Why Facebook Can't Dial Up Phone Success

TheStreet.com

NEW YORK (TheStreet) -- Just as investors are clearly underwhelmed by post-IPO Facebook FB , analysts are equally skeptical about the social networker's rumored plans to enter the smartphone market.

The New York Times reports that Facebook is preparing to make a leap into the fiercely competitive smartphone market. Citing unnamed Facebook employees, engineers sought out by Facebook recruiters and people briefed on the company's plans, Facebook plans to release its smartphone by next year, according to the Times.

Facebook declined to comment on this possibility when contacted by TheStreet, although analysts say that a smartphone move would be decidedly unwise.

"There's not really a lot of data points to support it," explained Matt Thornton, an analyst at Avian Securities. "The closest initiative was the Samsung Nexus with Google GOOG , which did OK, but was not a full-on success."

Thornton notes that Facebook is not a mobile brand, making it even more difficult to break into the smartphone market. Furthermore, he explains, hardly anyone outside of Apple AAPL and Samsung is enjoying success in the hardware business.

"It's a very difficult business," agrees Ron Gruia, an analyst at Frost & Sullivan. "There's so many handset manufacturers out there, it's hard to make an entry."

Last year, however, the AllThingsD Web site reported that the Palo Alto, Calif.-based firm is working with HTC to build a smartphone code-named 'Buffy' running a tightly integrated Facebook service.

There has even been chatter that Facebook could buy HTC or beleaguered Canadian handset maker Research in Motion RIMM , which cut its fiscal first-quarter guidance on Tuesday, and hired bankers to help with its strategic review.

Facebook raised just over $16 billion in the largest-ever tech IPO earlier this month, so cash is not an issue for Zuckerberg and his team. RIM, which saw its shares tumble almost 8% on Wednesday, has a market cap of $5.42 billion. HTC has a market cap of roughly $11.8 billion.

Thornton, however, warns that major smartphone M&A would be more trouble than it's worth for Facebook. 'It's a big chunk of change and your shareholders will be merciless if it doesn't go well." he said.

Recent rumors that Facebook is eyeing Opera Software and its Web browser, however, make much more sense, according to the analyst.

"If they want to have the Opera Web browser tightly integrated on an HTC phone, that would be an interesting way to tap this market," he said. "That way, you can dabble and see whether you really can differentiate."

Opera Software declined to comment when contacted by TheStreet.

Rather than leaping into the handset market, Facebook could pursue alternative revenue streams, says Frost & Sullivan's Gruia, such as licensing out an API application programming interface to service providers.

"Service providers will want to pay to piggyback on the social network," he told TheStreet. "Facebook could charge service providers a royalty for every time the API is invoked - that's one quick way for them to make some money."

Facebook shares slipped 1.98% to $28.27 on Wednesday.

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