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Take a look while you can, because I don't imagine Facebook's (Nasdaq: FB ) latest moneymaking venture will last very long. Facebook Gifts allows users to buy gifts for each other, with no sentiment, knowledge, or responsibility other than fronting the cash. Welcome to social gift giving, the most superficial way to give a gift, ever.
A card with cash
How does Facebook Gifts work? A user selects a gift and pays for it. The recipient immediately receives a message, fills out their shipping information, can change the size, flavor, style, or even exchange it for something totally different, and the gift is shipped. It's like a highly stylized way of giving cash as a gift.
The best part: if a recipient swaps out the gift chosen for them, the sender is not notified, and "any story on your timeline will continue to show the original gift." You both can pretend that you loved the original gift, and since it seems that you have no understanding of what someone you would buy one of these gifts is interested in, or know where they live, chances are you really don't know them very well and will never ask to see the original gift.
This service is coming after Facebook acquired Karma, a start-up that provided a similar service, back in May. At the time, the start-up was only three months old. It started out with $4.5 million in funding.
With more pressures for Facebook to find ways of monetizing its users, especially with a growing mobile user base, Gifts could help the company pad its revenue. According to eMarketer, Facebook is expected to bring in $72 million in mobile ads this year, while Twitter will earn $129 million, Pandora (NYSE: P ) will snag $226 million, and Google will dwarf them all with $1.4 billion. Google is forecast to hold onto over half of the mobile ad market through 2014, while Pandora is expected to lose market share while Facebook and Twitter gain share.
Also, gifts aren't the inventory-less advertising business. Chances are Facebook won't be holding inventory, so it seems likely that it will serve just as the marketplace between vendors and buyers, something like Internet marketplace eBay (Nasdaq: EBAY ) without the bidding. However, eBay has operating margins of only about 20%. This pales in comparison to what advertising platforms can earn, like Google's operating margin of 30% or Baidu's 50%. And even if Facebook earns some extra revenue, lower margins won't help profit grow as quickly.
It appears Facebook is grasping at straws to find ways to make money. With a focus on monetization, it acquired an extremely young start-up. Its superficial Gifts service seemingly goes against what Zuckerberg wrote in Facebook's registration statement, "We hope to strengthen how people relate to each other."
Still, this move isn't as out-of-focus as the Chinese Facebook-equivalent Renren's (NYSE: RENN ) recent $49 million investment in an educational loan company called Social Finance. Renren stated, "With gaming and e-commerce socialized … the next wave will be finance and education." Time will tell whether students will want to get a loan from the same company selling virtual sheep.
Not all coal in the stocking
There is some value to the platform. Facebook can improve its advertising when compiling size, color, and taste preferences. It could also open the door to more spending through Facebook, and using Facebook as a payments platform for many other goods and services. But that is a large leap from offering a teddy bear to displacing PayPal.
Additionally, physical goods sold in a store that Facebook controls is much better than virtual goods sold by Zynga (Nasdaq: ZNGA ) . Zynga, which contributes about 12% of Facebook's revenue, hastrouble maintaining users with its popular titles, and only 2% of its users are paying customers.
Facebook will have to take some chances to effectively monetize users. This is definitely a chance, but one that I think won't be very successful. For a more in-depth look at Facebook's prospects as an investment, including other key areas to watch in the future and other risks Facebook faces, grab your copy of our new premium report. Click here to get started.