Facebook Entering the Treacherous Waters of the Smartphone Market

SUN VALLEY, ID - JULY 07: Facebook CEO Mark Zuckerberg attends the Allen & Company Sun Valley Conference on July 7, 2011 in Sun Valley, Idaho. T

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Nick Bilton reports that Facebook is hiring engineers away from Apple to help redouble its efforts to build a Facebook smartphone.

This strikes me as a reason that investors are justifiably leery of a company under the personal control of its young and ambitious founder. It’s possible that a Facebook phone will be a big success, but the dirty little secret of the smartphone industry is that it’s mostly littered with failure. If you were talking about an industry in which a dozen firms are making fat profits, then obviously Facebook’s going to want to get in the game. But of all the firms out there making smartphones, only Apple and Samsung are making any money. The rest of the Android OEMs are basically just churning out consumer surplus in a no-margin commodity industry. And Android itself is a stunning success as a product (i.e., lots of people use it), but it’s not clear that it’s really a successful business for Google.

To really make money in this game, in other words, you’d either need a product that’s wildly superior to Apple’s or else some kind of business model innovation whereby competing with Google’s free operating system on price somehow earns you money. I’m not going to say it can’t be done, but it’s hard. There are already a lot of people losing a lot of money in this industry, and it’s not obvious what advantage Facebook brings to the table.