Will These Moves Help Facebook Win Back Investors?
Since its May IPO, Facebook (NASDAQ:FB) has been trying desperately to monetize its now 1 billion-strong user base and prove its value to shareholders. Concerns about the company’s ability to sustain growth resulted in a steep sell-off that at one point had shares trading at less than half their IPO price. Some of those concerns stemmed from the company’s slow move to mobile — to date, the vast majority of Facebook’s revenue has come from advertising, but the social network’s mobile platform, from which a rapidly growing number of users are accessing the site, could not display ads for some time.
While Facebook has worked out advertising on its mobile platform, at least to an extent, the company’s struggles with mobile brought up another issue: lack of diversity. Facebook’s revenue has largely come from just two sources. In the second quarter, more than 80 percent of its $1.18 billion in revenue came from display advertising, while roughly 15 percent came from social game-maker Zynga (NASDAQ:ZNGA), which gives Facebook a cut of revenues from sales made through virtual games hosted by the social network. After Zynga cut its 2012 outlook for the second time last Thursday, it’s more important than ever that Facebook demonstrate its ability to grow revenues elsewhere.
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That’s why the social network is transforming itself into an e-commerce platform. In September, Facebook launched a feature for users to buy and send real gifts. Through “Facebook Gifts,” users can purchase and ship products from more than a hundred vendors, with products like Starbucks (NASDAQ:SBUX) coffee, pastries from New York’s famous Magnolia Bakery, and cookie greetings from 1800 Flowers. Purchases and shipping are made simple by allowing recipients to input their own shipping details and even change the size, flavor, or style of the gift after being notified instantly after it’s been purchased.
Facebook will make money from this new gift-giving platform by taking a cut of each transaction. The amount will vary based on individual deals struck with vendor partners. Currently, gifts on the platform cost anywhere from $5 to several hundred dollars. To make the process as seamless and simple as possible, Facebook takes care of every step of the transaction, storing users’ credit card information, alerting them when their packages are shipped and received, and including customizable cards in each package that come stamped with the Facebook logo.
Facebook as also begun testing a featured called “Collections,” which will help retailers share their products on the social network. For the first time, Facebook is allowing users to click through and buy products on the site. Facebook is currently only testing the feature, and isn’t yet taking a cut of profits, though it can be expected to do so if testing proves successful.
To start, the company is allowing seven retailers to share information about products through “Collections,” which users can then share with their friends. Users viewing these collections are given three different actions to choose from: “like,” “collect,” and “want.” Each of these three actions will show up on a user’s Timeline for friends to see.
The sharing aspect is similar to how brands share products on the wildly popular Pinterest, on which users “pin” photos to boards that are shared with “followers,” or friends. Currently, users can link their Facebook accounts to Pinterest so that items they pin appear on their Timelines as well.
But Facebook’s feature varies from Pinterest is that the social network is including a “buy” link for products within a collection, sending people to the sites to purchase products. Facebook isn’t currently charging for the service, which means it won’t bring in any revenue, but presumably it plans to take a cut of sales that originate on its platform once the feature is out of beta testing.
Facebook is starting the test with seven major retailers: William-Sonoma’s (NYSE:WSM) Pottery Barn, Limited Brands’ (NYSE:LTD) Victoria’s Secret, Neiman Marcus, Fab.com, Michael Kors (NYSE:KORS), Smith Optics, and Wayfair.
But while the company is certainly on an e-commerce kick, creator and CEO Mark Zuckerberg has learned not to put all his eggs in one basket. Last week, Facebook began testing in the U.S. a service that allows users to pay the social network a fee to boost the visibility of their postings, thus ensuring that a comment or photo gets prominent billing on their friends’ Newsfeeds.
Facebook is still considering a variety of prices for the promoted-posts service, which is currently testing in the U.S. at $7, according to a spokesman. “When you promote a post — whether it’s wedding photos, a garage sale, or big news — you bump it higher in news feed so your friends and subscribers are more likely to notice it,” Facebook said in an announcement on its official blog last Wednesday.
The paid postings will be visible on both desktop and mobile versions of the social network, appearing near the top of people’s Newsfeeds for a limited period of time. The service was first tested in New Zealand in May, and has been tested in 20 other countries since. That testing began in a relatively small market, and has now reached Facebook’s largest, seems to indicate that the service has met with some success, and that the company may be nearing a wide release.
Though it’s not yet clear how much of a market there is for such a service, which was rolled out on October 3 to a limited number of customers for testing, it certainly demonstrates the company’s creativity and willingness to look beyond advertising for new revenues. And it’s that sort of outside-the-box thinking that investors want.
But so far, investors aren’t responding positively to the company’s efforts to find new growth areas. Facebook shares are trading below $20 today at just more than half their IPO price. Though still up more than 4 percent over the last month, Facebook shares have tumbled 10 percent in the last five days of trading.
It looks as though Facebook is going to have to prove the value of its new offerings — investors felt left in the dark about the company’s financial position when Facebook began publicly trading in May, and won’t allow themselves to be taken for a ride again. They’re likely awaiting solid proof that the company has been able to both improve and diversify revenues, which means they’re waiting on the company’s next earnings report for evidence that it has truly turned things around. Facebook will announce third-quarter earnings after the bell on Tuesday, October 23.
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