Gigaom

A Facebook Phone: Ambitious Leap or Fatal Mistake?


A Facebook Phone: Ambitious Leap or Fatal Mistake?

Photograph by Tomohiro Ohsumi/Bloomberg

At this point, the fact that Facebook (FB) is struggling with its mobile strategy is not really news. The company itself flagged the issue in its pre-IPO documents, saying advertising revenue is not keeping up with expectations, and its $1 billion Instagram purchase was widely seen as an admission it needs a lot of help in the mobile department. But does it make any sense for the company to build its own phone? Some argue this would be a natural extension of the social network’s strategy, but others say it would be a monumentally stupid move to make and is almost inevitably doomed.

Talk of a dedicated Facebook phone resurfaced this weekend with a report from Nick Bilton in the New York Times that said the social network “hopes to release its own smartphone by next year” and has been hiring hardware engineers and developers—including several from Apple (AAPL)—as part of that effort. According to the sources Bilton talked to, Facebook Chief Executive Officer Mark Zuckerberg sees the mobile-phone project as something crucial to the future of the company, which just went public in a somewhat rocky IPO. Said one Facebook employee:

“Mark is worried that if he doesn’t create a mobile phone in the near future that Facebook will simply become an app on other mobile platforms.”

There are also signs Facebook could be putting together all the elements that would be required for a device that could (theoretically at least) challenge Apple’s dominance in mobile: There is the new Facebook Camera app, which could be connected directly to a device’s camera; the social network recently launched its own Apple-style app store as a central repository for related services and software; Facebook Messages could be the company’s version of Apple’s iMessage; and there have been reports that the social network is planning to acquire the Opera browser.

As Bilton notes, this is Facebook’s third kick at the can when it comes to mobile. Two years ago, there were rumors the company was planning to release a phone made by handset maker INQ Mobile (13:HK), the same company that released the first phone with a dedicated Facebook button in 2008. As Om Malik detailed in a post in 2010, the idea was that Facebook would be a kind of social layer on top of a version of Android and that the social network’s functions would be deeply integrated into the device on every level. The INQ Cloud Touch, which was released last year, offered at least some of these elements but didn’t take off.

Then came another report from All Things Digital that Facebook was actually working with HTC on a full-fledged Facebook device. That sparked a debate between our two mobile specialists—Kevin Tofel and Kevin Fitchard—over whether the social network needed a dedicated handset. Fitchard argued it did, because Facebook would be at a competitive disadvantage if it had to rely on other companies to host its Facebook buttons and other features. Tofel, however, said he didn’t think many users would want a phone that was so overwhelmingly connected to Facebook.

According to Bilton’s report, the current Facebook project is an expansion of the “Buffy” project that All Things Digital wrote about last year and reiterated earlier this year. And Facebook provided the exact same statement it made when ATD wrote about the concept, which said:

“We’re working across the entire mobile industry; with operators, hardware manufacturers, OS providers, and application developers.”

Some have speculated Facebook could fast-track its mobile ambitions by simply acquiring INQ Mobile, in much the same way Google (GOOG) boosted its mobile plans by buying Motorola. Venture investor Eghosa Omoigui says the social network should hire some Qualcomm engineers and focus on emerging markets, or possibly even acquire BlackBerry maker Research In Motion (RIMM), which is on the ropes and cutting thousands of staff in an attempt to remain profitable. Former Wall Street analyst Henry Blodget, however, says getting into the hardware business would be a gigantic mistake, since it is “an extraordinarily difficult, low-margin, commodity business.”

In many ways, the battle to control the mobile experience is a logical extension of the walled-garden building that both Facebook and more recently Google have been engaged in—that is, an attempt to control almost every interaction with users and thereby convince (or force) them to spend more time within the company’s ecosystem, where more data about them can be harvested. That was the rationale behind the launch of Google+, and it has been Facebook’s primary motivation for virtually everything, including the development of the “open graph” platform.

Facebook has had a somewhat fractious relationship with Apple and its market-dominant platforms: An attempt at a partnership built around Apple’s Ping social network failed, and Steve Jobs later said Facebook’s demands were “too onerous”—although it’s possible the Apple CEO recognized Zuckerberg’s ambitions and decided they were more like competitors than partners. In any case, not long after that, Apple formed an almost unprecedented partnership with Twitter, which has been integrated as a kind of social layer throughout Apple’s operating systems and platforms.

As Bilton and others have pointed out, creating hardware is a very different business from building social software, and it’s not clear Facebook would be able to bridge that gap, regardless of how many billions it throws at the problem. The company’s existing mobile-app efforts have been lackluster at best (although its new Facebook Camera software has gotten some good reviews). It’s also not clear how building a hardware business would necessarily help Facebook generate more revenue. IDC mobile analyst Kevin Restivo said in an e-mail interview that:

“Mobile phone production is a business Facebook has zero experience in. It’s also a business with considerable cost and risk attached [and] no amount of homework done by Mark Zuckerberg is likely to help bridge the operational knowledge and gap needed to compete against the market leaders.”

After raising $16 billion in an IPO, Facebook obviously has the money to make some risky bets on building a brand-new business (or businesses). It clearly needs to do something to produce the kind of blockbuster growth that would justify what is still a phenomenally expensive stock price, and the company has said its future rests in large part on the mobile market. All of those factors have created a perfect storm of market conditions and desires, and the result could be a very big and potentially disruptive bet by Zuckerberg.

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