The Seductive Foolishness of a Facebook Phone

The rumors about Facebook making a smartphone have died down -- for the moment.  Facebook CEO Mark Zuckerberg said last month that it wouldn't make sense for Facebook to create its own smartphone.  I'd like to believe that finally put an end to the rumor forever, but you know it's going to be back.  Even when Zuckerberg issued his denial some people claimed he was lying (link). 

People react emotionally to hardware.  The idea of the leading online community making a phone is sexy, and seems intuitively obvious in an age when software giants like Google and Microsoft are making their own hardware.  Of course Facebook is making a phone.  Isn't everybody?

It reminds me of elementary school:

Mom:  Honey, why did you jump your bike off the roof?
Child: (in traction) Everyone else was doing it.
Mom:  If everyone else jumped off a cliff, would you do that too?
Child:  Yes, Mom, as a matter of fact I would.  Jeez, haven't you heard of peer pressure?


Mark Zuckerberg is young for a CEO, but I hope he's not that young.  I think making a smartphone is one of the most spectacularly stupid things Facebook could do.  Even if the product succeeded (which is very iffy), the distraction and business problems it would create could do severe damage to the whole company.  There are other, much easier ways for Facebook to make itself a power in mobile and to extend its dominance in new areas.  I think Zuckerberg and his troops should be concentrating on those enormous opportunities rather than messing around with hardware.

Knowing my luck with predictions, this means Facebook will probably create a phone and make it a huge commercial success.  In that case, you're welcome to come back here in a couple of years and tease me.  But in the meantime, here's why I think the "Facephone" would be a terrible idea, and what the company should focus on instead.


Making a smartphone: The Red Queen's Race

Most people outside the phone industry don't understand how hard it is to make a competitive smartphone.  Mobile hardware is moving at amazing speed, with companies like Samsung packing in new and updated features as quickly as they can.  Many customers are very sensitive to these features.  If you fall even a little bit behind -- say, with a camera that has too low a resolution, or a slow processor -- many people won't buy your phone, unless you discount it to the point where you aren't making any money.

You might be thinking to yourself, "okay, so just make sure you're using the leading components."  That sounds easy, but Samsung in particular specializes in sourcing those new components immediately (or making them itself) and building them into new hardware quickly, all at an aggressive price.  Unless you move extremely fast, you'll find yourself releasing new features at the same time as Samsung is moving on to the next generation.

So you need a hardware organization with close ties to the component suppliers, and with enough money to make advance orders for components that haven't shipped yet.  And you need to hire several complete engineering teams, so a couple of them can be working on future products in parallel while one team brings the latest flagship to market.

All of this is a huge investment.  It's also high risk, because sometimes you'll guess wrong on a component and have to eat its cost.  And at best, if you're wildly successful, all you can do is keep pace with Samsung.  It won't give you differentiation.

And oh by the way, rising competition from Huawei and ZTE in China is probably going to accelerate the process even further.

Then there's software.  A similar situation applies in software, even more so.  Apple and Google are competing to see who can cram more new software features into a smartphone.  For example, Apple adds voice recognition, and Google immediately counters.  If you're not prepared to quickly match all of those features, your phone will end up in the discount bin, the same as if you were behind in hardware.

So to enter the smartphone business today, you need a large software engineering organization creating a huge suite of applications, and updating them frequently.  Plus you'll need to do a large amount of hidden software customization to integrate with the specific features and applications of each major mobile operator.

You can save some of this investment by licensing a third-party operating system.  The choices are Android and...well, Android.  Which is made by your most bitter rival, Google, a company that has shown itself to be willing to manipulate Android to hurt competitors.  So maybe you do like Amazon and build on top of an open source version of Android, one that Google doesn't control.  But in that case you're using software that's a generation out of date, you have to write many of your own applications, and there's still that software integration work with the operators.  You save some time and investment, but not nearly as much as you'd like.

So now you've created a huge hardware and software engineering organization.  You next need to pay for all the parts and manufacturing.  You must create marketing deals with the operators and tech stores (which means hiring a dedicated salesforce).  You need to hire a support staff that responds directly to phone calls and e-mails (something that you, like other Internet companies, don't do).  You have to arrange for repairs and returns.  You need to license a huge range of patents, so Apple won't sue you.  And probably some other details I forgot about.

None of this is impossible for Facebook, but it takes a huge amount of time and investment.  It's not the sort of thing that you can do with a skunkworks team of a few dozen engineers from Apple.  Google, faced with this same situation, decided to buy Motorola.  If you really think Facebook is serious about the smartphone business, then the rumor you need to start is which smartphone company it's going to buy.

I'll kick off the rumors by nominating HTC.

But the real killer problem is that even after you do all of the above, all you've done is make a smartphone that matches the competition.  You still need to figure out what makes your phone so compellingly different that people would buy it instead of an iPhone, Samsung Galaxy, or the latest Google Nexus thing.


