Facebook Needs a Smartphone and a Search Engine

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Wall St. was not impressed by Facebook Inc.’s (NASDAQ: FB) new search capacity, which allows members to thumb through the activities and preferences of their “friends.” Investors probably believe that few members will take advantage of the service or even bother to explore its features at all. The truth of the matter is that Facebook did not risk anything to really expand the businesses built for its one billion members. Even if it posts extraordinary earnings, Facebook has not offered its shareholders any hope that it can revolutionize the Internet as it has in the past.

Facebook stated innumerable times that it will not launch its own smartphone or tablet, which Google Inc. (NASDAQ: GOOG) and Microsoft Corp. (NASDAQ: MSFT) have. The social network may think its has nothing to add to the sector. That is not entirely true. Any company with one billion captive customers has a chance to market successfully a device tethered to it basic services. The release of a smartphone would suggest that Facebook finally has decided to take a major risk to greatly change the way it does business, and with that a chance of a great deal more revenue and a more diverse sales base.

The same case can be made for adding a true search capacity to Facebook. Many analysts believe that Facebook would need to take the financial and technology risk to create such a service. That assumption leaves out the level of desperation Microsoft has to gain ground against Google. With its tremendous cash balance, Microsoft could help market a Facebook search product, as well as promote the product to its Bing and MSN customer bases.

The investment community still dislikes Facebook enough to be skeptical of the modest moves it makes to improve its advertising-based business. Management hoped to entice investors with the word “search” attached to its new product. The lack of opportunity for Facebook was immediately transparent, and its stock sold off 3% on the announcement.

Facebook’s member base growth recently has approached zero. It is little more than a $5 billion a year business that breaks even. However, it does have $10 billion on its balance sheet. It cannot account to investors how it might use that money, because currently it has no discernible plans to use it.

Facebook needs to take a real risk to change the social network game, or have its shares trade below its IPO price for a long time. A member search feature does not qualify.

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