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For Facebook to take Google’s Android code and customize it entirely around Facebook services would be insane. (ROBERT GALBRAITH/REUTERS)
For Facebook to take Google’s Android code and customize it entirely around Facebook services would be insane. (ROBERT GALBRAITH/REUTERS)


A new Facebook smartphone? Investors should hope not Add to ...

Chris Umiastowski is the growth investor for Globe Investor’s Strategy Lab. Follow his contributions here and view his model portfolio here.

In both my Strategy Lab portfolio and my own portfolio, I own shares of Google Inc. but not Facebook Inc.

I’m convinced the former is far better positioned than the latter to capitalize on where the Web is headed next, particularly the migration to mobile services. But now, with Facebook hosting a major media event on Thursday, I thought I would take another look at how these stocks stack up.

The invitation to this week’s event came with the teaser: “Come see our new home on Android.”

Android, of course, is the most popular smartphone operating system in the world, with about 75 per cent of the market, according to research firm IDC. But Android is owned by Google. What does it have to do with Facebook?

Facebook would probably not hold a media event just to reveal a new Facebook app for Android. That wouldn’t be exciting enough. So lots of pundits are speculating that Facebook is planning to build its own smartphone platform.

This is certainly feasible from a technical perspective. Facebook could take the open source Android code and tweak it, just as Amazon did with its tablet, the Kindle Fire, which runs on a variant of Android.

The deeper question, though, isn’t whether a smartphone is technically feasible, but whether it makes business sense.

Facebook makes the majority of its revenue from selling ads, just like Google. Android is Google’s way of putting its own services in front of as many people as it can, to generate more ad revenue when people use them.

A Facebook phone built on Android would be a direct challenge to Google – and it’s difficult to win such a challenge when you’re waging the war on turf controlled by your adversary.

There are already more Android users than Facebook users. For Facebook to take Google’s Android code and customize it entirely around Facebook services would be insane. Facebook phones would need to sell in huge numbers to offset the losses that could stem from a less friendly relationship with Google.

I think Facebook realizes that launching its own smartphone would be a big mistake. That’s why this week’s announcement will probably be something different.

I have no inside information, but I do know what I would like to see: a much deeper integration between Facebook and Android that would play to each company’s strengths.

For Facebook, that means keeping the focus on online socialization. For Google, it means doing what it does best – search and operating systems.

Google’s own social network, Google Plus, hasn’t posed much of a threat to Facebook so far. It seems to be more of a professional network, and could possibly threaten LinkedIn over time, but isn’t a serious rival to Facebook.

What happens if Google realizes that Facebook has the social power, and Facebook realizes Google has the smartphone power? They team up. Facebook capabilities become built into Android rather than requiring a separate app. Google and Facebook work together to monetize advertising capabilities on the platform, splitting the revenue in an appropriate way.

According to S&P Capital IQ, Facebook’s market capitalization is $60.9-billion (U.S.), or about $60 per active user. For a free service that depends upon advertising dollars to generate revenue, I don’t see this as a bargain valuation. Analysts think the company will post 57 cents in earnings per share this year and estimate that will grow to about $1.05 in 2015. So even using 2015 estimates, an investor is paying about 25 times earnings for the stock.

Investing in Facebook requires you to be confident that the company can maintain its growth rate. A partnership with Google would give me that confidence.

For now, though, I’m happy to sit on the sidelines and wait.

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