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Most fail when it comes to producing an attractive alternative to Apple's (Nasdaq: AAPL ) iPhone. So why is Facebook (NYSE: FB ) trying? According to reports, because CEO Mark Zuckerberg believes he has no other choice. Either create a phone or become the next MySpace.
I'm not so sure that's true. Then again, I'm also not Zuck. He knows more about his business than I do, and he's proven more than capable of overcoming challenges and mistakes in years past. My Foolish colleague Rick Munarriz is right when he says the best advice any of us can give Zuck is to not change.
The rebel within
Perhaps that's what we're missing when evaluating the news of a Facebook-branded smartphone. Zuckerberg and his team have made a good living ignoring the skeptics. They've also spent plenty on hardware design, partnering with Dell (Nasdaq: DELL ) to create an open-source server for its data centers. Is chasing the smartphone opportunity really so different? Once a rebel, always a rebel.
And yet there is a major difference worth noting. Facebook didn't have to shift strategy when designing its own servers. Selling a smartphone, on other hand, is a massive change that requires -- among other things -- developing a supply chain, finding distribution partners, and creating a marketing plan for reaching consumers who (at least right now) are predisposed to alternatives.
Six ways to leave your competition behind, Facebook
For today, let's presume Zuck can overcome these obstacles on the way to building a handset business that creates new value for those who own shares of the social network. Call it Facebook Mobile. Here are six things I believe the division would have to do in order to become a long-term success:
1. Give phones a hyperfast low-power chip. While we don't have a published spec for Facebook's proposed smartphone, it's a good bet that it'll have to be at least as fast and functional as anything Apple has introduced to this point. Chances are that means using a low-power multicore chip based on an ARM Holdings design. But it also doesn't have to be this way. Intel (Nasdaq: INTC ) has been looking for a partner to help crack open the mobile market; Facebook could be the perfect choice.
2. Employ a rich browser that renders HTML5 apps equally well on the device and the site. Users have to know that buying a Facebook phone doesn't limit their choice of apps. A Web-based OS could calm those fears. We've also seen Web-based software work well before on mobile devices, thanks to Palm. True, the company's webOS never went anywhere after Hewlett-Packard acquired the software, but that doesn't mean the OS itself was problematic. Rather, it lacked scale, and therefore developer enthusiasm. At 900 million active users, Facebook has one of the largest platforms in the world. Creating a unified experience via HTML5 could make the phone attractive to the same coders who right now spend the bulk of their time writing for iOS and Android.
3. Tightly integrate Skype for comprehensive contact management. What's more disruptive than a cheap phone? How about a phone that doesn't rely on the existing carrier network? Build the phone so that Skype is the default contact mechanism, offering savings to users fed up with carrier contract commitments while creating a nice revenue stream for strategic investor and longtime partner Microsoft (Nasdaq: MSFT ) .
4. Include a multi-band radio for hooking up with any network. Of course, the trouble with having Skype as the default phone is that there's no carrier, and a phone without a carrier isn't really a phone. Wi-Fi networks don't offer universal coverage. Give users the option to work with a carrier by embedding a multi-band radio compatible with every major telecom network.
5. Offer subsidies. Be like a carrier in offering users steep discounts on your devices. Subsidize to seed the market. Sure, it'll take a while to make up for the losses, but you're already missing out on billions in sales by being largely absent from the race for mobile ad revenue. Having a phone might also give Facebook Credits the opportunity it needs to become an alternative to Google's Wallet.
6. Create a direct-to-retail distribution network. End-running carriers is dangerous enough. Try it without having a retail distribution network in place, and failure would be all but assured. Recruit big names such as Best Buy and Amazon.com, and grant them incentives to market your phones.
I'll grant this is a big, hairy checklist that could take years and hundreds of millions worth of investment to complete. Such is the nature of strategic shifts; history proves they're never easy. And yet Facebook has transformed itself frequently throughout its short existence -- each time with more success than the last. So even if I have doubts about the need for a social phone, I don't doubt Zuck's ability to convince me otherwise.
More than a stock with a pretty face
With or without a smartphone, one of our top tech analysts says Facebook is only the second-best social media stock right now. Which one is tops? Get the details in this special report: "Forget Facebook -- Here's the Tech IPO You Should Be Buying." The research won't be available forever, so click here to get access today -- it's totally free.