Breakout

For “Gifts” to Win, Facebook Must Play Nice With Retailers

Jeff Macke
Breakout

Facebook (FB) is expanding the selection of products available on its nascent Gifts platform from cupcakes to products from Apple (AAPL), Gap (GPS) and upscale grocer Dean & DeLuca. As FB continues to grope for a tangible way to monetize its billion or so users, the company's delicate move into retail has the potential to both generate enormous revenues and make powerful enemies.

Paul Schatz, president of Heritage Capital, thinks Gifts is little more than a gesture to appease investors who are demanding evidence of top-line growth. "This is not what the company really wants to do," Schatz says in the attached clip. "This is what they're being forced to do."

As Schatz sees it, Facebook's foray into retail is not much different from the Internet companies of the bubble era that thought they could take on Amazon merely by adding a shopping cart to their website. To the dismay of Webvan, Pets.com and Ktel records, online retail isn't that much easier than opening a bricks and mortar store. Those retail dilettantes were mowed down by Amazon (AMZN)— which is exactly what Schatz thinks will eventually happen to Facebook.

"Facebook is a social culture that hasn't figured out how to monetize those billion users," he explains. "I don't believe this is the seminal moment for the company that's going to turn it into a revenue machine."

Schatz is absolutely right about Facebook becoming a full-blown retailer. It's not going to happen, and Facebook shouldn't even try. That doesn't mean the company isn't at least inching its way down the right track.

Related: Facebook Rally Is a Long-Term 'Buy' Says Kilburg

As argued here in September, Facebook has so much user information in terms of users tastes and networks that it's almost irresponsible for it to not sell tangible products. The model is simplicity itself: partner with merchants to sell stuff then split the money. The hurdle is in creating partnerships. Amazon is out of the question, but Target (TGT) or Walmart (WMT) would be more than happy to get some exposure to a billion shoppers.

The question is whether or not Facebook can share in a way that meets both parties' needs without alienating members of the Facebook social club. If that's not the case, the nicest present FB could give shareholders would be killing the Gifts initiative now, before things get out of hand.

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