E-Commerce

What Facebook Will Get Out of Gift-Giving App Karma


What Facebook Will Get Out of Gift-Giving App Karma

Photograph by David Trood/Getty Images

On May 18, Facebook (FB) announced it had acquired mobile gift-giving app Karma. There was other Facebook news that day, but lost in the hullabaloo was the fact that the deal was the social network’s second-largest acquisition to date. It totaled more than $80 million, according to two people familiar with the transaction who asked not to be named because the deal’s terms were private.

Karma is a 16-person startup that debuted its first smartphone app in February. But unlike past acquisitions, where Facebook bought small companies mostly for their talented engineers, the social network plans to continue running Karma’s service and regards the purchase as an important step into the business of online commerce, say the sources. It’s also a bet that gift-shopping, a multibillion-dollar industry that still takes place mostly in shopping malls, is about to get shaken up by Silicon Valley.

Karma is one of several new services to apply Web technologies to picking out, purchasing, and delivering presents. Once a user loads the app on a smartphone, Karma connects with Facebook and gleans data from the social network to know when friends’ birthdays, graduations, weddings, and other life events occur. Karma then suggests gifts to the user from its curated catalog—recommending a $30 bottle of Chandon sparkling wine for a recent grad, for instance. Once a purchase is made, the lucky friend receives a message requesting his or her physical address and, in some cases, offering the option to customize the gift, like changing the color or choosing to donate the money instead.

For gifters who have trouble coming up with ideas, Karma and its competitors are an alternative to gift cards, a business which rang up more than $100 billion in the U.S. last year, according to CEB TowerGroup (EXBD). They could also mean new opportunities for brick-and-mortar stores. “Major retailers have been struggling for a while about what to do with gifting as a business opportunity,” says John Poisson, chief executive officer of San Francisco startup Wantful, a Karma competitor. A social-gifting app “can help consumers remember to buy a gift [and] discover products without having to wander through a department store,” Poisson says.

Wantful raised $5.5 million from venture investors in March. Its users answer questions about friends to create a customized catalog of recommended gifts. Wrapp, a startup based in Stockholm, has deals with H&M (HMB:SS), Gap (GPS), and other retailers to create virtual gift cards which users send through social networks. Recipients redeem them using their mobile phones.

Facebook’s entry into social gifting is both a stamp of approval and possible threat. Since many of the apps use Facebook to promote their services and tailor gifts to friends’ likes, some fear the Karma acquisition means they’ll be muscled out. “The $100 billion question now is whether Facebook will remain an open platform that partners and supports companies like Wrapp in social gifting, as it did in social gaming,” says Hjalmar Winbladh, CEO of Wrapp. “Or is it abandoning that strategy and has plans to compete instead?” Reid Hoffman, a partner at Greylock Partners, which has backed Wantful and Wrapp, suggests social-gifting services are potential acquisitions for “a large body of players” including Amazon (AMZN), EBay (EBAY), and Google (GOOG).

Karma is a potential answer to one of the biggest questions posed by Facebook analysts: How will the social network increase its revenues? Advertising is not living up to expectations, especially in mobile. Karma, which buys items from manufacturers and resells them for a profit, gives Facebook a new business line. “This is absolutely an attempt to capture transactions,” says Sucharita Mulpuru, analyst at Forrester Research (FORR). “What remains to be seen is how big of a market this is.”

The bottom line: Facebook’s purchase of Karma represents a new revenue stream but worries other startups that specialize in social gift-giving.

MacMillan is a reporter for Bloomberg News and Bloomberg Businessweek in San Francisco.

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