How many startups will Facebook Gifts kill?

By Erin Griffith , written on November 8, 2012

From The News Desk

Each of the many, many gifting startups out there should have spent the summer reconsidering the future of their companies. Since buying Karma in May, Facebook has begun to testing out its social gifting functionality. The company hasn't been talking too loudly about it -- it's already tried and failed at virtual gifting once before, after all. But if it works, it could open the door for serious commerce on the platform.

Beyond the potential for Facebook itself, Gifts has another consequence. If successful, it'll probably kill any other social gifting company in its path.

If it fails? That's still bad for gifting startups. If Facebook itself can't do this, then good luck to any third party app developer who wants to try.

Here are a few that are: Wrapp, Giftly, Giftivo, Giftdish, Gifthit, GiftSimple, GiftDrop, DropGifts, YouGiftZiftit, Let's Gift It…. and probably 20 others I haven't encountered. They all offer some variation of seamless gifting, tied to Facebook, through gift cards, or a set of curated retailers, or video messages timed to birthdays, etc.

They have plenty of seed funding between them. But once they saw Facebook acquire one of their competitors, they should have known it was over. "Any gifting engine that Facebook introduces immediately makes non-Facebook gifting services less relevant," said one founder I spoke with. "Karma now has the mothership to position its offering however and wherever it might be optimized." Facebook is expected to reveal new retail partners to Karma, aka Facebook Gifts in an event held at the FAO Schwartz toy store in New York next week.

Facebook has rarely plucked API partners from its developer ecosystem in acquisitions. It's the whole "be your own bitch" idea -- if the platform company that your company is beholden to buys one of your competitors, you're done. That's why Facebook hasn't bought up any of the very profitable adtech companies on its platform, even if it meant leaving ad spend on the table. Buying one means all the rest are done. Cue ecosystem rage a la Twitter.

But Facebook needs to make commerce happen because it needs new streams of revenue. Commerce is a much bigger market opportunity than display advertising, and shareholders like it better, too. Thus far Facebook's forays into commerce have been flops. The company struggled to find supply -- retailers aren't setting up stores on Facebook (and when they do, they fail). So, like any good marketplace, Facebook went for the other side -- demand. Lucky for Facebook, it owns one of the biggest gifting events of the our lives: birthdays.

The Facebook "Happy Birthday" phenomenon is probably half the reason most people log in to the site every day -- out of obligation and fear they'll offend a friend by not posting a half-hearted "happy birthday dude" on each their friends' walls. Facebook Birthday Anxiety is an actual thing.

And that's led to the influx of startups trying to improve on the half-hearted "happy birthday dude." Facebook has tried to do that too -- the company at one point offered virtual goods, cards, and flair, and it brought in $30 million to $40 million in revenue at one point. They killed that in 2010.

This time around Facebook acquired its way into the sector, ecosystem be damned. They'll learn over the holiday season whether users are interesting in spending $10 or more for a Christmas (or birthday) present for their friends. There are plenty of arguments that it'll fail, namely, that people only wish acquaintances happy birthday on Facebook and wouldn't spend cash on a present anyways. Same goes for Christmas presents -- why not just send a card like usual? The gifting startups can also compete on price. With Facebook driving friends to attach gift cards and $10 or higher gifts to their birthday wishes, there may still be room for a $1 or $2 virtual gift option.

You could also argue that the startups have the David vs. Goliath advantage. A giant public company like Facebook isn't focusing all of its energy on something like Gifts, or check-ins, or whatever, in the obsessive way a startup might be. But Facebook has resources to do what it's best at, "moving fast and breaking things." The company moved quickly into gifts. What's likely to break is the startups in its path.

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