Given their enviable positions at the epicenter of some of technology's most important functions, Internet powers Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Facebook (NASDAQ:FB) have long been regarded as potential entrants to a number of tangential technology markets.
Case in point: When both Facebook and Google recently expanded their experimentation with in-app or in-ad purchasing, some observers argued that the moves represented a potential challenge to e-commerce leader Amazon.com (NASDAQ:AMZN). However, although such claims make for great copy, the e-commerce efforts from Google and Facebook represent a far more benign challenge to Amazon than it might appear at first glance.
Facebook's and Google's recent e-commerce efforts
In breaking down these recent moves, let's look at Facebook's and Google's parallel efforts individually. As noted in a Wired article, Facebook began testing an expanded version of its Pages for companies recently.
This larger layout reportedly affords companies more space to showcase their product lines within Facebook's social-networking platform. More importantly, the Pages overhaul also introduced the ability for consumers to purchase those goods and services from within a company's Page, a strategic move that closely mirrors important new functionality being developed by Google.
Although rumors of its development arose months ago, Google has been slowly rolling out a new feature called Purchases on Google. Similar to Facebook's new transaction-enabled Pages, Purchases on Google allows users to complete a transaction entirely through a new "button" in Google's online advertisements.
These moves clearly deepen Facebook's and Google's ties to the business of selling goods online, long the bastion of the likes of Amazon and eBay. However, these intriguing efforts threaten Amazon far less than they initially appear to, for a few key reasons.
Subtle but crucial differences
At first glance, pushing deeper into online shopping resembles gravitating toward e-commerce, but the two sales channels differ in a few important respects.
For starters, Facebook and Google won't act as retailers as part of these new initiatives. Retail offers low margins and favors scale-driven business models such as those of behemoths Amazon, Wal-Mart, and Target, to name a few. Entering this entirely new industry would probably decimate Google's and Facebook's high-margin technology franchises.
Instead, Facebook and Google more likely aim to capture a higher share of online ad-spend for their platforms. From my perspective, these new sales-driven ad formats help Google and Facebook reach this objective in two important ways.
First, creating a more direct channel through which consumers can buy a given product or service lowers the friction inherent in the buying process, especially on small-screened devices such as smartphones. Following a basic understanding of consumer behavior, decreasing the number of steps required to complete a transaction increases the odds that sales will, in fact, occur. Methods that lower the barriers to purchasing have proved so successful that Amazon used its 1-Click patents to sue competitors that attempted to mimic its ultra-effective sales tool before its 1-Click patent was largely watered down in recent years.
Aside from the increased efficiency these new formats should provide advertisers -- and the higher rates Google and Facebook could thus command for them -- these new in-app buying features benefit the online giants by keeping customers within their ecosystems.
Since Google and Facebook make money by selling ads, keeping users engaged on their platforms -- rather than redirecting them to another website -- helps increase the number of advertisements Facebook and Google can serve to consumers. Increasing a user's time on a site expands the user monetization opportunity for Internet companies in general.
The real threat
By now you probably understand Facebook's and Google's true intentions with these moves. Rather than move into the low-margin business of selling third-party goods as Amazon does, they see an opportunity to grow their ad revenue per user.
As a closing corollary, these new formats from Google and Facebook more realistically threaten their online retail partners by potentially cutting them out of important customer information such as credit card and contact information that's often used to drive ongoing relationships with customers. Google, for one, insists that it won't exclude its advertising partners from key customer data, which seems a little too much like biting the hand that feeds it. Either way, these interesting and budding efforts from Facebook and Google appear to offer plenty of promise for their investors in the years to come.