Breakout

‘Like’ It or Not, Facebook Is a Retailer

Jeff Macke
Breakout

After all the IPO hype and Hoodie-gate incidents, Facebook (FB) is finally starting to understand what it wants to be when it grows up. With the announcement of Facebook Gifts, the company is officially starting to sell non-virtual goods -- everything from $5 Starbucks cards to Magnolia cupcakes to some more expensive items. It's a baby step in the right direction for a company still struggling to define itself.

Facebook isn't a club, a billboard or a search engine. Facebook is a retailer. The company just doesn't quite seem to know it yet, although with this move, they are getting a bit closer.

FB has superficial information on what they claim are 900 million monthly users. That information will always be of limited value to advertisers for two reasons: First, the more FB allows ads, the lower the engagement level of the users will be. Each ad is worth less than the one before it. Second, Facebook only knows the person you pretend to be when talking to people you knew 20 years ago. Facebook is often a platform for a more "ideal" identity. But Google (GOOG) knows the real you -- dirty, non-socially acceptable details and all. Facebook can never really compete on that level.

Consider the way you buy books from Amazon (AMZN) or music from iTunes (AAPL). You barely think about it. A friend mentions a book or band or movie and it carries weight. Most people have unread books in their Kindle queue that they can't even remember buying. They just sort of made their way there because they seemed interesting at the time.

Beyond Cupcakes

Forget just sending cupcakes to a friend. Give me someplace to buy an album someone I sort of know likes, or a book they enjoyed. Even an app that doesn't involve virtual farm animals. Facebook can start this store themselves or partner with Amazon, Apple or scores of other providers.

The key is keeping the stuff Facebook sells small and within the FB ecosystem. "We have one billion users swapping purchase ideas and we want a cut of the revenues in exchange for giving you the business" is the pitch they should give to vendors.

It's not sexy and the margins are small but the revenues will be huge. If Facebook pulls it off -- and there's a 99% chance they won't -- the company could be the first real online merchant to emerge in a decade. If they stick with selling ads and items on the cupcake spectrum, the stock is worth about $5.

It's their choice.

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