Ecommerce could be Facebook’s next big business … if it addresses a few things

March 9, 2011 § 2 Comments

Much hoopla has been made about Facebook’s ecommerce opportunity.  Just as it has quickly earned a strong position in display advertising, and has grabbed share in virtual goods and payments, the industry pundits now say that online commerce will be its next billion dollar business.  The tools already exist, in fact, for merchants to integrate commerce directly into their Fan Pages, obviating the need for customers to link out to conduct their business.

But I think Facebook, and the merchants who sit atop its platform, are going to have to go beyond a “build it and they will come” approach, if they expect to reap the full potential of this new revenue stream.  I recently conducted an informal poll to gather insight on people’s attitudes and intent when it comes to Facebook commerce.  While there’s all sorts of caveats here, ranging from small sample size to survey bias, I think the findings are directionally useful – absolutely no one had the desire to buy traditional goods or services from within a Facebook page.  The rationale varied, but tended to fall into two themes: distrust and value.

Thanks in part to continuous headlines accusing Facebook of privacy violations (or of making it difficult for users to control their privacy settings), many people, it seems, are hesitant to relinquish any further data to the service.  And purchase decisions can be as revealing and personal, if not more so, than just about any other category.  Others simply don’t appreciate the value of buying through Facebook.  Some even assume that the inventory and buying experience will be a slimmed down version of what’s available on the merchant’s own site.  Facebook’s ecommerce strategy, therefore, should seek to resolve these barriers.  For example:

  • They should strengthen their online privacy policies.  A tall order, perhaps, for a data-oriented business model, but low hanging fruit include simplifying privacy controls, and being more sensitive to how its constituencies will react when it considers new features with questionable protections.  Remember Beacon, and the poor guy whose engagement ring purchase was revealed to his soon to be fiancé prior to the proposal?
  • Merchants would be advised to offer a comparable (if not unique) selection within Facebook.  If strategy or availability dictates otherwise, go deep on the specific categories that are offered there.
  • Product reviews and brand suggestions could be more personalized within Facebook (as compared to outside of it) if users opted-in to a higher level of disclosure.  For instance, Facebook could give buyers the option to share a purchase with their network anonymously or in the aggregate on external pages, and openly within Facebook pages.  So if you were shopping for the Motorola Xoom on Amazon.com, you might see that 15 of your friends “Like” the item or even purchased it, but if you shopped for the same gadget within Facebook, you could see specifically who those friends are, whether they posted any feedback, and so on.  Today, there’s no such distinction.
  • There’s no denying that credit cards are a suboptimal payment method for ecommerce, and even if you keep your card on file with multiple merchants, managing all those logins and passwords is a major pain.  Facebook’s payments platform, originally implemented to take a bite out of the virtual goods market, will be expanded to make real world purchases a whole lot easier.  Think PayPal for Facebook.
  • Facebook will ultimately host thousands (millions?) of commerce pages, likely positioning it as the broadest “store” on the Web.  As an aggregator, it could structure a rewards program with greater benefit than what’s offered by sellers individually.  Tied to its payment platform, points could be redeemed across its participating merchants, both physical and virtual.  It could also choose to award status and privileges to users who make purchases within its pages.  Facebook has done little to date with status awards, but history shows (recall Yahoo! Answers) that they can be extremely motivating.

Ecommerce could be a big deal for Facebook, and in fact, may be necessary to justify its massive valuation.  But to reach its potential, it should address its privacy issues, and seek to offer advantages over merchants’ own sites.

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Video entertainment … the fantasy list

February 3, 2011 § Leave a comment

If you’re in the media industry, you can’t avoid being caught up in the frenzy that is streaming video.  It’s the talk of the town.  Netflix this, and Hulu that.  There’s innovation from every angle, disruption of business models, and even venture dollars streaming in (pun intended).  It’s terrific fodder for the blogosphere.  Judging from the proliferation of products and services over the last few years (Amazon, Vudu, Roku, Boxee, Google TV, Apple TV, and so on), the market’s ready for services that let us access our content when and how we choose.  But for all the new solutions out there, none has fully delivered on the promise, which I’ll summarize as my media, my way.  The ideal is still a figment; leaving one to fantasize how, if given supreme power and influence, he’d design a solution from the ground up that meets all his needs.  My own wish list, which I think probably speaks for many, would include the following:

  • Provide a LOT of programming options, covering a broad range of genres and formats (i.e., short and long form).
  • Live programming, especially news and sports.  I would also have access to the content I want on demand.
  • The menu UI and navigation would be simple to use and easily harness the myriad of content choices.
  • Let me choose what to watch, and when, but also cater to my passive moods (which is most of the time when I’m watching TV) and curate the “must see” programs for me.
  • Deliver much of my content in HD.  And in the near future, HD3D (I’m happy to wait for when the goggles are no longer necessary).
  • Be ultra reliable, resistant to severe weather conditions, and don’t degrade in quality even if everyone in my neighborhood is online at the same time.
  • Push my content instantly.  Little or no time for downloading or buffering.
  • Seamlessly connect with my TVs.  It wouldn’t require another hardware component on the shelf, or if it did, it would be a small footprint.  Setup would be quick and straightforward.
  • Deliver content to my other screens as well – my PC/tablet and my smart phone.

