A report emerged last week that Facebook Inc (NASDAQ:FB) will release a smart speaker in 2018. The company would join Apple Inc. (NASDAQ:AAPL) and Alphabet Inc’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google in trying to dethrone Amazon.com, Inc.’s (NASDAQ:AMZN) Amazon Echo from its position as the runaway category leader.
The company isn’t exactly known for hardware though, so why try to break into such a competitive market with a Facebook smart speaker? And will the move have any upside for FB stock?
The Facebook Smart Speaker
Reports emerged last week that FB will release its own smart speaker in Q1 2018. According to TechCrunch, the Facebook smart speaker will include a 15-inch touchscreen display — making it very similar in form factor to the Amazon Echo Show. Design is by Facebook’s Lab Building 8 hardware team. And while Facebook declined to comment, TechCrunch’s sources say China’s Pegatron Corp (OTCMKTS:PGTRF) has already produced a pilot run of the devices.
The question is why?
Facebook’s Increasing Interest in Hardware
Facebook is a social media company. FB stock has enjoyed a meteoric — and largely uninterrupted — rise as the company has continued to pile on active users. Just as importantly, it has been successful in monetizing those users with advertising revenue.
However, the company has increasingly shown an interest in hardware. In 2014, Facebook bought VR pioneer Oculus. The Oculus Rift VR headset and peripherals now contribute to FB revenue. Messy lawsuits aside, if VR continues to take off this hardware bet could eventually have a material impact on FB’s bottom line. Last year, Facebook launched Lab Building 8, a secretive hardware development team.
While hardware sales provide a new revenue stream for Facebook — diversification that’s good for FB stock — Facebook seems to be focusing on products that boost the stickiness of its core social networking.
For example, when Facebook bought Oculus, CEO Mark Zuckerberg posted about the virtual reality technology’s applications beyond gaming:
“This is really a new communication platform. By feeling truly present, you can share unbounded spaces and experiences with the people in your life. Imagine sharing not just moments with your friends online, but entire experiences and adventures.”
In other words, virtual reality hardware is taking Facebook’s social media chops to the next level.
The Facebook smart speaker will undoubtedly offer a similar extension to Facebook’s core business. Key to that is the inclusion of the 15-inch touchscreen display. It’s big enough to provide a constant Facebook feed that can be seen from across the room. News, photos and videos, constantly on display — not just when someone picks up their smartphone. It could also support voice and video chatting via Facebook Messenger, roping in potential users who may not actively use PCs or smartphones.
As TechCrunch points out, the Facebook smart speaker would also provide another screen to push ads too, helping boost that all-important FB advertising revenue.
Entering An Increasingly Crowded Market
A Facebook smart speaker would be entering a tough market.
Demand for the devices is growing, and expected to hit over 100 million units annually by 2024. But the smart speaker market is currently dominated by the Amazon Echo. Amazon has a big head start, an extensive product line-up and thousands of third-party developers and companies on board. Google Home is growing in popularity, and in the fall the Apple HomePod will join the fray.
Each of these competitors has extensive experience in designing consumer electronics. And critical to the success of a smart speaker, each has its own virtual assistant to support voice commands. FB lacks its own assistant that can handle voice commands — at least at the moment.
When the Facebook smart speaker launches in 2018, revenue from sales of the hardware aren’t going to be sufficient to move the FB stock needle much. However, like everything the company does, it will represent another component in its strategy to keep adding users, keep those users actively using its service, and leveraging that huge, engaged user base to drive ad revenue to new levels.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
