Why a Facebook Phone may not be nuts

A Facebook-branded smartphone isn't as crazy as it sounds.

Before you mock that conclusion (as our editor did at first), hear us out: a branded smartphone could be the social-networking king's key to competing more aggressively with Apple and Google as the Internet heavyweights take turns competing, cooperating, and causing one another fits.

Of course, Facebook has been denying reports that it's building its own branded cell phone. Facebook execs say it's doing nothing more than working closely with handset partners, but CNET has confirmed that the social network has reached out to hardware manufacturers and carriers seeking input on a potential Facebook-branded phone.

Though it's still unclear exactly what, if anything, Facebook is cooking up, the two big questions many people are asking are why would the company even consider such a move and what are its chances of being successful?

Answering the first question is easy. The mobile market is important for any company doing business on the Internet because that is where the eyeballs are. There are close to 5 billion cell phone subscribers worldwide, according to the International Telecommunications Union. About a billion of them will be using a device on a wireless broadband connection by the end of 2010. And that number is quickly growing.

For companies like Facebook and Google, which have based their businesses on Internet advertising, more eyeballs often translate into more money.

It makes sense that Facebook would be looking to tap the fast-growing U.S. mobile advertising market, in which both Apple and Google have recently made significant moves, according to eMarketer. Mobile advertising spending in the U.S. is expected to grow 42.5 percent to $593 million this year, up from $416 million in 2009 and $320 million in 2008. By 2013, the mobile ad market in the country is expected to reach an estimated $1.5 billion.

And so it's easy to see that Facebook's apparent interest in developing or sponsoring the distribution of mobile handsets may be tied closely to the company's faith in the potential of mobile platforms. Facebook is already the most popular application on smartphones in the U.S., according to Nielsen. More than 50 percent of all iPhone, BlackBerry, and Android phone subscribers use the Facebook application regularly, Nielsen recently reported.

According to internal Facebook statistics, more than 150 million out of Facebook's 500 million active members access the social network on mobile devices, and Facebook mobile applications are "deployed and promoted" by more than 200 mobile operators in 60 countries. Most promisingly, Facebook has said that these mobile users are twice as active on Facebook as nonmobile users.

But smartphone apps alone may no longer suffice. Facebook has had trouble deeply integrating the Facebook service and features into some mobile platforms. While Research In Motion and Palm have each embraced Facebook, others such as Apple and Google have not.

For example, Apple's iPhone still has no deep Facebook integration. And Apple is actually launching its own social products, such as the Game Center and a music social network it calls Ping.

Google has also not fully embraced Facebook. Even though Android is an "open" platform, none of the manufacturers developing phones using the Android OS has released significant Facebook integration. Still, millions of people are downloading and using the application.

Meanwhile, RIM is including Facebook status updates in its messaging platform on the new BlackBerry Torch. And Palm natively integrated Facebook friends as part of its contact list.

It's clear that deeper Facebook integration is not sending these devices off the shelves, but Palm has noted that its Facebook ties have gotten positive feedback from users and reviewers. And HP, which now owns Palm, will continue to keep the Facebook integration in the next iteration of software.

Still, Apple and Google are major players each with their own mobile ad networks and payment systems. And they're not looking to share any of the spoils with Facebook. As a result, Facebook, the largest social-networking platform on the Internet, has been relegated to a developer role. And that may not be good enough for Facebook's ambitions.

There have been other hints that Facebook is looking to take a greater stake in the mobile market. The revamped iPhone app that Facebook launched last year seemed structured to imitate a mobile operating system in itself, perhaps facilitating the addition of third-party applications. This summer, it added Facebook Places, a geotagged "check-in" service in the league of Foursquare and Loopt, to its suite of smartphone app features.

Around the same time, the company purchased a start-up called Hot Potato, which brought the "check-in" craze beyond merely logging presence at physical venues and instead encouraged users to spread real-time information about events and activities. Upon completing the acquisition, Hot Potato announced that Facebook would be shutting it down. Founder Justin Shaffer, the real reason for the buy, has joined Facebook; sources suggested at the time that his focus would either be to help build out the Facebook Places geolocation service, which had just launched, or to revamp its Events product. Given his mobile expertise, it's easy to imagine that his likely role as part of Facebook Events would be to retool the limited product for mobile use.

