oct 8 2012 []
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