What Facebook Can Learn From Vale

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By now there is no doubt that Facebook (NASDAQ: FB) is focusing most of its efforts on expanding its presence and profitability in the mobile sector. So far, the only sources of significant revenue generated by Facebook on its mobile platform are from advertisements placed directly inside the newsfeed of its mobile Facebook apps. With its struggle to fully capitalize on the potential of its mobile platform, Facebook has had to amend its S-1 Filings to include a cautionary note on how user access through the mobile platform was leading to "daily active users (DAUs) increasing more rapidly than the increase in the number of ads delivered." Recently, Facebook has taken its mobile strategy one step further in hopes of finding new ways to establish itself and generate revenue in the mobile sector: according to The New York Times, Facebook "hopes to release its own smartphone by next year." In fact, Facebook has already solicited the expertise of more than half a dozen former Apple software and hardware engineers to help it develop the Facebook Phone.

So what exactly can Facebook learn from Vale (NYSE: VALE)? At first glance, the companies couldn’t be any more different. After all, Vale is a 70-year old Brazilian company that engages in the exploration, production, and sale of basic metals. Facebook is a social media giant that just completed its IPO. Yet, in developing its own phone, Facebook should be mindful of the recent developments surrounding Vale and, more importantly, the lessons they teach in the importance of focusing on core businesses.  

Vale has recently slimmed down its operations to optimize its asset portfolio and focus on core businesses after being burned by its overdiversification: in the last three quarters, Vale experienced an average EPS decline of 34%. Vale discovered that it started to lose its competitive advantage and experienced diminishing profitability as it expanded its operations, many of which started to become burdens. For example, Vale recently announced on Monday that it had sold all of its Colombian thermal coal assets to Goldman Sach’s Colombian Natural Resources for $407M. This was due to the fact that its thermal coal assets were, according to the Financial Times, “relatively small and costly in comparison to the large operations of its rivals in the region.” Moreover, Vale has already sold its aluminum assets to Norsk Hydro and, according to Barclays, “will likely divest its oil/gas business some months ahead.”   

In creating the Facebook Phone, Facebook faces the same risk of over-stretching itself as it attempts to enter markets that it does not have sufficient knowledge of. Facebook is first and foremost a software company with a core competency centered around social media. Although smartphones are natural facilitators of social media, the hardware production, distribution, and sale associated with smartphone creation are completely tangential to Facebook's focus of connecting the world. Adding a hardware component to Facebook, whether through acquisition or green-field operations, would be a huge burden to the company and would diminish Facebook's profitability. Few companies have managed to successfully integrate the software components of their business with hardware production to create winning, profitable phones; for every iPhone example out there, there are at least ten Microsoft Kins. As IDC mobile analyst Kevin Restivo notes, “Mobile phone production is a business Facebook has zero experience in. It’s also a business with considerable cost and risk attached [and] no amount of homework done by Mark Zuckerberg is likely to help bridge the operational knowledge and gap needed to compete against the market leaders.” Moreover, just like Vale's Colombian thermal coal assets, Facebook will face significant competition in the mobile market and cannot match the economies of scale of market leaders such as Apple and Samsung in producing its own phone. 

Despite the tremendous obstacles associated with creating its own Facebook Phone, Facebook's overall strategy of focusing on expanding its mobile presence is the correct mindset. However, this strategy can be better executed through first expanding its current smartphone partnership with HTC, much like GoogLe has done with its Android system and various carriers such as Motorola (which Google recently acquired for its patents). HTC has an established presence in the mobile market and has established hardware operations that Facebook could utilize through a strategic alliance, without the hassle of starting from scratch or the integration problems of an acquisition. Facebook already has created an entire operating system, it recently acquired Instagram, and it is currently in talks to acquire Opera Software and its browser capabilities; these assets would greatly complement any phone and would further help establish Facebook as more than just a mobile app. Facebook needs to understand that it has the capacity to combine these assets to make a phone great. It just doesn't have the capacity to make a great phone.

Bilifuduo has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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