Another factor to consider is the still-expanding Facebook Credits, the virtual currency that the company finally began to roll out last year. Credits is now the standard currency in many of the biggest and most popular games on Facebook's developer platform, and given sunny predictions about mobile commerce, bringing Credits to mobile is a likely forthcoming step.

But as with so many other Facebook projects, bringing the Credits system to Facebook's mobile apps would be heavily limited by handset, carrier, and operating system restrictions. Launching its own mobile handset or operating system may be one strategy that the company has explored to combat these inevitable roadblocks.

Could a Facebook phone succeed?
Now on to the second big question about a Facebook phone: what are its chances for success?

It's hard to say, but it's clear it wouldn't be an easy road for Facebook. Other companies have tried and failed to build their own branded cell phones. Google's Nexus One phone and Microsoft's social-networking Kin phone, both of which launched earlier this year and lasted only a few months on the market, serve as cautionary tales for Facebook.

Google launched the Nexus One in January. But by summer, it abandoned hopes of making the device a mass market hit, and it stopped selling it. Google's biggest mistake was that it didn't work with carriers to distribute the device. The company expected customers to pay full retail price for the phone. And Google only offered the device online. But few customers bought the device, teaching Google and others the importance of carrier distribution.

"Google underestimated what it takes to market and support a hardware device," said Charles Golvin, an analyst with Forrester Research.

As for Microsoft's Kin, which more closely parallels a possible Facebook phone, Microsoft tried to build a social-networking brand out of thin air. The company had worked on the phone for years and decided to target the always-connected teen market with a high-end feature phone. But the phone was a huge disappointment from the start, and after having the device on the market only two months, Microsoft discontinued it in June.

The lesson with the Kin is that Microsoft went for the midrange market. The device was neither a cheap feature phone nor a full-fledged smartphone. Though this mid-tier market still exists, consumers are quickly bypassing advanced feature-phones and upgrading straight to smartphones, as wireless operators make data service plans more affordable.

The major advantage that a Facebook phone would have over the Kin is the fact that Facebook is already a hugely popular brand. As mentioned before, there are 500 million Facebook users and about 150 million already using the mobile Facebook application. And it is already the most popular application on many smartphones. For many consumers, Facebook is social networking.

Still, building a phone is no easy task, nor is it inexpensive. The most cost-effective path for Facebook if it builds its own phone would be to work with a handset maker, such as HTC, and use the Google Android OS as the basis for the device. This would allow Facebook to develop a phone quickly.

This could present challenges on a couple of different levels. First, Google may view Facebook as a competitive threat, which could make a relationship between the two companies sticky. Secondly, to get the level of integration that is necessary for Facebook to make its smartphone stand out against competitors using the same Google Android OS, the company would likely have to sacrifice some Google applications and standard Android features. And this might mean that a possible Facebook phone wouldn't be able to access apps in the Android Market.

Even though Facebook may be the most used mobile app on most smartphones, it is not the only application that consumers are interested in.

"Basically, Facebook would have to sacrifice a lot of the cool applications that come on an Android phone that many consumers want," said Ross Rubin, an analyst with NPD Group. "And I'm not sure that the deeply integrated Facebook functionality would be enough to win over consumers if these other features are missing."

Even if Facebook is able to build the new phone, Forrester's Golvin said that's only one piece of the bigger puzzle. Facebook would still need strong relationships with wireless carriers to distribute the device. And it would have to work out a retail strategy, likely offering the phone in places such as Best Buy.

"These are all things that Facebook knows nothing about today," he said. "And getting all of this in place is not insignificant, and it's expensive."

"Google underestimated this when it went to market with the Nexus One," he said. "And they got hammered. I think it's fair to say that Facebook as a private company doesn't have the same level of capitalization that Google has. So it just seems like an awfully big risk."