Still reeling from their IPO fiasco, Facebook (NASDAQ: FB) is already lurching headlong into the next disaster. The social media company wants to make smartphones. Yes, that’s right. Facebook is going into the smartphone business. The first question that came to my mind was: why?
CEO Mark Zuckerberg and his merry board of directors need to stop and conduct some serious research before giving this project the go ahead. For starters, they just might want to check out who they’ll be competing against. There’s only two competitors, but they just happen to be the undisputed smartphone heavyweight champions of the world: Apple (NASDAQ: AAPL) andSamsung (KE: 005930). If this alone isn’t enough to convince Mr. Zuckerberg that his Facebook phone idea is bad, then perhaps taking a closer look at the other major obstacles will.
High Start-Up Costs and Low Profit Margins. Computer and telephone hardware manufacturing traditionally carries high start-up costs and yield low profit margins. Apple and Samsung earn billions of dollars from their worldwide sales because they’ve been making and selling phones for decades. They’ve been through their learning curve; they know which production methods work and which do not. They invest heavily in R&D to develop hot products people want to buy. This sheer size and global reach allows Apple and Samsung to take full advantage of their economies of scale, including negotiating the best vendor prices and obtaining excellent product placement in stores. These companies know what they’re doing. Facebook does not.
Intense Smartphone Platform Competition. Apple’s iOS and Google’s (NASDAQ: GOOG)Android may dominate among smartphone platforms but they have plenty of competitors trying to make inroads. Samsung relies on Google’s Android but may soon develop their own operating system. Microsoft (NASDAQ: MSFT) is working to make their Window Smartphone on par with Android and iOS, and RIM (NASDAQ: RIMM) is clinging to its small market share. Facebook has decades of catching up to do if it hopes to develop an operating system that competes with Android and iOS.
Smartphone Distribution. You can spend hours browsing the seemingly endless array of mobile phones available at your local Best Buy. You can also buy mobile phones pretty much anywhere, including walk-in convenience stores, shopping mall kiosks and local flea markets. Mobile phone manufacturers must have their phones available for sale in as many outlets as possible. Effective distribution is vital to a manufacturer’s bottom line and jostling for premium product placement is fiercely competitive. How does Facebook plan to break into the tough distribution market?
Lack of Consumer Demand. Facebook’s application is easily downloadable to any phone free of charge. So what would make me want to buy a Facebook smartphone? Just to have their logo on the cover?
It would take a substantial financial investment on Facebook’s part to break into the smartphone industry. From a practical standpoint, it would be easier and far more cost effective for Facebook to partner with Apple or Samsung. Investors should be very concerned about Mr. Zuckerberg’s newest direction for the company. With Facebook’s stock price dropping slowly by the day, investors could have a lot more than just a botched IPO to worry about.