With Facebook Gifts demise, Credits are maturing

Now Facebook can focus its e-commerce efforts on third parties using the platform, not on a restrictive internal product that was great as a test but ultimately a resource drain.

Caroline McCarthy Former Staff writer, CNET News
Caroline McCarthy, a CNET News staff writer, is a downtown Manhattanite happily addicted to social-media tools and restaurant blogs. Her pre-CNET resume includes interning at an IT security firm and brewing cappuccinos.
Caroline McCarthy
3 min read

The way you should look at the just-announced demise of the Facebook Gifts feature is that it's a step in the evolution of e-commerce on the site. For Facebook Credits, the virtual currency that powered the marketplace of virtual knickknacks, the training wheels are now off. E-commerce on Facebook has moved beyond the relative safety of the company's internal test bed and can now be fully focused on getting pushed out to the social Web at large.

As Facebook has proven in the past two years, its financial success lies right there: building something relatively simple atop its madcap web of social connections, with the potential for any person or any company in the world to use it. The Gift Shop, effectively a Platform app in and of itself, didn't quite fit in.

To be sure, Facebook Gifts were popular. Its cartoon teddy bears, bouquets of flowers, and glasses of virtual champagne never disappeared from members' profiles, even long after other forms of seemingly senseless viral fads (remember the glorious feat of the sheep toss?) had grown stale.

And shutting down the Gift Shop must have been a very contested internal decision at Facebook, beset by factions and debate. The company is famed for its "iterative" business practices, a willingness to redesign the homepage over and over and to kill lagging features, but the Gift Shop had seemed like enough of a mainstay to keep around.

It had also produced real successes. In November 2008 a sponsored gift on behalf of The New York Times, depicting the front-page headline that announced Barack Obama's historic election, led the pack of "election-related gifts"--of which Facebook eventually sold more than 2 million. Several months earlier, venture capital firm Lightspeed Venture Partners had estimated that Facebook was making as much as $35 million a year on the Gift Shop from transaction revenues and brand sponsorships.

Last summer, Facebook marketing and outreach director Randi Zuckerberg unveiled an initiative that brought non-profits into the Gift Shop, partnering with organizations like Project RED and the World Wildlife Fund so that members could give one another virtual gifts that donated to a good cause in the process. Several months later, the Gift Shop went through a big expansion, dividing gifts among categories like e-cards, sports, charity, and music files (powered by Lala, which was eventually acquired by Apple and then shut down).

To this date, when you clicked on the Facebook profile of a member on that member's birthday, a Facebook Gifts window would pop up at the top of the screen encouraging you to purchase a gift for that friend.

But you can think of the Gift Shop as a sort of test laboratory for e-commerce on Facebook. It was the first feature on the site that collected members' credit card numbers, the first appearance of the "credits" currency that's now being expanded to the thousands of third-party developers on Facebook, and also really the first sign that Facebook users were willing to spend real money on pixelated gimmicks. That last point is something that many skeptics thought would be of improbable mainstream success: it can be said that the Gift Shop was the first real sign that in the U.S., the virtual goods industry had a shot beyond niche appeal to the spear-and-magic-helmet set in role-playing games.

Looking at the math, shutting down the Gift Shop makes sense: Facebook takes a 30 percent cut of third-party Credits transactions. It would likely prove more profitable for Facebook to turn over all virtual gifting to third parties than to operate a virtual gift emporium in-house, with limited marketing and engineering resources devoted to it, and in turn discouraging developers from operating virtual "gift shops" of their own by running a proprietary competitor.

But they served their purpose. Millions of Facebook members now have their credit card data on file and are familiar with using the Credits system. Which is why, at long last, Facebook is ready to start bringing virtual commerce into the spotlight, cutting deals like the one earlier this week with Asian payments company MOL Global. Closing up shop at Facebook Gifts isn't a sign that the product was failing, but rather an indication that the company views social-network e-commerce as capable of much more.