Facebook Phone @ The Motley Fool

A Facebook Phone Has 0% Chance of Success

By Evan Niu (TMFNewCow) | More Articles 
July 22, 2012 | Comments (9)

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Surely, you've heard the rumors by now: Facebook (Nasdaq:FB  ) is building a smartphone. A New York Times report in May has renewed talk of a Facebook Phone, while speculation dates as far back as 2010. All Things D chimed in last November, saying the social networker was tapping HTC for the hardware, although the recent report says Facebook now wants to do its own hardware.

The problem for Facebook is that it would have exactly a 0% chance of succeeding.

Where do we start?Assuming Facebook is interested in building a smartphone, how would it even accomplish this? What operating system will it run?

iOS is only available to companies whose names rhyme with "chapel," and Facebook already loathes Google (Nasdaq: GOOG  ) , as in let's-hire-a-PR-firm-to-launch-a-smear-campaign-against-it loathing, so standard Android seems far-fetched. It has numerous ties withMicrosoft, but Windows Phone has an embarrassingly low market share.

Hewlett-Packard's (NYSE: HPQ  ) webOS is about to see an open-source release, but who really wants to be associated with that platform after its tumultuous history? Not even HP, as making webOS open-source is akin to donating it to charity, complete with a tax write-off from all the impairments it ate. I doubt that Facebook wants to go with the equivalent of a "free to a good home" Craigslist post for a major strategic shift.

The only real possibility is a heavily forked version of Android that's unrecognizable to the average user, much like what Amazon.com did with the Kindle Fire and is likely doing with its own Kindle Phone. But then at that point, you're talking about three very distinct flavors of Android -- a Google Android, an Amazon Android, and a Facebook Android -- each with their own ecosystems. That just sounds like a nightmare for developers and consumers alike.

Why ask why?The big question is why Facebook would want to get into the cutthroat and incredibly complex smartphone business. The carriers themselves also happen to hate a little thing I like to call "innovation," and Facebook wants to get in bed with them?

Beyond the fact that mobile is a giant Achilles' heel for Facebook as it is, I find it hard to believe that would be motivation enough to jump into smartphones, especially since the report believes that Facebook is looking at getting into its own hardware, poaching Apple (Nasdaq:AAPL  ) hardware engineers in the process.

No, this is beyond profiting on hardware, which is already incredibly hard to do. This is about becoming a platform company. Facebook and Mark Zuckerberg have taken lessons from Apple and Steve Jobs and now don't want to be relegated to being just another social-networking app on a user's home screen. It wants to become its own platform, complete with its own payment system and cut of sales.

Facebook doesn't want to rely entirely on advertising forever, growing its desktop payments platform to 16% of trailing-12-month sales. That growth is thanks in large part to Zynga's (Nasdaq: ZNGA  ) success in casual social gaming, but Zynga also wants to become a platform company. IHS iSuppli also noted earlier this year that users on Facebook's platform have stagnated lately.

So just as Facebook was beginning to enjoy some platform dollars, its user engagement begins to decline and its biggest contributor wants to go it alone. It makes sense why Facebook would want to move on to greener mobile-platform pastures, but Zuckerberg should also be smart enough to realize how bad of an idea this is.

Burn, baby, burn!Just as Facebook and Apple are now getting awfully cozy with multiple integration partnerships, a smartphone entry would immediately begin burning bridges to Cupertino.

Consider Google's decision to compete directly with Apple using Android. Big G and the Mac maker were the best of buds until then, and now Apple tries to cut Google out of the loop wherever possible, most recently by developing its own in-house maps app. Steve Jobs had also made a comment or two on the topic.

Even as Android has quickly risen to become the dominant mobile OS in the world, it's hard to see who is actually profiting from that rise. Android OEMs, for the most part, aren't. Google doesn't disclose Android-related revenues explicitly, so it's hard to quantify how much Google itself actually benefits from Android. Google would have dominating mobile advertising anyway, especially if it was still close with Apple, and probably could have scored integration of its services into iOS, so the incremental monetary benefit of Android to Google relative to if it didn't exist is questionable.

Yet the costs of Android are significant. It has direct costs for ongoing development and support, potential patent litigation costs, and not to mention that $12.5 billion it just spent on a bleeding business. The cost/benefit trade-off doesn't add up to me.

Does Facebook want to spurn the largest tech company in the world for dubious benefits, as Google did before it? Google is already on Facebook's enemy list, and having both Google andApple gunning against you isn't an enviable position.

What were we saying?To get into the smartphone business, Facebook will need to deploy extensive engineering efforts that it doesn't have, enter the consumer electronics space where it literally has no experience, find manufacturing partners, forge relationships with wireless carriers that are notoriously difficult and controlling, and burn bridges with one of its most important and powerful partners, all for a minuscule chance that it finds but a modicum of success.

What we were saying about cost/benefit tradeoffs, again?

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