Facebook's hardware strategy can't come too soon

Wednesday 22 March 2017 | 14:00 CET | Market Commentary
Facebook will hold next month its annual developers conference F8 in San Jose. According to unconfirmed reports, hardware is expected to take a central role in the presentation.

Building 8, the R&D unit announced at the previous conference, is reportedly working on various devices, such as a camera and drone. There are a number of reasons why this is an important development for Facebook:

  • First, it's a business decision. The other major internet players (Google, Amazon, Apple, Microsoft) are already active in the hardware segment. They are well-positioned in this, with their R&D, cash flow and customer knowledge. If anyone is going to develop new hardware, it will be these people.
  • Second, there are opportunities for cross-selling. This is perhaps the most important reason for Google, Amazon and Facebook. Hardware (CPE - customer premises equipment) is, alongside broadband, the most important enabler for online services, which means advertising for Google and Facebook and e-commerce for Amazon. For Facebook, hardware also is an important enabler for a still new market segment, VR and AR (virtual reality en augmented reality), which the company is focusing on intensely.
  • Third, vertical integration. This gives businesses more control over the value chain and the customer experience.
  • Fourth, hardware means diversification. With a heavy dependence on advertising, a second source of income is more than welcome. Even more so as Facebook is approaching the saturation point. It's still reporting strong growth, but this will fall, make no mistake about it. The company may even be too late with hardware, as its competitors already have extensive portfolios.

We know the company is a market leader in two areas: social networking (Facebook, Instagram) and communication (WhatsApp, Facebook Messenger) - as much as there is a distinction between these two segments. Advertising is its dominant source of income (98% of revenue in Q4 2016). Oculus, Facebook's VR system, is still not contributing much. Success is not guaranteed, as its rivals have shown (think the Amazon Fire smartphone, Google Glass). Adding a hardware vision would bring many advantages, but first Facebook needs to make up the distance with its competitors. 


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