In early 2011 Paul predicted that Facebook would eventually create a “Facephone” with Microsoft as a potential partner. In our conversation with Paul he touched on some very important pieces of the puzzle that help to fill in the gaps of why Facebook would want to do this and what it would mean to the market (and anyone that would partner with them).

One of the primary reasons for a Facebook phone is the current limitations that Facebook has by only being an App on someone else’s operating system. Although there is a lot that Facebook can do they lose considerable control by riding in on Apple and Google’s products. Now this does not mean that they would discontinue their apps for other phones, it just means that Facebook would be able to focus their IP and exercise more control over the user experience than they can right now.

According to Paul, who has worked in the mobile industry for a number of years, if Facebook can focus on innovation and change some of the core technologies that we use on our phones every day like SMS, MMS and other messaging services they can have a huge impact on the market. To do that they have some hurdles to overcome.

One of the first is that they have to have a partner that has an existing OS they can rebrand and famake their own. Here is where Microsoft comes in. As they have Windows Phone (an OS with a small market share) Facebook could partner with them (and by extension Nokia) to develop a Facebook branded phone using Windows Phone for the core OS.

As to why Microsoft would want to do this that is pretty clear. Microsoft attempted a social networking style phone (actually two) before. These were the Kin phones; both of them were complete failures for multiple reasons. One of the first was that they were simply ugly the second was they really had limited functionality and did not bring anything truly new to the market. Microsoft would like nothing more than to push back against that failure and to accelerate their penetration into the mobile market. This is also something that Facebook needs to do as with their recent IPO failure (and continued loss) they now have to earn money to keep stockholders happy. Microsoft also owns a large amount of Facebook stock now which could be another indicator of a potential partnership.

A partnership with Microsoft could also alleviate the need for Facebook to buy or develop their own browser. They can use and improve the experience from the version of IE that is part of Windows Phone. Facebook could also leverage some of Microsoft’s experience with email and messaging. As the owner of Skype and their own Messaging system it is possible for Facebook to piggy back on that technology (although they might still develop their own technology for this). Remember email, SMS and MMS have not changed significantly in a number of years. The first company to actually make a core change to this service and push MMS, SMS and email to a better technology is going to cause a market shift.

Now we have the potential connections between Microsoft and Facebook let’s look at potential partners for the hardware and a few other technologies that will be needed for a Facephone. There have been rumors that Facebook might be considering buying HTC. We have taken a look at this rumor and while on the surface there is some potential for it, in the long run it does not make much sense. HTC is a large manufacturer of Android phones and is in a number of legal battles with Apple. As Google found out, when you pick up a company you inherit their legal troubles too. This is not something that Facebook would want to do. HTC also is not a big manufacturer of Windows Phone based devices so if they are looking at Microsoft for a partner it would not be the best choice.

On the other hand, Nokia might be a good potential partner. They have some core technologies and experience that could help to escalate the production of a Facebook phone. Nokia has good experience with Windows Phone, SMS, MMS, and even mobile billing and payments. These technologies are all ones that Facebook needs to make their product work. Nokia also has an existing partnership with Microsoft which would make them an excellent choice (if Facebook goes that route).

As we mentioned before any product by Facebook will bring privacy and security concerns to the market, but this is really only in the US. Paul brought up the important fact that in Europe consumers are much more educated on their rights and are aware that mobile companies have access to their data. However, what they can do with that data is clearly defined and protected. In the US this is not the case as we all have found out the hard way. To succeed in the US mobile market Facebook will have to clearly define their data policies especially if they attempt to push mobile billing and payment. As we saw with Google Wallet and the potential security risks with some of the technology they implemented it can be a big problem in the US. In Europe mobile billing and payment is more widely accepted and implemented and again Facebook can leverage Nokia’s experience with that technology.

Overall Facebook could, with the help of Microsoft and Nokia, make a change in the way mobile phones and devices are used and manufactured. IF, and only IF, they can improve on existing technologies or invent new ones for mobile messaging and work to integrate them in a meaningful way into the social networking experience. They will also need compelling hardware and an operating system to run these on. So far Nokia and Windows Phone have very little market traction, but perhaps with Facebook as a partner they can market this to the growing consumer pool between the ages of 15-25. This group of consumers feels the need to be connected all the time and to them a phone that ties in with Facebook could be something to rival even the iPhone.

Something like this could be exactly what many carriers in the US and around the globe are looking for to break the strangle hold that Apple and Google currently have on the market. If done right it could certainly help Microsoft to penetrate further into the market and even help Nokia regain some of the ground they have lost. Again, this is still a lot of “Ifs” to get around. Paul expects Facebook to make a formal announcement defining their mobile strategy in 3-6 months with a real product to roll out in 12-18 months. This seems to tie in with the current rumors that Facebook will launch their phone before the end of 2013. We are very interested in seeing exactly what they come up with and if any of these predictions prove to be accurate over the coming months.

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