Is a New E-Commerce Powerhouse in Development?

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Facebook (NASDAQ: FB) has had its problems since going public. Even the Amazing Kreskin is predicting doom and gloom in Facebook's future. One of the big problems that the social network faces is the increased use of mobile apps as a way to access the site, since people who use Facebook features from an app aren't exposed to the same ads that they would see when accessing the site from a web browser. With around 80% of Facebook revenue coming from ads last quarter they are an important part of Facebook's business model, especially since despite what the occasional "share this post" meme would suggest the social network is and intends to remain free to use.

One possible solution is starting to roll out to select Facebook users through the main website and the official Facebook Android app. Dubbed "Facebook Gifts," the new service allows people to shop for gifts to buy their friends from a variety of different merchants. You select a gift card, cookie arrangement, flowers, or various other gifts and pay for them, then your friend gets a notification asking for a shipping address so that the gift can be delivered. Facebook gets a cut of the proceeds, giving them a much-needed slice of the e-commerce pie.

Of course, Facebook Gifts is still in its infancy and will take months to even become available to the majority of Facebook users. It's not a bad idea, per se, since Facebook automatically notifies you when friends have birthdays or other major life events and will add a "Send Gift" link that lets you head straight into Gifts from your Timeline feed. They've already partnered with businesses such as Starbucks, Magnolia Bakery, and 1-800-Flowers, and as the platform becomes more widespread it's likely that more vendors will be hopping onboard. As the program becomes widespread it could potentially turn into a decent source of revenue for Facebook.

The big question is whether Facebook Gifts is merely a stepping stone to a larger e-commerce presence from Facebook. It's not a huge stretch of the imagination to picture Facebook eventually modifying the gift-giving framework to allow users to shop directly from partnered merchants. It's not unreasonable to think that a number of retailers would jump at the chance to have access to Facebook's 800+ million users, so the likelihood of a strong network of retail partners is high if the company did take the leap. When you consider that the Facebook Gifts platform is already being deployed in the Facebook app for Android, if the company does expand the service in the future then users could theoretically shop from their home computer as well as mobile devices.

This could be interesting since it would put Facebook in direct competition with other e-commerce giants such as Amazon.com (NASDAQ: AMZN) and eBay (NASDAQ: EBAY). While these retailers are accustomed to online competition, Facebook entering the e-commerce field could present a new level of competition unlike any of the sites that these retailers currently compete against. Even if you discount a portion of the Facebook user base as duplicate accounts used for playing social games and accounts that were created to access specific content and then abandoned, the sheer size of Facebook's active community represents millions upon millions of potential customers. Amazon especially could feel the impact of Facebook suddenly becoming a major force in e-commerce since it is the go-to website for direct purchases for many; if Facebook users could shop from their phones or computers without leaving the site then it could potentially lower some of Amazon's appeal. EBay wouldn't suffer quite as much due to its auction format, but the increasing emphasis on fixed-price listings on the auction giant would still leave it vulnerable to customer loss.

The greatest advantage that Facebook could have over sites like Amazon and eBay is the fact that it would still be a social media site first and an e-retailer second. On Amazon you can create wishlists and registries and can even share them with others, but they aren't front-and-center because Amazon's focus lies on the products and not the community. On eBay you can watch items for later purchase but there isn't a strong social experience there either. Both sites have their own communities but they are largely sheltered from the shopping side of things whereas Facebook could theoretically combine the two into a single user experience. Provided that it expanded to allow it, Facebook could incorporate wishlists into the social aspect of the site and make it easy to browse the items that your friends and family members want without them having to specifically share them. Add in the requisite "Share this purchase on your Timeline" button after you buy something and shopping could become a more fun and social experience for those who enjoy that sort of thing.

Bear in mind that at the moment this is all based on speculation. It will take months for Facebook Gifts to roll out so that it's accessible to a sizable portion of Facebook's user base, and at the moment it is a US-only platform (though it's not unreasonable to assume that it will roll out to the rest of the world eventually.) If it is successful, however, then there is a very real possibility that Facebook could look at expanding the platform to include more shopping options and a larger network of retailers.

While it remains to be seen how this develops, an expanded shopping experience certainly seems within the realm of possibility provided that there aren't major problems with the Facebook Gifts program. Investors who want to like Facebook but have yet to find a compelling reason to buy should watch this development closely, since creating an e-commerce revenue stream would allow the social network to remain more relevant over time and would establish a source of income that wasn't dependent on ads. Of course, any announcement of an expanded e-commerce platform could easily be a few years away since nobody knows yet how well Facebook Gifts will turn out... except perhaps for the Amazing Kreskin.


Croaxleigh has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com and Facebook and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Amazon.com, eBay, and Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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