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Facebook Introduces Gift Service

via Jessica Guynn, Los Angeles Times

Could Facebook Inc.’s new gift service be the early Christmas present that Wall Street has been waiting for?

After its disastrous debut as a public company in May, the social networking giant has come under increasing pressure from investors not just to squeeze more advertising dollars from its nearly 1 billion users but to find new ways of making money.

On Thursday, the company launched Facebook Gifts, a service that lets users buy and send real gifts — not virtual ones — to friends. It marks Facebook’s long-awaited entry into mobile and online commerce that could help the company regain its luster on Wall Street.

With gifts, Facebook is sticking its toe in the water of a competitive online business dominated by giants such as Amazon.com and EBay. Susquehanna Financial Group analyst Herman Leung estimates that gifts for Facebook friends could generate as much as $872 million in annual revenue for Facebook by 2014.

“Physical products, physical gifts, are absolutely something that Facebook could make money on,” said Matt Brezina, chief executive of Sincerely, a San Francisco company that has partnered with Facebook to send postcards to friends.

Facebook has been experimenting with other moneymaking initiatives such as coupons and promotions for local businesses and letting users buy online goods and services, including monthly subscriptions to video and music streaming services. It has also begun to buy up companies that can potentially deliver new business opportunities, the largest of which was its acquisition of mobile photo-sharing app Instagram for about $1 billion.

One of its key targets is commerce, which Scott Kessler, Internet equity analyst at S&P Capital IQ, says is a “huge potential opportunity for Facebook.”

But, Kessler added, “Facebook hasn’t yet fully explored all of the options and opportunities available to them.”

The stakes could not be higher. Investors have tamped down expectations for Facebook, once hailed as the hottest technology company in nearly a decade. The company went public with an eye-popping valuation only to shed nearly half its market value, dragged down by concerns about slowing growth in its advertising business. Last year, ads accounted for 85% of Facebook’s revenue of $3.7 billion. During the second quarter, more than 80% of its nearly $1.2 billion in revenue came from ads.

Facebook will pitch its worth to Madison Avenue and large-brand advertisers next week at an annual advertising confab in New York, where Chief Operating Officer Sheryl Sandberg and board member Marc Andreessen will be interviewed onstage by Charlie Rose.

“We are marching fast in that direction, but we don’t think [advertising is] our only opportunity,” David Fischer, Facebook’s vice president of business and marketing partnerships, said in an interview over the summer. “There are lots of opportunities to come.”

On the night before its initial public stock offering, Facebook held an all-night hackathon. One of the hacks: brainstorming potential moneymakers for Facebook aside from online and mobile ads and transaction fees from third-party games. Joining the hackathon were fresh new recruits from a 16-person start-up called Karma, one of a crop of new online and mobile services that help pick out, buy and deliver presents to friends.

Shortly after Facebook Chief Executive Mark Zuckerberg rang the Nasdaq opening bell in the morning, the newly public company made its first official announcement: Facebook had bought Karma in its second-largest acquisition ever. It shelled out $80 million to move swiftly into the growing market for social gift giving.

Facebook had been working on its own gift-giving service but was so impressed with Karma that it bought it instead. Karma already used Facebook Connect, which lets users sign on to third-party websites and apps with their Facebook identity. The team behind Karma, Lee Linden and Ben Lewis, had deep experience in mobile commerce. They had previously founded Tapjoy, which helps mobile apps make money from users.

Facebook has always held itself out as a platform for software developers to build apps that reach its huge audience. Millions of apps including those from game maker Zynga Inc. operate on the platform, and Facebook takes a 30% cut of revenue. Now Facebook is moving in on some of those commercial opportunities itself.

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nalysts say Facebook Gifts could help Facebook make money from mobile commerce, something it has been slow to do, even though half its users log in on phones and tablets. Data from research firm ComScore Inc. suggest Facebook users are spending more time on the service from their mobile devices than ever. Mobile devices now represent 43% of total minutes spent on Facebook, up from 38% three months ago.

Facebook shares Thursday fell 30 cents to $20.32 but gained in after-hours trading after the Facebook Gifts announcement.

Facebook users spend most of their time on the service posting photos and updates, or chatting with friends, and not much time shopping. But Facebook thinks gift giving could become an important form of communication with friends.

With Facebook Gifts, online and mobile users can click on “gifts” on Facebook friends’ pages on the website or Android phones. IPhone and iPad apps are coming soon. Links will also show up next to notifications for friends’ birthdays, weddings, graduations or other big occasions. Users can choose a gift such as a T-shirt, cupcakes or a stuffed animal. The recipient will be notified through Facebook to enter a shipping address. In some cases, recipients can pick out what flavor cupcake or what color T-shirt. They can also exchange gifts if they want something else.

Facebook began rolling out the service Thursday to select users in the U.S. At the moment it has 100 retail partners, including Starbucks and 1-800-Flowers. Facebook, which will store credit card data for users, will take a cut of each gift transaction. The amount will depend on the individual deals it struck with its partners.

Facebook cautions that this is just one of many new initiatives it is exploring. And it hasn’t had much luck breaking into new businesses. Last year Facebook gave up on an effort to sell Groupon-like daily deals. But executives have high hopes that Karma can jump-start its entry into online and mobile commerce.

“We’ve all known for a long time that Facebook has lots of ways that they could make money. The next thing to look for are experiments like these. They will try something out and see if it gets traction,” said Kevin Landis, chief investment officer at Firsthand Capital Management in San Jose, which owns Facebook shares. “A lot of these could be flops, and that’s OK. All they need is for just a few to take hold and turn into a big hit.”


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