Facebook Phone – A Missed Call or a Brilliant Strategy?

facebook phone

Facebook went public on May 18th, with almost $4B in cash. Additional $16B was raised during that day. Facebook is not rumored to develop a Facebook Phone, believing it would be a good use of its cash reserves and will solve one of Facebook’s burning issues: mobile revenues  (Watch out, investors: Facebook says mobile users could hurt revenue).

I might have to eat my hat a few years from now but…

Excessive cash leading Facebook’s mobile strategy

Mobile hardware is a marginal business (Amazon’s declining profits are a recent proof of that). Handset vendors have two alternatives to make a profit:

  • Sell at a premium – Apple was the only handset vendor to be able to do that successfully so far. History (and “The innovator’s dilemma” by Clayton M. Christensen) has taught us that most industries get commoditized (Storage, PC) at some point. Performance reaches a ‘good enough’ point and competition is focused on price and affordability. The mobile industry seems to be heading that way as well.
  • Reduce cost – Apple has been criticized again and again over the conduct of its factories in China but its low cost manufacturing drove their 40% plus gross margin in 2011.

On top of the challenges on the gross margin side, a hardware business is very different than an online business, as Google discovered back in 2010: It requires customer service, maintenance and repair, supply chain, distribution channels and potentially physical stores. Android’s dominance as a mobile OS cannot be attributed to Google’s handset attempts. Google currently uses the galaxy at a ‘certified platform’ to launch its newest fully feature OS versions  but a majority of its market share is accountable  to the wide variety of handsets running Android OS.

So what should Facebook do to drive their mobile business?

Facebook, in my view, should focus on advertising, dominate consumer “mobile time” or develop a mobile platform:

  • Advertising – Mobile advertising is still at its infancy. Mary Meeker published last week its Internet Trends report, citing the gap between mobile traffic /engagement growth and ad spending. Better targeting tools are necessary to drive ad spending and Facebook is one of the dominant companies to revolutionize mobile targeting.
  • Dominate consumer “mobile time” – According to Nielsen, 10% of a typical US mobile user’s time is spent on social networks, mainly Facebook.  “Owning” any of the other activities, such as email usage (41%), Portals (~11%) or search (~7%) would greatly improve Facebook’s dominance over our mobile ‘life’.
  • Mobile platform – Facebook can develop a truly open mobile OS (think about Linux for mobile), focus on its own cross platform app store (given the current landscape it think that would bring limited value to Facebook) or offer a set of APIs that would empower app developers in ways that don’t exist today, offering stronger integration with Facebook. Any of these alternatives offers the potential for Facebook to improve its knowledge graph and reach.
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About shanishoham

After 14 years of General Management and incubating/scaling new businesses & organizations for enterprises (established a $55M mobile business and a $100M/400 employees global division), I became an investor Today I’m a board member/mentor with 5 incubators & micro-VCs and involved with many other private & public incubators around the world. I also founded a VC firm named 2020 and I'm a member with a number of angel groups so i get to see & work with many startups, innovation centers and other parties across the ecosystem. I’m an alumnus of the Stanford Graduate School of business - Sloan Master in Management program, a 10 months intensive program for 57 carefully selected experienced Executives and leaders from all around the world.

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