Facebook Is No Phone Maker; Home Interface Worst Idea Since IPO

| About: Facebook (FB)

The one-year anniversary of Facebook's (NASDAQ:FB) infamous IPO is coming up, and as that date approaches, the social networking company is notching its first major product failure.

With a lot of hoopla, it unveiled the "Facebook Phone" earlier this Spring. Within a month, the price was cut from $99 to less than a buck. AT&T, which was onboard to sell the device, is now reportedly dropping the phone from its shelves once it sells the last of them.

To be clear, this wasn't a phone actually manufactured by Facebook. Instead, it was a smartphone manufactured by HTC, and it featured what is called Facebook Home. This is an interface that allows Facebook users to pretty much constantly be on Facebook as long as they have this specially made HTC smartphone or a Google Android-powered smartphone.

In hyping the new interface, Facebook had this to say:

"With Home, everything on your phone gets friendlier. From the moment you turn it on, you see a steady stream of friends' posts and photos. Upfront notifications and quick access to your essentials mean you'll never miss a moment. And you can keep chatting with friends, even when you're using other apps."

I'm sure someone thought this was a marvelous idea. But I questioned how many people would want to be tethered to their friends 24 hours a day via their mobile! Either I am missing something, or I'm not too happy with my friends. No matter, I'd venture to say that most people would find being tethered to their "friends" via their smartphones every time they used the device to be extremely annoying.

There are a number of issues with Facebook Home. The first relates to the decline in the number of people who are going on Facebook as much as they did a few years ago. The "Facebook Phone's" biggest potential market would seem to be teens. However, even the interest from this group in Facebook seems to be waning. Don't take it from me; the company admitted as much during a recent regulatory filing.

"We believe that some of our users, particularly our younger users, are aware of and actively engaging with other products and services similar to, or as a substitute for, Facebook. For example, we believe that some of our users have reduced their engagement with Facebook in favor of increased engagement with other products and services such as Instagram. In the event that our users increasingly engage with other products and services, we may experience a decline in user engagement and our business could be harmed."

Then there is the growing number of smartphones that consumers have to choose from. In April, Samsung warned about the saturation in the smartphone market. In the release for its fourth quarter 2012 earnings, Samsung called the growth in the global smartphone market "furious." However, that pace should slow as price competition intensifies and more new products are released. The good times for smartphone makers may be ending in the U.S., but there is potential in emerging markets for affordable phones.

A last issue that I'll point out has to do with Facebook Home's design. Much has been reported about the user complaints posted on Google Play where Android users can download the app. There have been an estimated one million downloads, but half of the reported 16,000 reviews give it just one star. Just fewer than 20% give the app a five-star review. This is according to BGR.

Although the "Facebook Phone" has flopped, it may be for the best. The company's developers can focus on better ways to monetize users, especially through display advertising. You've heard it said dozens of times, but the future of companies like Facebook, Google (Nasdaq: GOOG), and Yahoo! (NASDAQ:YHOO), depends heavily on the revenues they derive from advertising.

Consider this. Facebook managed to wrangle the top spot for display ad revenues from Google in 2011, but lost it to the search engine giant last year. According to eMarketer, Facebook is expected to rake in $2.75 billion this year to maintain being second to Google, which is expected to earn $3.11 billion of display ad revenue this year.

So as the world's largest social networking site prepares to celebrate the one-year anniversary of its IPO on Friday, I hope that in the background, developers are regrouping from the "Facebook Phone" flop. Instead, I hope they are working like busy bees on projects that will continue to capitalize on subscribers so that their experiences in using the site is worth their time, which will help lure and keep advertisers happy to spend money on the site.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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