Facebook’s Trojan Horse Commerce Strategy

If you were to ask the question, “what is Facebook?”, you might get a variety of different answers: a social network, a communication platform, a content aggregator, and so on. Yet one thing Facebook isn’t – yet – is an e-commerce player. But it’s arguable that much of what Facebook has been building over the last several years amounts to a Trojan horse strategy to become one. Rather than entering Amazon’s market directly, Facebook has been building the scaffolding around its e-commerce business and doing everything but actually introducing ways to buy things across Facebook. Given how Amazon tends to respond to direct threats to its business, this may be one of the smartest things Facebook has done in its history.

What then, is this e-commerce scaffolding Facebook has been building? Think about what you’d need to have in place to build a successful e-commerce business:

  • Goods – either goods procured directly or close connections with companies that could be suppliers of such goods
  • Potential buyers – as large a number as possible of potential customers for those goods you have to sell
  • Signals – ideally strong signals about which goods you’ll offer will be of interest to your potential customers
  • Customer service infrastructure – ways for your buyers and sellers to communicate with each other before, during, and after the sale
  • Marketing tools – both above-the-line advertising and word-of-mouth tools for making potential customers aware of the goods on sale

Facebook, at this point, has all of this and more. With over a billion and a half users and masses of businesses who already run Pages and buy advertising on the site, it has well beyond a critical mass of potential buyers and sellers. Every company of any size in the vast majority of the major countries in which Facebook operates has a presence on the site and a relationship with Facebook, and a majority of individuals in many of those countries do, too.

Facebook already knows a great deal about your interests, and indeed, serves up targeted advertising for those products already, even though today the purchase flow that follows a click on one of those ads is completed outside the Facebook walled garden. In the form of Messenger, which was recently expanded to allow businesses to communicate with customers, Facebook has a customer service infrastructure and communication medium to allow buyers and sellers to interact throughout the purchase cycle. And through both paid advertising and the social connections and ability to amplify messages through social sharing, Facebook has a variety of tools to get the word out about products. With the M virtual assistant, Facebook even has a discovery mechanism for connecting potential buyers with sellers that may meet a particular current need, combining timeliness and relevance in a way only search engines have previously achieved.

The next interesting question then becomes where the Buy button shows up first. It clearly has potential in the context of advertising but, given the emphasis on Messenger as a channel for B2C interactions, it seems likely it will have a role there, too. Ultimately, Buy buttons should pop up in appropriate contexts throughout Facebook, probably even inserted automatically by AI that recognizes product names in status updates and Messenger conversations and recognizes the products themselves in pictures and videos users share. Of course, all of this will spread to both Instagram and WhatsApp (perhaps even Oculus) over time as well. At this point, it’s far less a question of whether Facebook will embrace commerce and much more a question of when.

One of the biggest determinants of Facebook’s ability to finally pull the trigger on commerce will be its ability to solve its biggest and thorniest problem — payments. For all the information users have willingly handed over to Facebook over the years, the one vital piece of information it hasn’t asked for or received is the 15 or 16 digits on the front of users’ credit cards. Yet having some kind of payment infrastructure in place is an essential piece of that commerce scaffolding. David Marcus, who now runs Messenger, obviously has a long history in this space, but so far all we’ve seen along these lines is peer to peer payments in Messenger. When that product launched, I surmised it might well be a way to break through the payments barrier but it hasn’t exactly set the world alight since. Using partners that have existing payment systems would be one option, but many of the most obvious partners have become direct or quasi-competitors to Facebook over recent years, including both Amazon and Apple. Once a user’s first transaction is completed, the rest is straightforward, but it’s that first transaction that’s going to be the hard part. Crack that and Facebook should quickly become a major player in e-commerce, adding yet another arrow to its quiver and opening up a whole new set of revenue streams.

Published by

Jan Dawson

Jan Dawson is Founder and Chief Analyst at Jackdaw Research, a technology research and consulting firm focused on consumer technology. During his sixteen years as a technology analyst, Jan has covered everything from DSL to LTE, and from policy and regulation to smartphones and tablets. As such, he brings a unique perspective to the consumer technology space, pulling together insights on communications and content services, device hardware and software, and online services to provide big-picture market analysis and strategic advice to his clients. Jan has worked with many of the world’s largest operators, device and infrastructure vendors, online service providers and others to shape their strategies and help them understand the market. Prior to founding Jackdaw, Jan worked at Ovum for a number of years, most recently as Chief Telecoms Analyst, responsible for Ovum’s telecoms research agenda globally.

