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The wait is over; after years of speculation from tech enthusiasts and countless denials from Facebook (NASDAQ:FB), we finally have what the speculators were referring to as the Facebook phone. I've been following the rumors since Facebook announced the "Home on Android" event last week, and most of the speculators were suggesting that Facebook was about to launch a smartphone manufactured by HTC running a highly customized version of Google's (NASDAQ:GOOG) Android OS with a deep layered Facebook integration. An epic fail from Facebook, I thought, as I wondered who would go and especially buy a phone just because it was all covered in Facebook, and why would Facebook make such a big effort to enter an already hypercompetitive smartphone market? However, introducing a Facebook style "launcher" for all Android-based phones is an interesting development, because it gives Facebook access to millions of Android users around the world while giving users the flexibility and choice to install or uninstall the new interface whenever they want. The idea is interesting; however, whether the Facebook Home is a game changer in mobile or just another fad will depend on how Facebook executes this idea. In this article, I give my take on Facebook Home.

What is Facebook Home?

Facebook Home is a group of applications that will replace your Android based phone's home screen, lock screen and app launcher with a completely Facebook-centric interface. The default home screen and the lock screen are replaced by a "Cover Feed", which is an auto-playing feed of full-screen photos, status updates, and links from the users' friends. The Home also features a messaging component called "Chat Heads" which allows the users to respond to messages from friends without having to leave the application they are already using. New messages appear as bubbles of the friends' profile photos which expand to become pop-up chat windows over the app being used. Facebook Home also features a new app launcher which appears upon swiping upwards on the user's profile picture. The new launcher displays the users' favorite apps on one screen, and the whole app drawer on a separate screen. Home also includes a "people-centric" notification system, which means that notifications are sorted by friends who triggered an event rather than on new information coming from an app.

How Does Facebook Benefit From This?

While Facebook insists that the new Home puts the focus on people over apps, we all know that what Facebook really wants is to make money off mobile. And Facebook understands that people are not naïve; when asked whether the Home would feature any ads, CEO Mark Zuckerberg was responded in a surprisingly blunt manner. "Yup! There are no ads in this yet. I'm sure that one day there will be," he said. This shows that Facebook is looking to send direct and positive signals to investors and advertisers in addition to its users.

If Facebook is able to convince a sizable number of Android users to adopt it, there could be huge advertising revenue potential from Home. Imagine: a user pulls out her phone from her purse to check for any new messages and immediately sees a relevant ad on the auto-scrolling Cover Feed, before even unlocking her phone. She notices that there are no new text messages, but a couple of new photos and status updates from her friends, so she starts scrolling through her cover feed, again giving Facebook the chance to show her more ads. And Facebook would be displaying all these ads without the user having opened the Facebook app even once.

Advertisers would also be happy to use smartphones' large screens to show big, full screen, targeted ads to users, and might be willing to pay more for displaying such ads which could be another success for Facebook.

In addition to the direct benefits in terms of increased advertising revenue from a larger number of ad impressions, Home is also designed to help Facebook gather more data about the users by driving increased user engagement. For example, a user only has to double tap the screen to like or tap once to comment on a post on the Cover Feed. Also, the Chat Heads messaging could give Facebook access to a massive database of information that they are sharing with their friends over the phone while texting. This data can then be mined to find the users' likes and preferences, and would help advertisers to make more targeted and effective ads.

Finally, Home could potentially give Facebook the one piece of information that was missing from the puzzle: the users' location. With information about the users' location, Facebook could make its ads many times more effective and become even more attractive to potential advertisers.

Execution Risks

While the idea of Facebook taking control of users' entire mobile experience sounds interesting to investors, it is far from certain whether a sizable number of Android users will adopt it. The first concern that I have is with the software development aspect of the new interface. Facebook has now had several years to develop its native Android app; however, the user experience on Facebook's Android app remains horrible. The app is incredibly slow, full of bugs, crashes quite often, and has consistently received below average reviews on the Play Store. That it is still one of the most used apps on Android is in itself a testament to Facebook's influence over its users. However, this raises doubts over whether Facebook can create a slick and smooth interface for its users in the form of Facebook Home, or will it be as bad as Facebook's existing app, because whilst users may tolerate a slow updating app, they may not be so forgiving to a substandard user interface.

Another concern lies with the frequency and style of advertisements on the Cover Feed. Whilst Facebook has been constantly increasing the frequency of the ads it shows both on mobile and desktop without significantly damaging user engagement, there is a limit to what users will tolerate on their lock-screens. Sure, you might be happy to know that your favorite garments store that you have 'liked' on Facebook is having a sale in the locality you are visiting, but you might not be impressed if the Cover Feed keeps showing full screen, annoying ads about a local dentist that you don't care about.

Concerns about privacy could also hinder the rapid adoption of Facebook Home. Although privacy concerns are a part and parcel of Facebook, Home raises apprehensions about privacy to a whole new level. Users who install Home will be logged into Facebook 24/7. This means that by analyzing location patterns from the phone's GPS, Facebook could learn where each user lives, works, shops and eats. Facebook can also potentially gather data from the phone's accelerometer to learn if you are walking, running or driving. Whilst the majority of the users have ignored privacy concerns thus far, they may consider Home as too big of an intrusion into their privacy.

Facebook must carefully consider all these risks when implementing the Facebook Home if it wants to gain widespread adoption; otherwise this will become just another fad for a small group of Facebook enthusiasts and quickly fade away.

Impact on Stock

Ultimately, the investors need to know how Home would impact Facebook's revenue and profitability in the coming quarters. I believe that the near-term impact would be limited because it would probably take months before Facebook home is rolled out to millions of Android devices around the world. In fact, Facebook could face pressure on short-term profitability because it is already incurring additional expenses to develop products like Home and the recent redesign of its news feed, while the revenue benefits from these projects are longer term in nature. However, I still think that this initiative will help improve the sentiment around the stock. There have been concerns raised by investors that Facebook is not doing enough to tap the mobile market; this initiative will dispel such fears and signal to the investors that Facebook is working hard to become an integral part of the users' mobile experience. I recommended going long Facebook a few weeks ago, and since then the stock moved lower but bounced just off my stop-loss level, and right now that trade is profitable. I would still recommend buying Facebook due to improving sentiment around the stock.

Source: Facebook Home: A Real Game Changer In Mobile Or Just Another Fad?