Analysis Of Facebook Gifts By Greg Schvey Of Aggregift

Facebook reported on their 4Q12 earnings call that $5M of revenue was generated from the combination of Promoted Posts and Gifts, with the majority from PP [1]. By finding the revenue generated by PP, we can back out the performance of Gifts.

1. Promoted Posts (PP) generated an estimated minimum of $4M of revenue in 4Q12

A minimum of 200K pages used PP in 4Q12 o 500K used PP by the end of Q4 [2] o 300K used PP by the end of Q3 [3] o 500K - 300K = 200K new Pages using PP in Q4 The minimum price to promote a post is $5 The average page who uses PP does so 4x per quarter o As of 12/6, 300,000 Pages had promoted 2.5M posts [4], or an average of 8.33 per Page o PP launched on 5/31/12 [5] o Between PP launch and the announcement of that stat on 12/6, 189 days had passed, or 2.07 quarters o 8.33 PP per Page using the feature / 2.06 quarters = 4.04 avg PP/quarter/Page who uses it 200K Pages * 4 posts per Page * $5 per post = $4M minimum revenue from PP in Q4

2. The maximum $1M of revenue from Gifts translates into a maximum of 267K gifts sold $1M of Gifts revenue to Facebook means the total value of gifts sold through Facebook is $6.7M o Facebook receives an estimated 15% of the price of each gift sold [6] $6.7M total value of gifts = 267K gifts o The average gift sold on Facebook is $25 [7] 3. With a tight band of max/min possible gifts sold, we estimate that Facebook sold 25-200K gifts or 0.03-0.12% penetration of the US market (Facebook Gifts is available only to US users [8], Facebook has 163M users in the US [9])

If 17% of PP customers from Q3 used PP in Q4, Facebook made $0 from Gifts o 50K / 300K = 17% o 200K new PP users in Q4 + 50K returning = 250K Pages o 250K Pages * 4 posts per Page * $5 per post = $5M revenue from PP in Q4 We estimate that repeat use of PP is towards the higher end of that cap, since 70% of promoted posts are purchased by repeat customers [10] (note: this figure may refer to customers of any type of Facebook advertising, given the language/context in the source)

4. We also looked at what this means for Gifts going forward Gifts was heavily promoted during the holiday season Gifts capitalized on new feature buzz, with an abundance of news articles about it during 4Q12 Over the weeks/months since the holidays, general interest in Facebook gifts is approximately 25-50% of what it was during the holiday season [11], cresting again slightly only recently for Valentine's Day Anecdotal evidence from Gifts' retail partners supports the notion that the feature did not perform well [12] 5. Investors have been vocally bullish about the prospects of Gifts "We see the Gifts feature as the stepping-stone to abroader, formidable e-commerce platform on Facebook," Topeka Capital Markets analyst Victor Anthony said. "In 2014, we estimate that FB could generate approximately $800 million in incremental revenues and $330 million in incremental EBITDA from ecommerce." - CNBC "Facebook shares...rose 7.1% on the news [about Gifts]" HuffPo "Facebook Gifts Could Be Billion-Dollar Biz" - InvestorPlace

Potential Weaknesses of this Analysis

Minimum price to promote a post could potentially be less than $5 o $5 is the minimum price for a promotion, but a promotion can be stopped before it completes

$5 still seems like a conservative figure, given that Pages with more users are charged hundreds to promote a post [13] Timing between 300K Pages using PP and 2.5 million posts may be off o Dan Levy spoke on 12/6, this analysis assumes the figures given were current to that date o 300K Pages was the same figure used on the Q3 earnings call, so this number may be higher as of 12/6, reducing PP per quarter per Page that uses PP If that's the case, the actual figure of PP may have been higher as well, so we used both figures as given Even if the PP/Page/Quarter goes down, no realistic figure for PP would have a significant enough impact to discredit this analysis Average cut to Facebook from each gift may not be 15% o This is based on estimates from respectable news sources o Some have estimated they receive a higher cut (less gifts per $ of revenue), some have estimated they receive a lower cut (more gifts per $ of revenue), so 15% seems appropriate Maximum gifts sold within any kind of remotely reasonable use of these figures: approx 500K / 0.3% market penetration
o

Sources
1. "This past quarter, payments and other revenue also included around $5 million from sources outside of games, primarily user Promoted Posts and to a lesser extent from our new Gifts product." Facebook 4Q12 Earnings Call 2. "Almost 500,000 pages have used Promoted Posts" Facebook 4Q12 Earnings Call 3. "We have seen Promoted Posts from over 300,000 Pages" Facebook 3Q12 Earnings Call 4. Facebook's Global Director of SMB Markets speaking at a conference 5. Facebook Launches Promoted Posts for Pages via allfacebook.com 6. As estimated by TechCrunch and the NYTimes Blog 7. Stated explicitly by Facebook, as reported by the NYTimes

8. Facebook Gifts Now Available to All US Users via PCMag 9. Via socialbakers, the leading social media analytics firm 10. "More than 70% have become repeat customers" Facebook 4Q12 Earnings Call 11. Looking at Google Trends data 12. "Facebook Gifts has a rocky debut" via PandoDaily 13. "businesses pay Facebook Inc. anywhere from $5 to hundreds of dollars to promote a post" via WSJ Blog