93 thoughts on “Facebook’s Trojan Horse Commerce Strategy”

  1. One of Amazon’s moats is its incredibly refined, designed, and appreciated customer service UX. How does Facebook ensure that? If it leaves that to its suppliers, we’ll get multiple failure modes as each supplier wins or loses the challenge of customer UX.

    Perhaps Facebook will launch a purchase app that manages and optimizes customer UX in a fashion similar to iTunes Store being the mediator between the music industry and fans.

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    1. Another element that Facebook needs to be able to provide is Trust. Most people don’t like to buy online from suppliers with an unknown track record, because many things can go wrong (e.g. goods not meeting the description, poor quality goods, packages not arriving or arriving much delayed, payment details not being protected properly, etc.).
      The easiest way for Facebook to get started is by partnering with reputable store brands, suppliers and publishers. I don’t think people will hesitate to click a “Buy from Macys”, “Buy from Dell” or “Buy Pampers” button. That would leave the long tail of online goods and online sellers to Amazon, but that is clearly not where the volume is.

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  2. I’ve been watching and waiting to see which of the Google, Facebook, and Apple group would move forward on the e-commerce path, as their businesses/markets converge. Google was most obvious with its Google Express (formerly Google Shopping Express) but its growth seems very slow (like the majority of non-advertising Google efforts). Apple has a few pieces in place, like Pay, and accounts/credit cards on file, but hasn’t given any indication that it is looking to expand beyond the Apple Store/App Store/iTunes Store. So I think you’re right that Facebook will be the first of them to challenge Amazon.

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  3. You seem to have overlooked the other crucial part of e-commerce: Warehouse and fulfillment center operations. That’s real infrastructure not virtual, something that Facebook is unproven in.

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    1. Yes, I think that’s a very important point.

      Of you actually count all the publicly visible innovations that Amazon has been working on for the past few years, the vast majority are in fulfilment and repurchasing. Very few, if any, are about discovering new products. That’s the moat that Amazon is building.

      I’m pretty sure that Amazon does not consider “Buy” buttons in Facebook or anywhere a threat to their business. If anything, it’s simply a new advertising channel for them.

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    2. I assume Facebook would be partnering with already-existing retail like Macy’s, Best Buy, Newegg, etc, who already have warehouse and fulfillment operations.

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      1. If Facebook is just going to be a conduit for existing e-commerce players, taking a cut off the top as their fee for supplying eyeballs and “Buy” button clicks, then they might as well just partner with Amazon.

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        1. I doubt Amazon is interested in partnering as it already believes it is best positioned to be the front door for any ecommerce. I think Facebook’s search for continued growth is leading it to try to do to/for retailers what it is already trying to do to/for publishers. See Ben Thompson’s Aggregation Theory explanation at stratechery,com, which is summarized in his current The Voters Decide entry.

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  4. Jan, nice article… I do not see Facebook’s end strategy as being a traditional e-commerce player. The model that Facebook and David Marcus will be focusing on is Tencent’s WeChat model, whereby Facebook will be an introductory broker to goods and services, including games, movies, music, physical goods, flights, hotels, services (Uber), Tickets (sports, concerts, theatre tickets), restaurant reservations, etc. Once they build up this platform, especially the travel pieces, Facebook will then gain access to credit cards, loyal cards, and other payment details of the individual. Currently, Facebook is making ~$3.73 annual revenue per user (up from $2.80 YoY), which consists of $3.60 of advertising revenue and $0.13 in payments related revenue. Payments revenues have actually declined YoY! WeChat is currently monetizing its ~700M users at ~$7.00 ARPU, which is why Tencent is basically tied with Alibaba as the most valuable internet company in China. Once Facebook turns on the revenue spigot on Messenger (and WhatsApp), these numbers will increase very rapidly. More importantly, you will see Facebook be very well positioned to then implement their own payments platform. Think of Facebook Connect for eCommerce…Stripe, Paypal, and others will have a very strong competitor. More importantly, Facebook will know so much about their users that they will have one of the best foundations for creating an online identity management platform for its users that will extend across the internet ecosystem, which Facebook will be able to further monetize in the form of “Card Not Present” online payment fraud protection, which can run more than 1% for many online sellers.
    Please take a look at my presentation on Slideshare (pgs 17-27 are very relevant to this discussion), which details WeChat’s model and Facebook’s move into payments and e-commerce moving forward – http://j.mp/FBAfricaMEPaymentsCommerce
    also check out my other research on Twitter @seriesapartners …thanks!

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