Nik Cubrilovic

Bloomberg has a report out today about retailers shutting down their online Facebook stores due to lack of interest and activity from users. The headline example is Gamestop – who, despite having some 3.5 million fans on Facebook – recently shut down its Facebook shopfront because it didn’t take off with users. From the article:

“There was a lot of anticipation that Facebook would turn into a new destination, a store, a place where people would shop,” Mulpuru said in a telephone interview. “But it was like trying to sell stuff to people while they’re hanging out with their friends at the bar.”

The story also reports that in the past 12 months other large US brands such as Gap, J.C. Penney and Nordstrom have also opened and then subsequently closed stores.

On the same day a story is published about e-commerce failing on Facebook other stories are published about the rapid growth and success of Pinterest – the social collation and shopping site. Pinterest may already be generating tens of millions of dollars in revenue through affiliate fees received from vendors who are referred users from the service.

So what is going wrong at Facebook? How has Pinterest managed to capitalize on the intersection of social and ecommerce while the worlds largest social network has been left to flounder?

The IPO

Facebook recently filed an S-1 with the SEC and intends to go public sometime in the next 3 months. While it is not yet known, it is said that Facebook are aiming for a valuation of between $75-100 Billion dollars.

The key numbers are:

• 845 Million active users (login once a month)
• 483 Million users who login at least once a day
• 43% of all global Internet users are regular Facebook users
• $3.71 Billion in revenue last year, YoY growth of 88%
• $470 Million per year is from Facebook Credits
• Operating margin of 43%
• $1 Billion in earnings
• Revenue growth is slowing, from 88% ‘10-‘11 to 60% ‘11-‘12
• 85% of revenue from ad sales
• $4.75 of revenue per year per active user

A valuation of $100 Billion would imply a PE of 100. A valuation of $75 Billion would imply a PE of 75. Apple trades at a PE of 13x and Google at 20x – so for Facebook to justify a $75-100 Billion valuation it would need to grow its earnings by an order of magnitude.

The question then becomes where this growth will come from. Almost all of the wealthy world is already using Facebook. The next 850 Million users will come from countries where ad rates are a fraction of what they are able to achieve currently. The solution to revenue growth is to either grow revenue per user (currently ~$4 per user vs ~$20 per user at Google) or further diversify revenue.

Facebook has already achieved one thing that Google hasn’t – it has two large sources of revenue in ads and in Facebook credits. Credits is expected to grow since it is compulsory for Platform apps to integrate them, but ad yield will be more difficult to grow an order of magnitude without significantly altering the product and user experience.

E-Commerce

Analysts who place Facebook’s valuation at the higher end of the $75-100 Billion range usually justify those numbers by forecasting large revenue growth in e-commerce on Facebook, and Facebook as a retail threat to Amazon and other online outlets. From the Bloomberg article:

Business consultant Booz & Co. predicted in January 2011 that physical goods sold through social commerce would balloon to $30 billion from $5 billion by 2015, with Facebook contributing a majority of sales.

It is hard to see how this will be achieved when major brands have attempted to open storefronts on the platform only to shut them down due to lack of interest

Social Commerce

The market at the intersection of e-commerce and social has already been established and is growing rapidly, but it is leaving Facebook behind. Pinterest is one of the fastest growing products ever, and recent estimates (although possibly wildly inaccurate) suggest that the site is already achieving tens of millions of dollars in affiliate revenues from its 10 million (and rapidly growing) users.

The expectation amongst technology commentators and analysts is that in the social era one social network (Facebook) would rule all. Facebook would leverage its large base of users to attack each vertical and in-turn switch on gushers of multiple-billion dollar revenue streams. The reality is that social networking online is becoming fragmented. Users of Pinterest can quickly re-create their social network on the site since it integrates with Facebook, and they are also offered the flexibility of a ‘do-over’ – deciding which contacts they want to share their shopping experiences with and which contacts they don’t.

Pinterest has features that are analogous with Facebook – friends become followers, sharing becomes re-pinning, like becomes love, etc. It takes less than a minute to move over your social network from Facebook and to import it into Pinterest.

The advantage that Pinterest and other vertical social networks have is that they are designed for one particular use case rather than having to accomodate them all. The growth in Facebook features means more and more links on the frontpage and an ever confusing interface for users where commerce and commercial advertising are mixed with personal notes and baby pictures.

Why Facebook is Losing E-Commerce

Design

Outside of the core Facebook features – notes and photos from friends, the design of Facebook is terrible. As a user I find myself anxious when clicking on any link outside of the standard view. Despite using the product for over five years, I have zero familiarity with it. Other products that I use as often I can navigate almost blindly, yet with Facebook all of the features beyond the main timeline and posting interface are a huge jumbled mess.

If I wanted to find a product on Facebook, I wouldn’t even know where to start. Here is an example:

The search box can only be used to find people or brands, and then only by name. Compare this to Pinterest:

Leading brands have invested millions of dollars in promoting their Facebook pages through regular advertising channels, yet most of them offer very little functionality and if you like a product page you end up with a torrent of promotional material in your timeline.

Facebook has been designed for personal interactions between friends, it hasn’t been designed as a way to find and research products that you may be interested in.

Separating and Grouping Friends

The second reason, and this was pointed out in the Bloomberg article, is that users do not want to mix friends that they share notes or photos to with friends that they seek shopping recommendations from. Facebook has no easy way to segment friends – you can’t follow a person you are interested in because of their fashion sense and product recommendations without also being exposed to the mundane details of their life such as which events they are attending and photos they are sharing.

Pinterest and other social networks allow users to segment their friends – they may not want their parents, spouse or immediate relatives to know what they are shopping for but they are happy to share it with dozens of like-minded strangers or friends on Pinterest. Personal photos and notes stay on Facebook, Shopping and e-commerce happen on Pinterest and other sites.

Privacy

Related to that point is the issue of privacy – where Facebook does not have a great track record (see Beacon et al.).

Do users trust Facebook with more data than they already know about you? Do you trust them with your daily shopping habits? Do you trust them not to share your information with retailers who are setup on the site? Do users feel that their privacy is being violated when their news stream consists of a mix of personal photos along with product promotions?

It may be inevitable that due to the issue of privacy alone social networking users become uncomfortable with a single site being the basis for all online activity. The trend may become that multiple social networks – each serving a particular vertical and each knowing only a slice of information about the user – becomes the norm.

There is a conflict here for Facebook. They are being entrusted by users with a lot of personal information while at the same time their business interest is to increase the yield from advertising – which can only be achieved with better ad targeting, which means more personal information being revealed to advertisers.

What Can Facebook Do

To win-back e-commerce Facebook will have to redesign their product and somehow segregate the different applications on a social network. One stream for personal information, another stream for e-commerce and product recommendations, another stream for gaming, etc.

Facebook will also have to figure out a better way to integrate applications with their platform. Why is Pinterest a separate website with minimal Facebook integration rather than an application built on Facebook? The promise and idea of Facebook was to become the social operating system for the web – yet potential partners are tapping into it for nothing more than sucking out contacts.

Unless there is a redesign of the product and the platform, Facebook may grow out to be the social network for photos, events and notes – leaving the lucrative verticals such as online commerce to competitors such as Pinterest and not fulfilling its potential as the social platform for the entire web.