Why Facebook Needs a Phone

Facebook as the dominant social network is becoming the replacement facebook-phone.pngfor the phone. Nowadays in fact it is fairly common to use Facebook as the primary way to stay in touch with others – especially among those under 30. The point here is that the phone is becoming the Facebook communicator.

And with mobile adoption continuing ta a blistering pace – many people have multiple mobile devices in fact, Facebook should be sitting pretty, right?

Well, yes and no. Facebook is benefiting from more user time on its network but it is having trouble monetizing mobile sessions because you can’t show as many ads on a small screen. Sure, you can charge more for geotargeted ads on a mobile but that market hasn’t evolved to the point where it is a huge money maker and moreover it is unknown if the amount of money received for one geotargeted mobile ad will be more than the aggregate amount made from all the ads shown on a 20 inch monitor.

But there are threats seemingly from everywhere.

Apple: Twitter is tightly integrated into iOS and the company has Ping, a music-sharing social network which isn’t talked about much but shows Apple isn’t giving up on becoming the hub for social interactions.

Google: There is no bigger threat to Facebook than Google Plus and Google owns Android – the fastest-growing mobile OS. Obviously this isn’t a great situation for Facebook.

One of the reasons that Google got into the operating system and browser business was because they wanted to be sure there were choices in the market – they had to ensure consumers always had access to their services and that a company like Apple couldn’t lock them out.

Likewise, Facebook has to be worried about the same things.

This weekend Nick Bilton of the New York Times wrote about Facebook’s latest attempt at building a mobile phone – citing the complexities the social networking company has to overcome.

Interestingly the reactions from others have been very blunt. Henry Blodget says investors should run away screaming if Facebook gets into the hardware business. Adrian Kingsley-Hughes from ZDnet argues that a Facebook phone doesn’t stand a chance.

And some of the arguments are logical – hardware is a virtually impossible business – just look at the constant stream of layoff and high level departure announcements from the likes of Nokia and RIM.

And they are correct – Facebook knows nothing at all about hardware.

But the flipside to this argument is consumers will resonate with a phone provided by the app they associate most with their mobile device. In other words, if you spend most of your time in Facebook, while on your mobile device, why not get the phone from the same company?

There are countless ways the social hub can go about making this dream a reality.

They can work with HTC or another hardware vendor. They can strike retail deals with Radio Shack and Best Buy, Wal-Mart and others.

The carriers are looking for ways to minimize their dependence on Apple so they would likely be happy to assist as well.

The challenge of course is how can they make money from such a relationship? It seems the only way may be for Facebook to eventually make the hardware themselves or at least design it and have it manufactured by Foxconn or another similar company.

Let’s look at the situation from Google’s perspective. The company sells an intangible product – online ads which have no physical cost associated with them and their business is doing well. And still, they are being beaten in terms of growth and market capitalization by a company with an expanding brick and mortar footprint and one who sells physical products.

In other words the world’s leading online advertising company – one who has a virtual monopoly in search isn’t doing as well as a hardware company – one who relies on malls for much of its revenue. Malls? Really? Its 2012 for heaven sakes.

This probably puts the Motorola mobility acquisition news in a different light doesn’t it?

And as explained so well by GM, Facebook is better for consumer engagement than it is as an advertising vehicle. At least today. That doesn’t mean of course the company isn’t going to do well offering other services such as streaming audio and video… But for it to be worth the sky-high valuation which has been assigned to it – it is going to have to grow like crazy for many years.

And if they can sell hundreds of millions of phones, they can not only make additional revenue but protect their crown jewel – allowing consumers access to their social network on their mobile devices.

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