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Why Is Facebook Developing a “Portal Box” for TVs?

By Leo Sun – Aug 1, 2019 at 11:13AM

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The tech giant tries to run before it can even walk as it works to launch its own version of a set-top box.

When Facebook (META 2.16%) launched its Portal smart screens last November, many critics derided it as a tone-deaf move that ignored the company's privacy and security debacles. However, Facebook stood by the Portal and announced that it would introduce two new models this fall.

Last October, a report from Cheddar claimed that Facebook was developing a camera-equipped device for TVs which would offer video chat features alongside streaming content. The Information recently revealed more details about the device, claiming that Facebook approached Disney, Netflix, HBO, Hulu, and Amazon (AMZN 2.55%) to launch streaming videos on the platform.

The Information claims that the device will resemble other set-top boxes and that it could arrive this fall alongside Facebook's updated Portal devices. But would anyone actually buy a Facebook-developed set-top box with a built-in camera?

Facebook's Portal screens.

Image source: Facebook.

Facebook's hardware ambitions

Facebook generated 98% of its revenue from online ads last quarter. The remaining sliver, $262 million, came from its "payments and other fees" business, which includes hardware devices like its Oculus VR headsets and Portal screens. Most of the unit's sales, which rose 36% annually last quarter, were likely driven by VR headsets.

Facebook doesn't disclose its hardware sales, but during last quarter's conference call, CEO Mark Zuckerberg claimed that the company was selling the new Oculus Quest "as fast as we can make them." Research firm SuperData also expects the Quest to be the best-selling VR headset this year with 1.1 million shipments.

That 1.1 million sounds like a high number, but it's still a niche market compared to Canalys' estimates of 1.4 billion smartphones and 78 million smart speakers shipped in 2018. Launching Portal smart speakers could diversify Facebook's business away from online ads, tether its ecosystem to the growing smart speaker market, and expand its reach beyond PCs and mobile devices.

Shifting into the set-top box market complements that strategy, since Statista Research estimates that 210.7 million set-top boxes will be shipped this year. But Facebook will arrive woefully late to that market -- Parks Associates estimates that Roku (ROKU 5.60%) and Amazon already control nearly 70% of the streaming device market in the U.S.

A viewer uses a smart TV.

Image source: Getty Images.

Would anyone buy a Facebook set-top box?

Facebook's Portal devices are currently tethered to Amazon's Alexa, but it could eventually launch its own virtual assistant for those screens. Facebook also lets users watch streaming videos (including its own Watch and Live content), make video calls via Messenger, play games, and access other apps.

Facebook's set-top box will likely include all those features, and bundle in additional streaming media apps. Facebook's rumored discussions with Disney, Netflix, and others suggest that it's more interested in locking in TV viewers than using the device to promote its own Watch platform.

There might also be an unmet demand for live video calls on TV. Roku, Fire TV, Apple TV, and Chromecast don't sport cameras or native video call apps, so Facebook's box might appeal to people who want to make video calls from their living rooms.

However, there are already plenty of easy workarounds (usually involving mirroring apps) for adding video chats to existing set-top boxes and smart TVs. Adding cameras and microphones to smart TVs and set-top boxes also became frowned upon after it was revealed that certain smart TVs gathered data with their microphones.

Facebook fails to read the room ... again

Once again, Facebook is developing a device for a crowded market without reading the room or reflecting on its own public image. As a result, the Portal will likely fail to dent Alphabet's Google and Amazon's near-duopoly in the U.S. smart speaker market, and its set-top box cousin probably won't fare much better against Amazon and Roku.

Facebook's eagerness to establish a hardware moat against Amazon, Apple, and Google is understandable. Unfortunately, its approach remains tone-deaf, and its devices don't offer any killer advantages against the market leaders.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon, Apple, Facebook, and Walt Disney. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Facebook, Netflix, Roku, and Walt Disney. The Motley Fool has the following options: long January 2021 $60 calls on Walt Disney, short October 2019 $125 calls on Walt Disney, short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and long January 2020 $150 calls on Apple. The Motley Fool has a disclosure policy.

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