Differentiation cures all

Reading all of the above, you might respond, "hey, all of the same conditions applied before Apple entered the smartphone business, but it managed to succeed without making many of the investments you talked about."  And you'd be right.  The iPhone's success shocked the major smartphone players because they assumed the iPhone's relatively poor hardware specs (no 3G!) and missing software features (no MMS!) would make it an afterthought.  Apple succeeded because the first iPhone's differentiation -- real PC-style web browsing -- was so compelling that for many users it outweighed all the other drawbacks of the phone.  RIM did something similar with mobile e-mail years before, so there is a precedent for shaking up the phone industry with breakthrough devices and relatively low up-front investment.  Maybe Facebook can be the next company to redefine the smartphone.

There are two problems with this for Facebook:

1. You're not Apple.  Although Apple was not a phone company, it was a world-class consumer hardware manufacturer with a fanatical focus on user experience and quality.  RIM had many years of pager experience before it made the first BlackBerry.  Neither company made a tweaked phone; they brought a different set of system design practices to the phone industry.  The iPhone alone didn't defeat Nokia and Motorola, they were beaten decisively by Apple's business processes.  Facebook lacks that sort of process differentiation, especially relative to Google.

2.  What possible differentiation in a Facebook phone would be so compelling that it would make the iPhone and Android obsolete?  Almost by definition, an innovation that great is something that I can't imagine today.  Maybe Mark Zuckerberg can, and if so I salute his vision and welcome our new Facebook overlords.


Which future do you want to live in?


The other issue Facebook needs to consider is what industry structure is best suited to its future. 

There's a future scenario in which the usage of the web becomes more and more dominated by smartphones, and in which smartphone users are limited to a selection of apps and websites manipulated by the smartphone manufacturers.  In other words, the web becomes a series of walled gardens rather than than the open environment it is today.  If you believe that scenario is destined to happen, and if you believe the only way to have a role in smartphones is to make your own hardware, then of course Facebook has to make a smartphone.  It's dead otherwise.

But I don't think that's how the future works.  It's not a fixed destiny, it's a set of possibilities.  Our own actions shape the future and call it into being.  The more powerful and persuasive an organization or individual is, the more it can do to shape the future.  And Facebook is a very powerful, persuasive company.

I think the best future for Facebook is one in which the web, including the mobile web, stays open to software-only innovation.  In this world, customers choose which websites and web apps they want to use, without being forced into a particular choice by a hardware manufacturer.  This would enable Facebook to run on all smartphones, keeping the company focused on expanding its network and adding new features and services to it.  In other words, Facebook could keep doing what it does best, rather than pouring money into a new set of skills and gambling that it can out-compete Samsung and Apple on their home turf.
   
If Facebook creates its own smartphone, I think it makes that open future less likely.  A Facebook phone would encourage other software companies to make proprietary phones, further closing off software openness.  And it would make the other phone companies much less likely to cooperate with Facebook.  Today, smartphone companies will fall all over themselves to work with Facebook.  Even Apple is actively integrating Facebook with the iPhone.  How long will that last once Facebook starts selling a phone?  Instead of Facebook everywhere in mobile, we could end up with Facebook noplace except on the Facebook phone.


Beware the Ides of Flash

Right now, Facebook is so popular that Google can't prevent it from working with Android.  The more that Apple integrates with Facebook, the more pressure Android licensees will feel to match that integration, even if Google discourages it.  But if Facebook were kicked off iPhone, Google would have a much freer hand to disadvantage and exclude Facebook from Android. 

This is my biggest concern about the Facebook phone idea.  The company could easily produce a phone that is just good enough to scare away its other phone partners, without being good enough to dominate the smartphone market.  The Facebook phone could call into being the exact industry structure that Facebook wants to avoid.  That's why I see it as hideously high risk, a bet-the-company move that should be taken only when there's no other chance to survive.
   
And Facebook has other choices.


What Facebook should do

In ecology, the most successful species are not the ones that adapt best to the environment, they're the ones that reshape the environment to match their needs.  That's what I think Facebook should be doing.  Instead of competing with smartphone manufacturers, it should run a series of integration experiments with them.  Facebook's early efforts in that direction were not very successful (link), but that's why I'd put more resources into them -- there's a learning curve.

Facebook's goal should be to get the handset companies competing with each other to build Facebook more and more deeply into the phone.  How about creating a set of Facebook integration requirements, and a "Facebook Ready" logo for complying phones?

In addition to integrating the core Facebook functions, Facebook needs to bring along the Facebook economy.  The challenge for Facebook is not just to transfer its content to mobile, it's to make available the full ecosystem of third party apps and services that make Facebook so powerful on the desktop.  I know some of the smartphone manufacturers don't want anything that looks like a third party platform on their phones, but Facebook is one of the few web companies popular enough to force it.  Provide the full ecosystem to some phone manufacturers, and the others will be forced to follow suit.

This would give Facebook not just an application on smartphones, but a mobile platform that it can grow rapidly and in new directions, as it did on the desktop.  Instead of competing at the commoditized hardware layer, Facebook can compete at the platform and UI layer where most of the profitability is.  It's the right place for Facebook to fight, but it's all put at risk if Facebook makes its own phone.

8 comments:

dang1 said...