A demanding list, I know.  But wait a second!  Doesn’t a cable subscription and DVR, combined with TV Everywhere deal structuring and authentication, deliver all of the wish list items, at least in part?  For all the hype out there, isn’t cable TV still the single best solution?  One of the last big pieces, streaming live video to our PCs and smart phones, appears to be falling into place with the latest deal announced earlier this week between Comcast and Turner.  VOD windows are shrinking as well.  The other domino is device compatibility, which is in the midst of tipping too (see also Comcast for iOS).  Comcast is obviously ahead of the curve on these initiatives, but is a reasonable proxy for the direction of the industry overall.

Don’t get me wrong – I’m not saying that the cable guys don’t have more work to do.  But with all the hubbub about the online-only challengers, it’s easy to lose sight of just how close the incumbents really are to the goal line.  The fact is that the challengers have a much bigger gap to fill.  Any household that chooses to “cut the cord” as things stand today will do so only with great sacrifice.  This video summarizes it nicely. 

My point is this … the online guys have helped to identify the market need, and in doing so, have been getting much of the attention.  But the buzz around their efforts has sounded the wake-up call for the paid TV incumbents.  Yes, traditional, subscription TV is expensive, and yes, the challengers will continue to work on the large gaps in technology and content (driving up their cost of goods, I might add).  The incumbents, though, have a solid head start, and the technology, the capital, the content relationships, and (maybe most importantly) the incentive, to strike back hard.  Already, they, and especially Comcast, have demonstrated that they can move relatively quickly.  So before you join the pile-on, give the cable guys some credit.  They will not sit idly by.  In fact, we can expect them to come out swinging.

Amazon on the verge of a rare mistake

January 31, 2011 § 5 Comments

Over the weekend, super-blog Engadget revealed screenshots of an apparently new product offering from Amazon.  Based on the screens, which are no longer accessible from Amazon’s site, the ecommerce juggernaut intends to offer unlimited streaming of TV shows and movies, for FREE, to all Prime subscribers.  Prime subs currently pay $79 annually for unlimited shipping, and Amazon has reported a strong correlation between the launch of this delivery service and an uptick in sales activity.

In and of itself, Prime may be a winner, but I think Amazon is on the brink of making a large mistake if it intends to include online media benefits for no additional charge.  Here’s why:

  • It devalues the online media industry.  For the sake of argument, let’s attribute the full price of the Prime service to the media feature.  At $79, it’s already $16 below Neflix’s comparable, streaming-only service.  If it’s successful, as Amazon surely hopes, Netflix will have no choice but to meet or beat the price, and voila!  There go Netflix’s profits, and Amazon’s differentiator.  Listen for the hissing sound of margin escaping the industry, like air from a balloon, as the two race each other to the bottom.
  • It requires heavy subsidization.  Shipping is a money loser for Amazon.  Even with the Prime subscription fees, Amazon spends more on shipping than it takes in, and the stats are worsening.  According to its financial statements, Amazon took in $1.193B in shipping revenue last year, while incurring $2.579 in cost.  Relative to the prior year, shipping revenue grew only 29%, while cost grew 45%.  Yikes.  It may be a perfectly sound strategy for Amazon to increase its appeal by making shipping more affordable, but with shipping being a cost center, the subsidy for the online media business has to be funded by its core ecommerce operation.
  • It smells of the “causality trap”.  Their research may indicate otherwise, but it’s not intuitive that the way to increase memberships to its premium shipping service is to add online media benefits.  And even if their ploy were successful at growing Prime subs, it’s even less likely that the new members will buy more physical goods from Amazon (which is necessary for the subsidy to work).  I think Amazon my be falling for the causality trap, in which company planners observe a beneficial correlation (in this case, Prime subs order more frequently than non subs), assume a causal relationship, and then extrapolate that if they could only drive more of the causal behavior, that the correlation will surely hold, and they’ll make a whole lot more money.  But this is flawed logic.  Existing Prime subs value the service for its shipping benefits and are therefore more likely to be active buyers.  If new subs are lured in by media benefits, they will care less about the shipping features, relatively speaking, and can be expected to behave differently from the installed base, i.e., buy less often.

So what might explain Amazon’s strategy?  It’s media business is large, contributing over 40% of its overall revenue, but while its Electronics and General Merchandise business is growing at an increasing rate (67% last year vs. 48% the year prior),  Media has started to flatten, producing a comparably modest 16% growth over the last two years.  So Amazon is under some pressure to try something new.  It is also likely anticipating a not-too-distant future as Netflix has, where streaming and downloading online content overtakes the sale of physical media, such as DVDs and Blu-ray disks.  Both are good motivations, but I think their strategy is off base.  If they’re willing to invest in subsidies, as they seem to be, they could boost media service subscriptions with a more relevant and targeted offering to electronics buyers, particularly those buying units compatible with its online media services (e.g., free 12-month trial).  Who wouldn’t give that a try?  An offer like that would produce paying subs as they roll off the promotional period, and would help differentiate their electronics business (not to mention, leverage the huge amount of volume generated by that business already).  Similar reasoning underscored Best Buy’s purchase of CinemaNow, Walmart’s acquisition of Vudu, and Sears’ recently announced partnership with Sonic Solutions.

Amazon, if you’re planning to give online media away for free to your Prime subs, you may want to take a step back and rethink that.  Sorry if I’m disappointing all you Prime customers out there.

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