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June 2, 2012

Slate: Facebook smartphone? Dumb idea

There are two ways to make money in the smartphone business. There's Apple's way: 1) Make premium products that people clamor for; 2) Sell the devices for substantially more than it costs to make them; 3) Figure out what to do with your rapidly accumulating stockpiles of cash.

And then there's everyone else's way: 1) Spend a lot of money to make lots of different kinds of phones; 2) Sell them for rock-bottom prices, sometimes even for free; 3) Chalk your losses up to long-term strategy.

Google is the primary exemplar of this second approach. The search company gives away its Android operating system to phone makers around the world. The free OS has allowed manufacturers to create lots and lots of Android smartphones, some of them really good, most of them quite bad. Phone makers sell Android phones at low margins, sometimes even below cost, hoping to make a fortune on all the people who are switching from dumbphones to smartphones and are looking for a good deal.

But while the pricing strategy has made Android the world's most popular smartphone OS, it hasn't resulted in much of a windfall for anyone. According to Horace Dediu, who runs the phone-industry analysis site Asymco, Apple now collects 75 percent of the profits in the phone business. And Google makes twice as much money from ads it displays on Apple devices than from those on Android phones.

Now there are fresh reports that Facebook is planning to enter this terrible business. The New York Times' Nick Bilton says the social network has been stealthily recruiting smartphone hardware engineers — including former Apple staffers — in an effort to build its own phone. Bilton's report is the latest in a series of stories about Facebook's long-in-the-works, on-again, off-again phone. TechCrunch first reported on the project in 2010, and last year All Things D disclosed several more details about the phone.

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