Facebook can take lead on the most powerful platform of them all- the web. On the web, Facebook not beholden to anyone. Facebook should knock off its walled garden nonsense. Walled gardens might be hugely profitable in the beginning due to their novelty, but more open platforms draw bigger, long-term, sustainable interest.

Apple's recent fortune is largely dependent on AT&T and Verizon's high iPhone subsidy. These high subsidies that are so chafing these carriers, that they're steering customers away from the iPhone, and in AT&T case, charging iPhone users to use Facetime to squeeze more money out of them.

shoobe01 said...

I was waiting for you to point out some of the more spectacular failures. Two I like are ESPN (had an MVNO on Sprint that became a co-branded product vs. an MVNO maybe before it launched!) and Garmin, which points to another path: just let someone else make it and glue some software on top. I'd suspect a FacePhone would be like this, and be awful. Maybe it already got made in prototype, and someone had the sense to say it was terrible, that's why Mark can say they are not doing it and not blink.

There, more unfounded rumors for you as well.

Chan said...

Bravo!

I think Mark will soon send (owe) you a 1M paycheck!

You does his business consultancy so well, Mark doesn't need his own team of guys to do that!

John said...

Facebook is also facing the question of how to replace the ad revenue that is being lost as its audience transfers from desktop to mobile (where ads aren't as prevalent or lucrative).

To do this, they absolutely need to ensure that they have a world-class ad platform which can work on more than one phone.

PS - the captcha system on your blog is horrendous. I had to go through at least 10 attempts to post this comment.

Michael Mace said...

Thanks for the comments, folks! A couple of thoughts...


shoobe01 wrote:

>>I was waiting for you to point out some of the more spectacular failures. Two I like are ESPN (had an MVNO on Sprint that became a co-branded product vs. an MVNO maybe before it launched!) and Garmin

Excellent point! I had meant to mention the ESPN fiasco (link), but forgot it, so thank you very much for pointing it out.


John wrote:

>>Facebook is also facing the question of how to replace the ad revenue that is being lost as its audience transfers from desktop to mobile (where ads aren't as prevalent or lucrative).

Absolutely yes. And if they think believe could capture massively more Facebook ad money by making their own phone, then maybe that would be another reason to make a Facebook Phone. So thank you for pointing that out. I could picture this idea where if they can track all of your phone activity, plus all your web activity, they can give you even more targeted advertising. Google had (has?) the same idea when it talked about giving away free phones+service. I haven't heard them mention that idea for years.

By the way, if Facebook really believes in the scenario above, why not just partner with the handset companies to install tracking software along with the Facebook app? I don't think it requires you to make your own phone.


>>the captcha system on your blog is horrendous. I had to go through at least 10 attempts to post this comment.

Yikes. I'm sorry for the trouble. The captcha system is generated by Blogger and I can't control it. If you have any more details on what happened, please send me a note directly (my contact info is here), and I will complain to the Blogger folks.

Thank you for being persistent.

Chan said...

John wrote:

>>Facebook is also facing the question of how to replace the ad revenue that is being lost as its audience transfers from desktop to mobile (where ads aren't as prevalent or lucrative).

I wanted like to ask Mace, actually what "is" Facebook's revenue model? At the time FB got started I wondering what is their business model. When it gathers momentum and draws zillion contacts in, I figured it is capitalizing on the most important data on the web, profiling the people and what their needs..

Then I wondered OK, how one can make a decent business out of "people's profiles" it has without really being evil or going underground?

I still can't make sense that Facebook has a sound business.

I read the stories Google going through snooping WIFI and StreetViews, in that regard Facebook has far more valuable data under their servers to be questions at if they use it to make money apart from ads and without being evil.

Any insights?

Mace: Bloggers new capchar actually suck! I am pretty damn sure no machine code can bypass it. But it hurts human eye!

Steve L said...

Excellent read and relevant comments.

I'd like your opinion on the 'reverse' scenario whereby FB enables the functions of the mobile phone to be fully available. e.g. voice and SMS are still a huge part of how we all communicate. I wonder if another scenario is to picture FB as a giant worldwide MVNO with 950m subscribers.

It seems to me that this scenario plays to FBs strength as a (near)-ubiquitous communication platform and could create more leverage over the smartphone manufacturers to integrate FB.

Comments welcome!

tatilsever said...

> "In this world, customers choose which websites and web apps they want to use, without being forced into a particular choice by a hardware manufacturer."

You write as if customers would rather chose web apps if they were not forced by carriers or manufacturers. This is a position flying in the face of evidence to the contrary. Customers and developers clamored for native apps, when Apple offered web apps as the only option at first. Just think about email, possibly the most common web app in the world. As soon as the cost barrier is removed and people expect to be the only legitimate user of a computer, (as in the case of work supplied laptops) they start using native programs, such as Outlook, to access email, even though web access is still possible in many, if not all, corporate email systems.

Facebook distributed an almost web app, heavily dependent on HTML5, through iOS app store and its performance was noticeably bad until it switched to a native version. For many, many applications, there are performance or usability gains to be had by going native and if you don't provide it, your competitors will.