Facebook's Hardware Gamble
Another Facebook post? No, I'm not a shill for the company. I'm still as skeptical as ever, but recent trends in the industry and at the company point to some signals of a potential transformation. They bear analysis: So let's take a look.
Remember the Facebook phone? Me neither. In fact, I was just about to sit down to start writing this post when the thought of it popped into my head. Here I was about to write a post about Facebook's foray into hardware, and I almost forget their first disaster.
Much like the Amazon Fire smartphone, Facebook Home was a solid idea that never took off in the marketplace. In fact, Facebook Home wasn't even hardware. It was a launcher and overlay for the Android operating system—essentially hijacking the Android operating system and injecting its own brand and apps throughout the device. With Facebook steering the way as the most used social network, and one of the dominant tech giants, why wouldn't they be able to slide through the side door of the smartphone market—especially since every application, OS, and other service wants to integrate with Facebook to steal social connections.
I always thought that Amazon missed the boat by not making a Fire MP3 player first. I know people like to say that dedicated MP3 players are dead, but a compact, dedicated device with a long battery life, and easy, mountable, interface still has an appeal to many. Amazon having their own music library, as well as Audible, could have made a unique device for media consumers much like they've been successful with dedicated eReaders despite the emergence of the tablet market… I owned a Zune and a Zune HD though, so take my opinion on dedicated MP3 devices lightly.
Facebook's phone initiative failed for many reasons, but a primary reason for it's failure is that a phone centered on Facebook becomes a niche device. Facebook felt the need to dominate the interface when the reality is that people want the utility of the smartphone to be front-and-center, and the integration of social media to be on the periphery. Niche devices in the phone market won't be able to sell enough to cover the costs of hardware and marketing.
Facebook's next foray into hardware (outside of their purchase of Oculus) was to launch Facebook Portal—and the world shook with laughter. Portal came out when Facebook was at its lowest in terms of consumer good will. Questions about data collection, data misuse, and privacy violations were beating at the door of the company, and even people comfortable with Jeff Bezos hearing their deepest, darkest thoughts and converting them to Amazon purchases scoffed at the idea of giving Facebook a microphone and camera in their home.
I won't lie; I was one of those people that scoffed.
As much as it makes sense for the leading social networking powerhouse to make a move towards connecting people with specialized hardware, Facebook's reputation was always going to prevent it from being successful. Portal was actually the remnants of Facebook's vaunted Building 8 project, which crash-and-burned quite spectacularly under former Google executive Regina Dugan at a time when Mark Zuckerberg was desperate to get into the hardware game.
Why the desperation? I mentioned in a previous issue how Facebook's future needs to be one of a diversified revenue portfolio and not just advertising. Mark Zuckerberg felt the same way when he decided to invest heavily in Building 8.
There's a lot of money at stake. The smart home market, which includes speakers and entertainment products, is forecast to reach $151.4 billion in revenue by 2024, up from $76.6 billion last year […]. The analysis doesn't include Facebook among the more than three-dozen companies listed as potentially key players.
As Building 8 failed, Portal became the sole focus of Facebook's own branded hardware effort, but has struggled for many of the reasons mentioned above:
[…] the company continues its effort to develop Portal, it has to contend with a deterioration of trust among consumers following a host of privacy scandals that make it difficult to lure customers into buying a Facebook-branded camera for their living room.
Then the world was turned upside down.
COVID-19 put the world on lock down, and Facebook has a good record for using it's people-connecting DNA to promote safety and communication during times of crisis—even if it's something as simple as "mark as safe." Now, with everyone confined to some form of self-isolation and travel severely limited, people need to find other avenues of communication. You could use WhatsApp; You could use Skype; You could use a simple phone call… but even people who despise Facebook as a social media news feed likely have it to stay connected to distant family and friends. It's the only way my family in New Jersey can see photos of my children.
We all have Facebook, which means we all have Facebook Messenger—even if we refuse to download it to our phone. Facebook Messenger is actually the path of least resistance for most, and it didn't take long for the previously scoffed Portal to sell out. Even as I write this issue—although most devices are back in stock and on sale for Mother's Day—the Portal TV device is still out of stock.
Facebook Portal sales have risen by 10x and largely have been positively received by end-users. It's actually a nice piece of hardware with a quality aesthetic. It allows for Messenger and WhatsApp video calling, but also integrates with Alexa—piggy-backing off of Amazon's services to beef up its utility. Notice something? This is essentially the same game plan as Facebook Home: A specialized layer integrated with existing, popular software. The difference? With Portal, the video chat is central, and Facebook owns that experience. They can use Alexa to fill gaps while they flesh out other services of their own that they can eventually swap out unnoticed. Also, unlike Facebook Home where the Facebook experience usurped the utility of the smartphone, Portal's very utility is centered on what Facebook is best at: Connecting people.
Facebook's Portal is so user-friendly that some are even recommending it as a tool to keep children socializing (an important developmental milestone) during the pandemic.
