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Facebook’s Phone: Little Promise, Big Problem

New product is illustrative of much larger issue with the company


Social media giant Facebook (NASDAQ:FB) boasts an impressive mobile user base, at over 650 million … but it’s not stopping there.

Instead, word is on the street that the company plans to launch its own branded smartphone — something that is expected to be announced at an event this Thursday.

Bank, Biotech Company Coming to Market
Bank, Biotech Company Coming to Market

As of now, the smartphone arms race is really about two players:  Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG). Each has a popular core operating system, which help guide the industry and provide tremendous power and profits.

I guess Facebook feels left out of the action.

So, it looks like Zuck & Co. will partner with HTC for the development of the handset, which will use a modified version of the Android operating system (Jelly Bean). This will make it possible for the main Facebook services — like the social network, Instagram and Messenger — to show up on the home screen when a user turns on the phone, which should boost usage and allow for more opportunities to generate ad revenues.

While all this sounds good — in theory — it may be tough to pull off.  It seems questionable that consumers will buy a phone because it has the Facebook brand emblazoned on it … and if anything, that may be a limiting factor. Most users want smartphones because of the diversity of applications — such as Snapchat, YouTube, Vine, Zynga’s (NASDAQ:ZNGA) Poker, Google Apps, Twitter, LinkedIn (NYSE:LNKD) and so on. Few want apps from just one vendor.

Besides, the smartphone market is already glutted with options, including Microsoft (NASDAQ:MSFT), Nokia (NYSE:NOK) and BlackBerry (NASDAQ:BBRY), to name a few. Even those household names have had trouble getting much traction.

Then again, if the Facebook phone fails, it will not be a big loss. The investment will likely be minimal. There will be no licensing issues and the modification to Android is slight.

But the Facebook phone is a sign of something more ominous: The company has not displayed much pizazz lately. Instead, Facebook seems to be mostly knocking off other properties, as it did with it’s attempt to imitate SnapChat with Poke. Or it has simply launched new products that are mostly enhancements, including Graph Search.

In fact, it looks like Wall Street is worried. Even though the markets have been particularly strong in 2013, the shares of Facebook have lost over 4% so far.

In the end, Facebook’s phone might not be about the phone at all. Instead, the company’s new product could be just another example of how it is losing some of its innovative touch.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of “How to Create the Next Facebook” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders.”Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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