Facebook has had something of a roller-coaster ride in recent weeks. It spent US$1 billion on photo sharing app Instagram, and had an initial public offering which valued it at more than US$100 billion. This was followed by question marks as to why it had spent so much for the app maker, and a class-action lawsuit brought by investors who did not think they got the full story at the time of the IPO.
This week, the rumour mill again began grinding to the tune of a “Facebook phone,” with the company apparently set to bolster its mobile proposition with a move into the branded hardware space. While vendors such as INQ Mobile and HTC have offered devices that have included Facebook integration front-and-centre, the reports this time said that the company has begun recruiting ex-Apple staffers to power its efforts.
There is little doubt that the company needs to do something about its mobile strategy. While it has so-far seemed to have operated this business like a start-up, growing its user base with no real effort made to monetise it, the investment community will not tolerate the lack of a clear mobile roadmap for long.
Indeed, the worse thing about Facebook is that currently the biggest threat to its advertising revenue is its own mobile services, which do not generate any significant income of their own. Cannibalising your own products is one thing, but Facebook is subtracting value in one column without adding in another – again, not the most sensible way to build a business.
But a shift into hardware is a case of jumping from the frying pan into the fire. While Apple and Samsung may happily tell you there is profit in the devices business, the list of companies who would be less positive is much longer. And Nokia, RIM, HTC, Motorola, Sony (Ericsson), et al are established players in the game.
There is some argument that the industry has shifted, and that what Apple and, as an example, Amazon’s Kindle Fire, offer is access to a broader ecosystem of content and services. But as Facebook is already struggling to make a profit from mobile services, building a new business that is at best low-margin, and at worse loss making, hardly seems a sensible way to improve its position.
And then, of course, there is the whole logistics of getting a device to consumers. While Apple may have succeeded for a few years working exclusively through a handful of operator partners, it was only when the iPhone became broadly available that volumes really took off. And Apple is, not to forget, a hardware maker, with years of experience managing its supply chain.
Facebook, in contrast, has never made anything. Certainly it would look to outsource much of the heavy-lifting to a contract manufacturer partner. But it would still need to get devices into the hands of customers, whether through retail or operator channels, and then provide after-sales support. And is there any evidence that a significant number of customers will pay for a Facebook-branded product, rather than a free-to-use, ad-funded service?
While much of its business is surrounded by secrecy in terms of the numbers, Google’s experience in this market is relevant. Its first Nexus-branded device was sold directly to customers, and was largely assessed as a failure. By focusing on software, it has left the hard work to its vendor partners, while benefitting from the increased use of its Internet services.
In some ways, Facebook is already positioned in the sweet spot in mobile. It has a regular user base. Through its various HTML5 app efforts, it has the potential to create an alternative app ecosystem, with an impressive distribution reach and monetisation through Facebook Credits. Its core social networking app is either pre-installed or available easily across platforms – and not just for smartphones, but feature phones as well.
And all without the need to actually build the hardware.
What the company really needs is not a smartphone, it’s a business model for its mobile services. This would enable it firstly to stabilise its revenue as customers shift from desktop to mobile, as well as positioning it to capitalise on further growth in mobility.
The editorial views expressed in this article are solely those of the author(s) and will not necessarily reflect the views of the GSMA, its Members or Associate Members