I don't want to give Facebook too much credit here. They have a ton of privacy concerns that still need to be addressed, and although they have done admirable with their Data for Good initiative, there is little to suggest that Portal is doing much more than taking advantage of the pandemic and current market conditions. I'm approaching this from the outside with a business analyst's perspective. The pandemic has allowed Facebook to gain a foothold in the smart home market; It gets to be a gateway drug to other devices and services, and Facebook can position themselves to "recommend" the most compatible devices and services.
If I think about the market over the last 5 years, there's one company that I feel Facebook missed the boat on: Ring. Ring has always been explicitly tied to the "neighborhood" as a concept, even if it was simply a doorbell security camera. The branding and the ideology of the company was a "more secure home" in the sense of a community and the normal community-driven activities (like mail). Ring eventually evolved their services to include a Neighbors application, connecting Ring consumers in the same neighborhood for self-policing. I won't comment on if this self-policing is a good or bad thing (we've all read some of the horror stories about discrimination), but this digital community is Facebook's bread-and-butter, and Amazon scooped it up right in front of them. Ring would have not only allowed them to create a digital compliment to real communities, but would have gained them a foothold in the hardware market.
As a side note: I'm surprised Facebook hasn't gone after Nextdoor yet. NextDoor and Walmart recently partnered on a "Neighbors Helping Neighbors" initiative that is right up Facebook's community-driven alley.
If Facebook missed out on Ring to Amazon, what would be another move they could make? Arlo.
Arlo has been taking a beating in the stock market as sales and revenue have decreased. Previous parent company (and majority shareholder) Netgear redistributed their shares to their own shareholders, and changes to executive leadership are afoot. Perfect time for Facebook to make a move.
Facebook is in a position to come out of the pandemic with a bit of good will and a tiny slice of market share, but they will not be able to ramp up hardware innovation or production fast enough to take advantage of that good will on there own. They could, however, jump start it with a purchase like Arlo, and if they really wanted to be ambitious, just buy Netgear entirely.
The Amazon Echo is not the central hub of your home. Same is true for Google Home or any other personal digital assistant. Your Modem and WiFi router have always been that hub. Your personal network runs off of it. Alexa can't access the world's knowledge without it. If Facebook wants to make a move into hardware, purchasing Arlo and then Nextdoor would be the first step in creating a local digital community to compliment Facebook's global social network, but purchasing Netgear gives them control of the hub of your digital life.
Netgear already boasts the best mesh network in the industry, and they have over 25 years of experience in developing quality hardware. As the parent company of Arlo, that experience shows in Arlo's own devices. Facebook's Portal shows that the average home owner wants simplicity. If you want a decked out smart home, and decide on SmartThings, you need a hub (or two), and you have to connect that to your router. If you want to be able to control your smart home with Google Home or Amazon's Alexa, you need to buy an additional device and hook it to your router. Just something as simple as a smart light bulb (Philips Hue requires a hub) or a door sensor that you want to control with your voice requires multiple hubs. This isn't simple.
Through going all in on a purchase like Netgear (and Arlo) Facebook can streamline the hub, slowly integrating simplicity (and voice control) into WiFi routers and mesh extenders. Facebook's Portal already works with Alexa, so again, they can integrate for functionality, while pealing off services and replacing them with their own as they go.
- With Netgear, they would have a solid hardware partner that can get them in the homes of millions of users
- With Arlo, they would have a smart security setup that could rival Ring
- With Portal, they have a simple flagship smart home component with a built-in user base thanks to Messenger
If you combine this with a Nextdoor-like application or purchase, Facebook is then positioned to own three spheres of community:
- The global social network
- The local digital community
- The virtual meta layer (via Oculus)
I remember a long while back when Foursquare (remember Foursquare?) was attempting to market themselves as the location layer of the Internet. Thinking of the Internet (and digital space) in multiple layers makes sense. Facebook already owns the social layer of the Internet: How people communicate and share information online. With the local digital community, Facebook can better integrate tools like Facebook Events and Marketplace with local community-specific functionality available in applications like Neighbors and Nextdoor. This is essentially enabling a data layer on top of the community in a manner more driven towards physical location than global communication. Finally, with Oculus and Facebook Horizon, Facebook can begin experimenting with world-building in virtual reality, but expect Oculus to begin tackling both VR and augmented reality (AR) when the hardware is small enough for everyday use. AR gives us the option of an added layer of reality that we only glimpsed with Google Glass. Magic Leap wants desperately to own this space (they've dubbed it the Magic-verse), but they've struggled financially. In Oculus, Facebook has the best VR device on the planet, and they are positioned both financially and technologically to capture and build that meta-verse layer.
If Facebook's endgame is to diversify their revenue to move away from their reliance on advertising, and they are serious about getting in deep in the hardware game, it would be a missed opportunity not to accelerate in the face of this pandemic to build from the solid reviews and goodwill that Facebook Portal has provided them.