A Facebook Phone Has 0% Chance of Success

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 with Microsoft, 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 and Apple 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?

Competing directly with Apple usually doesn't go well for rivals. The iPhone now has nearly unstoppable momentum that will drive growth for years. Sign up for The Motley Fool's brand-new premium Apple research service to read more. Facebook is under pressure to find new revenue sources beyond advertising, but this social networking company already has one. Grab a free copy of this special report on the tech stock you should be buying instead of Facebook.

Fool contributor Evan Niu owns shares of Amazon.com and Apple, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Microsoft, Amazon.com, Apple, Google, and Facebook. Motley Fool newsletter services have recommended buying shares of Amazon.com, Google, Apple, and Microsoft and creating bull call spread positions in Microsoft and Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (17)

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  • Report this Comment On July 22, 2012, at 2:52 PM, applefan1 wrote:

    Yeah, but Suckerberg would have his own to show off. BTW, whatever happened to Suckerberg.. He hasn't been interviewed in a while.

    Is the media shunning him since his stock tanked?

  • Report this Comment On July 23, 2012, at 5:43 PM, dew250 wrote:

    Ever hear about INQ. It's a company that came out of nowhere and was a huge hit because they made a Facebook phone.

    If Facebook acquires the right hardware talent (shouldn't be too hard should it? After all, Google did it without too much trouble), Facebook has the software chops to make it shine (espcially if they integrate thier Instagram team).

    0% is an awfully bold prediction. I would say that it's ambitious and there's a very high possibility of failure... but I think it's a worthwhile and ambitious attempt.

  • Report this Comment On July 23, 2012, at 5:46 PM, TheOthermfa wrote:

    I'm getting so sick of Facebook popping up everywhere I go on the Web, that I'm seriously considering closing my FB acount just to see how long it takes to withdraw its tentacles. And as soon as the iPhone 5 is available, I'll move back to it from this sorry excuse for a phone from the Google-Motorola-Verizon industrial complex, if I don't just revert to a StupidPhone altogether. The Luddites were right.

  • Report this Comment On July 23, 2012, at 5:50 PM, pureairusa wrote:

    I have the answer, FB/Nokia then I`ll be rich!!!!!

  • Report this Comment On July 23, 2012, at 5:58 PM, xetn wrote:

    I can't believe you consider this the top story of the day. Who cares where FB gets a phone or not?

    It would be just one more in a crowd of many.

  • Report this Comment On July 24, 2012, at 10:08 AM, sgatelab wrote:

    I think this article way underestimates FB's customer base AND Microsoft's technology to achieve outstanding results. This is a MUST for both companies and a partnership that should work !!!

  • Report this Comment On July 24, 2012, at 11:16 AM, ziq wrote:

    Not zero, but close.

    But, methinks the gentleman doth protest too much.

  • Report this Comment On July 24, 2012, at 12:57 PM, bob0917 wrote:

    The author may know more about stocks than I do, but I don't believe that he knows that much about the cell phone industry. If Facebook creates a phone I do believe that it will be a flop like the Microsoft Kin but all of the other emotion based comments regarding Google vs iOs vs MS is something I expect from ZDNet. The Facebook folks do know something about technology and if they do move forward with a phone it will probably be with an OS that already has support such as Android even if Google and Facebook don't like each other; free is still free even if Google doesn't like them.

  • Report this Comment On July 24, 2012, at 2:34 PM, TMFNewCow wrote:

    bob,

    Before the recent hardware engineer hires, Facebook knew nothing about consumer hardware and electronics. The "technology" that they "know something about" isn't directly related to the smartphone industry (beyond apps). Also, even though the source code for Android is free, OEMs typically need to have Google's seal of approval to get support for various services, most notably including Google Play. There are also Android-related patent licensing costs that must be paid to Microsoft, so it's not actually free.

    Besides, this is a platform play, so the idea of Facebook running standard Android and feeding content sales to Google makes no sense, since then Facebook simply becomes another hardware OEM like Asus or Samsung or HTC or others, which is not a particularly attractive business.

    -- Evan

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