Northern, WI 5/29/12 (StreetBeat) -- Can a software company build its own smartphone? We may find out soon.
This past week, Google (Nasdaq: GOOG) completed its acquisition of the hardware maker Motorola Mobility for $12.5 billion, which could lead to the search giant's making its own smartphone. But another software titan might be getting into the hardware game as well: Facebook (Nasdaq: FB).
Employees of Facebook and several engineers who have been sought out by recruiters there, as well as people briefed on Facebook's plans, say the company hopes to release its own smartphone by next year. These people spoke only on the condition of anonymity for fear of jeopardizing their employment or relationships with Facebook.
The company has already hired more than half a dozen former Apple software and hardware engineers who worked on the iPhone, and one who worked on the iPad, the employees and those briefed on the plans said.
This would be Facebook's third effort at building a smartphone, said one person briefed on the plans and one who was recruited. In 2010, the blog TechCrunch reported that Facebook was working on a smartphone. The project crumbled after the company realized the difficulties involved, according to people who had worked on it. The Web site AllThingsD reported last year that Facebook and HTC had entered a partnership to create a smartphone, code-named "Buffy," which is still in the works.
Now, the company has been going deeper into the process, by expanding the group working on Buffy, and exploring other smartphone projects too, creating a team of seasoned hardware engineers who have built the devices before.
One engineer who formerly worked at Apple (Nasdaq: AAPL) and worked on the iPhone said he had met with Mark Zuckerberg, Facebook's chief executive, who then peppered him with questions about the inner workings of smartphones. It did not sound like idle intellectual curiosity, the engineer said; Mr. Zuckerberg asked about intricate details, including the types of chips used, he said. Another former Apple hardware engineer was recruited by a Facebook executive and was told about the company's hardware explorations.
When asked Friday, Facebook did not deny or confirm that a project to build a smartphone existed, but pointed to a previous statement it gave to AllThingsD last year that said in part, "We're working across the entire mobile industry; with operators, hardware manufacturers, OS providers, and application developers."
For Facebook, the motivation is clear; as a newly public company, it must find new sources of revenue, and it fears being left behind in mobile, one of the most promising areas for growth.
"Mark is worried that if he doesn't create a mobile phone in the near future that Facebook will simply become an app on other mobile platforms," a Facebook employee said.
Facebook is going to great lengths to keep the phone project a secret, specifically not posting job listings on the company's job Web site, but instead going door-to-door to find the right talent for the project.
But can a company that is wired as a social network learn how to build hardware? Mixing the cultures of hardware and software designers is akin to mixing oil and water. With the rare exception of Apple, other phone makers aren't very good at this.
The biggest names in consumer electronics have struggled with phone hardware. Hewlett-Packard tried and failed. So did Dell. Sony has never done very well making phones.
"Building isn't something you can just jump into," explained Hugo Fiennes, a former Apple hardware manager for the first four iPhones who has since left Apple and is starting a new hardware company,Electric Imp. "You change the smallest thing on a smartphone and you can completely change how all the antennas work. You don't learn this unless you've been doing it for a while."
He added, "Going into the phone business is incredibly complex."
Facebook also faces hurdles, often of its own making, on mobile. Twitter, for example, is fully integrated into the Apple iPhone and allows people to seamlessly send Twitter messages with photos or article links. Facebook, which has had a contentious relationship with Apple, is still not integrated into iOS.
One Facebook employee said the phone project had been rebooted several times because Facebook originally thought it could figure out hardware on its own. The company has since learned that it needed to bring in people with phone-making experience, several people said. So it is hiring hardware engineers to work with a phone manufacturer and design the shape, style and inner workings of a Facebook phone.
Despite the difficulties, Facebook seems well positioned in certain ways to enter the smartphone market. It already has an entire operating system complete with messaging, calendar, contacts and video, and an immense app store is on its way with thousands of highly popular apps. There's also that billion-dollar camera app, in the form of Instagram.
If Facebook fails with its own team of engineers, it could buy a smartphone maker. The company took in $16 billion from its bumpy I.P.O. It could easily scoop up an infirm company like Research in Motion, which is valued at less than $6 billion, and drop a beautifully designed Facebook operating system on top of RIM's phones. HTC, which is upset with Google for buying Motorola, is worth about $11.8 billion and becoming cheaper by the day.
Facebook would not necessarily challenge Apple if it entered the smartphone marketplace. Instead, it could be Facebook vs. Google, which makes the Android operating system, with both companies going after a huge number of buyers of lower-priced smartphones.
"When you offer an advertising-based phone, you're targeting all the users on prepay that are budget-conscious of their communications costs," said Carolina Milanesi, a vice president and analyst for the Gartner Group.
Ms. Milanesi said that at a mass market level, both companies could take the same approach as Amazon, offering low-cost hardware, like the Kindle, and subsidizing some of the costs through advertising.
After all, both Facebook and Google make their money through advertising. If the companies have the opportunity to continually put ads in front of people on a smartphone screen, you would think the only question left would be to pick the right ringtone that makes that ka-ching sound.
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