Facebook e-commerce: the next big thing?

A group of e-commerce start-ups, backed by some of the tech world's most pedigreed financiers, are betting that Facebook Inc can become an e-commerce powerhouse to rival Amazon.com Inc and eBay Inc.

As the world's largest social network hurtles toward a $5 billion initial public offering, it will come under more pressure from Wall Street to find new sources of profit growth and reduce its reliance on advertising, which accounted for 85 percent of its 2011 revenue.

Some entrepreneurs and investors increasingly think "f-commerce" - meaning e-commerce on Facebook - is the answer. Start-ups such as BeachMint, Yardsellr, Oodle and Fab.com are coming up with novel ways to persuade Facebook users to not just connect with friends on the social network, but to shop as well.

Backed by tens of millions of dollars from venture capital firms like Accel Partners and Andreessen Horowitz, and other big investors like Goldman Sachs , these start-ups are pushing out shopping apps, hosting online garage sales and testing out new business models on Facebook.

"E-commerce is a huge category with very strong tailwinds and it's a natural move for Facebook," said Sam Schwerin of Millennium Technology Value Partners, which owns Facebook shares and has a stake in BeachMint.

Amazon revolutionized online shopping by crunching lots of customer and purchase data to come up with relevant, personalized recommendations. In the same vein, Facebook's combination of data, analytics and payment technology could fuel the next generation of e-commerce, Schwerin said.

Facebook declined to comment, but investors said the company understands the importance of having an e-commerce strategy.

"It's a big imperative for them," said Theresia Gouw Ranzetta of Accel Partners, an early backer of Facebook. "They understand it's an important strategic benefit for them to make e-commerce players successful on the platform."

Big brand stores flop
Facebook had 845 million monthly active users at the end of 2011, far higher than Amazon's 164 million active accounts or the eBay online marketplace's 100 million active users.

But despite that huge base, Facebook is primarily a way to connect with friends, and not an online shopper's first destination. Big retailers including J.C. Penney , Gap and Nordstrom had previously set up stores on Facebook but shut them after generating few sales.

That has not stopped venture capital firms from pouring money into rookie companies they think have cracked the code.

There is a lot of buzz about Fab.com, a one-year-old company that has amassed 2 million users who broadcast their purchases via a "bought" button that advertises their shopping habits to friends. Fab built its user base in part by offering $5 a month to those who sign up - Chief Executive Jason Goldberg said "tens of thousands" opted in.

BeachMint co-founder Diego Berdakin said his company had set up a live video event called StyleMint.tv last holiday season featuring a brief appearance by Facebook CEO Mark Zuckerberg's sister, Randi Zuckerberg. For about two hours, they showcased BeachMint products that people could buy with one click.

More than 50,000 Facebook users watched the show and a "huge percentage" bought something, Berdakin said, adding, "At the time, it was the biggest day in our history in terms of sales."

Yardsellr, started in 2010 by former eBay manager Danny Leffel, organizes people into 3,000 communities, or "blocks," based on common interests. When someone posts a product for sale, it is sent to the news feeds of people in that block and purchases can be made with a few clicks.

Gross merchandise sales, a measure of the value of products, has been growing about 30 percent a month, according to Leffel. "Social commerce could be bigger than eBay," he argued.

Then there's Oodle, a start-up headed by Craig Donato, who runs Facebook's official marketplace, which boasts more than 3 million unique monthly users. When buyers and sellers post items, their Facebook identities are attached, giving users more confidence in the transactions, Donato said.

Making money
For now, Facebook is making money mostly by selling ads to merchants trying to target potential customers. But many experts say it is a matter of time before the eight-year-old social network will ask for a cut of shopping transactions, or seek other ways to profit.

They point to Facebook's relationship with online games developer Zynga Inc as an example. Facebook takes a 30 percent cut of revenue generated from the sale of virtual goods used to play Zynga games.

Gamers pay for those virtual goods using Facebook Credits, a virtual currency that could eventually be used to buy physical goods, according to some Internet entrepreneurs.

"Facebook has a huge opportunity to monetize e-commerce," said Christian Taylor, chief executive of Payvment, a startup that operates thousands of Facebook stores. "They have the infrastructure and team to pursue that."

Others downplay the potential for Facebook Credits, saying physical goods offer much thinner profit margins than virtual products.

"The 30 percent model is great for products with near-zero cost of goods sold," said Kevin Hartz, head of ticketing start-up Eventbrite, which works closely with Facebook. "But selling a TV with thin margins, that model will just not apply."

Nevertheless, if e-commerce on Facebook takes off, many expect the social network to find a way to make money off it.

"When you build on top of a platform like Facebook, there is always the risk that the platform provider decides to change the rules later on," said Laura Valverde of Beetailer, which runs more than 3,000 stores on Facebook.

"We have seen this with Facebook Credits and games. So, once social commerce fully takes off, it will only be natural that Facebook tries to benefit one way or another from it."

Copyright Thomson Reuters 2012