Cover Story

Facebook Banks on a Little Help from Its Friends


Merrill Squires avoids car salesmen at all costs. So when the 48-year-old marketing executive from Dallas was choosing between a Chevrolet Tahoe and a GMC Yukon Denali recently, he turned to his 600 Facebook friends. Dozens responded, and one old pal—a Denali owner—steered him toward the Tahoe. "I trust his opinion on it, and I would never have thought to pick up the phone and call him," Squires says.

Social-media networks are starting to influence all kinds of purchases, from cars to movie tickets. Shoppers sift through Twitter posts for opinions about gadgets or running shoes. They turn to Kaboodle, a Web site for sharing shopping lists, to get gift ideas. But Facebook, with 300 million users worldwide, has the best shot at combining retail and social media in bold and lucrative ways, and it's chipping away at this challenge.

Last year the company rolled out Facebook Connect. When retailers use this service, they get a Facebook log-in window on their Web site. That allows Facebook users to tap their friend lists for input as they shop. Already, 43% of online retailers have signed up, according to researcher e-Tailing Group, and an additional 31% plan to join in the next year.

Facebook Connect does add a twist to the experience of visiting an online store. When shoppers who are logged into Facebook see an item they want to buy, they can press a button, sending a photo and product details to the pages of their friends, who can give it the nod or recommend something else. These comments can pop up months later when mutual friends are looking for similar information. Brian Bateman, 33, uses Connect when he buys concert tickets from Live Nation (LYV) to recruit friends to go with him.

Facebook's director of platform marketing, Ethan Beard, says the idea is to make e-commerce more like going to the mall with friends. Shopping can be a "social experience, but with the Web it turned into sitting by yourself [at] a monitor," says Beard. "Social media and tools like Facebook Connect are making shopping social again."

For five-year-old Facebook, retail may be the path to profits. Advertising currently makes up most of its estimated $500 million in revenues, but online ad growth is slowing. Investors foresee shoppers opting to use Facebook rather than search engines such as Google (GOOG). "That's the vision. That's why Facebook is worth so much money," says Dave McClure, a consultant with Founders Fund, a venture capital firm that backed Facebook in 2006.

POWERFUL COMBINATIONFor now, Facebook lacks an online payment method, but it recruited a handful of staffers, including at least one executive, from eBay's (EBAY) PayPal (EBAY). A payment system would allow it to collect fees from merchants for transactions performed within the Facebook network—a potentially huge revenue source, based on how well retail and social media have been mixing. Fashion designer Diane von Fürstenberg has set up a promotional page on Facebook that has attracted 25,000 fans. And next month she plans to launch a line of sunglasses at the same time that her retail Web site begins offering Facebook Connect.

Others are skeptical that the social circles people develop on Facebook have the power to change the way we shop online. "I don't know that enough of us have [Facebook] networks large enough that there is overlap in what products we are looking for," says Sucharita Mulpuru, e-commerce analyst at Forrester Research (FORR). But many retailers are placing serious bets on friend power. T-shirt seller Threadless shows off a weekly roundup of new shirts to fans on Facebook, which is where it now spends the lion's share of its ad dollars. Says Cam Balzer, marketing vice-president for Threadless: "When you start to see the power of those audiences and the word of mouth ... it makes you want to get more out of that same audience."

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

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