Is the Facebook 'Buy' Button a Threat to Amazon and Twitter?

Facebook (NASDAQ: FB  ) is now testing a new "Buy" button with a limited number of small and medium-sized businesses across the country. The concept is simple -- instead of simply encouraging users to "Like" a product via a sponsored News Feed ad, companies can add a "Buy" button that leads straight to an online purchase. The button is visible on both the desktop and mobile versions of Facebook, and participating businesses can embed the button directly in posts and ads.

19 million of Facebook's 30 million active small business owners currently manage their pages on mobile platforms -- but for visitors to make a purchase, they must leave Facebook. The "buy" button is intended to solve that problem by allowing Facebook to process payments on-site.

Source: Flickr.

This isn't the first time Facebook has flirted with the idea of integrating e-commerce into its network of 1.3 billion monthly active users. Back in 2009, Facebook introduced Facebook Credits, a virtual currency platform for in-game purchases and virtual goods, but it was discontinued in 2012. In 2012, Facebook tested out Facebook Gifts, a platform for sending physical gifts to Friends, but that too was shut down a year later.

Considering the failure of those efforts, should Facebook users and investors take its experimental "Buy" button any more seriously?

A reaction rather than an innovation
In my opinion, Facebook's Buy button is a knee-jerk reaction to Twitter and Amazon rather than a real innovation.

In May, Amazon (NASDAQ: AMZN  ) launched #AmazonCart (#AmazonBasket in the U.K.), a hashtag-based e-commerce partnership with Twitter (NYSE: TWTR  ) . Amazon's Twitter followers could add products to their online shopping carts by replying to hashtagged tweets. The purchases could then be completed on Amazon's website. American Express and Starbucks have also offered hashtag-based promotions on Twitter.

#AmazonCart. Source: Twitter.

Earlier this year, Twitter was reportedly in talks with online payment company Stripe to accept payments via Tweets. Last week, Twitter acquired CardSpring, a payments company that links credit cards to mobile apps for online shopping. Both moves have fueled speculation that a one-click, on-site "Buy" button for Twitter could soon become a reality.

Therefore, Facebook's "Buy" button should be considered a direct response to Twitter's evolution into a social shopping network.

Will 'social shopping' actually work?
Facebook and Twitter both face a similar dilemma -- how to diversify their revenues beyond advertising. Last quarter, advertising respectively accounted for 91% and 90% of Facebook and Twitter's revenue, respectively.

Ads are still big business -- Facebook's advertising revenue rose 82% year-over-year to $2.27 billion, while Twitter's advertising revenue soared 125% to $226 million -- but there is a lot of untapped potential in e-commerce. In the U.S., e-commerce sales are expected to climb from $263 billion in 2013 to $440 billion in 2017, according to research firm eMarketer.

Facebook's position as a closed network for family, friends, and acquaintances makes it a strong platform for recommending purchases based on personal information, preferences, and social connections. Twitter's position as a soapbox for news outlets, companies, and celebrities also makes it an ideal promotional platform for new products. The viral effect of sharing and retweeting could also help companies reshape their marketing initiatives.

Both business models are more flexible than Amazon and eBay's (NASDAQ: EBAY  )  websites. For example, Amazon presents product recommendations, but only based on past purchases or prior browsing history.

The potential drawbacks
Although Facebook and Twitter possess the scaffolding for a social shopping network, it doesn't mean that they should hastily launch "Buy" buttons on a wide scale yet.

The first big problem is that Facebook and Twitter could become rivers of promotional garbage. In the past, Facebook and Twitter revolutionized online ads by letting users Like or Follow companies they liked. That concept -- which packages the company as a "friend" -- could be nullified if the company intrusively streams "Buy" buttons into the user's news feed.

Opening the doors to e-commerce will also lead to a need for a fraud prevention department. While hashtag-based purchases on Amazon are clearly Amazon's responsibility, the lines become blurred if a small business promotes itself on Facebook, defrauds customers, then vanishes without a trace. Moreover, users are likely reluctant to share their credit card information with Facebook, considering recent high-profile attacks on eBay, PF Chang's, and Michaels.

Turning Facebook into an e-commerce site could also affect the Yelp (NYSE: YELP  ) -like starred review system it launched last November for small businesses. Poor reviews for single products could directly translate into poor business reviews, which could cause a backlash from small companies -- similar to what happened to Yelp over the past few years.

The Foolish takeaway
In conclusion, Facebook's "Buy" button is an interesting new idea that could turn it into a full-fledged e-commerce site. However, it's unclear if it's really the right direction for Facebook.

On one hand, Facebook can boost sales by taking a cut of on-site sales, gaining a new stream of revenue. On the other hand, it compromises the idea of seamless ads in the News Feed and exposes its business to fraud claims and security issues.

One thing is certain -- e-commerce isn't something that Facebook can simply dabble in. If Facebook intends to move ahead with this plan, it needs to fully devote itself to it, unlike its failed Credits and Gifts initiatives. If not, Facebook should devote more time to improving the experience for small business owners, while letting them accept the payments off-site.

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