In a move that surprises no one, Facebook (NASDAQ: FB ) will shutter its physical Gifts platform at the end of this week. It turns out that people just didn't want to send teddy bears and chocolates to their Facebook friends. And while the attempt first signaled a company quickly grasping for revenue ideas with little focus, the closure of the service signifies a refocused company more worthy of an investor's research.
Gifts: A reprise
In May 2012, Facebook acquired a three-month-old start-up called Karma that provided the basic "gift-giving among friends" service. It, however, took Facebook until that September to launch its own version. Maybe Facebook bought the company so young because it wanted to avoid a high acquisition price tag if Karma took off, like its billion-dollar Instagram acquisition. But really, the service was just a bit too unproven and Facebook shouldn't have even glanced in its direction.
In addition, the way Facebook implemented Gifts was a bit of a joke in insincerity. While one user would put up the money for the intended gift, the recipient would be able to change everything from color and size to the actual item. And then enter their shipping information. As I wrote earlier, it was a highly stylized way of gifting cash.
Facebook better have the receipt
Now, Facebook will be shifting away from these physical gifts in favor of digital gift cards. According to AllThingsD, "more than 80 percent of gifts sent on Facebook were digital." Lee Linden, who was in charge of the Gifts platform, told AllThingsD, "Physical gifts do require more work to maintain, and if less than 20 percent of users are taking advantage of it -- the purpose of this redesign is to double down on what people want."
Handling physical inventory was out of Facebook's expertise. And really, a poor decision to keep up profit margins. Selling and shipping goods comes with notoriously low profit margins because of the low barriers to entry. Amazon.com (NASDAQ: AMZN ) , while having a bottom line clouded with intensive reinvestment, has only reached a 4% profit margin in one quarter over the past five years, and since 2012 hasn't broken 1%. And logisitics is Amazon's expertise.
But this is good for Facebook. It can focus on where it should, advertising, which can have extremely high profit margins. For example, since 2009, Google hasn't had a quarterly profit margin under 15%. Double-digit profit margins should be more comfortable for both Facebook investors and the company.
Still a bit distracted
Facebook still is pursuing other strange projects, like the Facebook Card that "allows" users to load money onto it that locks that cash up to be spent only at certain retailers. While the companies may love the idea, consumers may just be wise enough not to hold cash on such a strange gift card that limits their options and flexibility.
As long as Facebook remembers its expertise, such small projects could help it diversify revenue sources. But the company just has to remember not to stray too far into another industry.
Facebook's foray into hawking hazelnut cookies may not have worked, but it still keeps trying to challenge and encroach on the other tech giants of today. Will it be able to outcompete its competitors in the next decade? To help answer this question, we've created a free report called "Who Will Win the War Between the 5 Biggest Tech Stocks?" Inside, you'll find out which companies are set to dominate and give in-the-know investors an edge. To grab a copy of this report, simply click here -- it's free!