Why Facebook would be smart to buy RIM

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For Research In Motion Ltd. – a company whose stock price hasn't been this low since the winter of 2003 – Facebook entering the smartphone market might just be a good thing.

Sure, the odds of Facebook actually acquiring the BlackBerry-maker as part of its reported move into the hardware business are very slim. But unlike the revolving door of tech giants that were rumoured to be interested in RIM over the past couple of years, Facebook as a buyer actually makes a little bit of sense.

Quoting anonymous sources, The New York Times reported this weekend that the world's biggest social network hopes to release its own smartphone by next year. It's not the first time Facebook has tried to build a phone, but now that it's armed with billions of dollars from its recent IPO, the company is out on a poaching run, hiring just about every phone engineer it can get its hands on.

All of Mark Zuckerberg's talk about making the world a more connected place aside, there's really only one reason Facebook would want to make the leap into the cutthroat world of smartphones: Money.

For all its popularity, Facebook has almost no idea how to generate revenue from mobile devices. When Mr. Zuckerberg created Facebook eight years ago and the world's Internet users were firmly tethered to their desktops, that wasn't much of an issue. Today, with smartphone sales growth a full order of magnitude greater than desktop growth, it's a very serious issue. Like Google, Facebook makes money off ads, but ads don't do so well on smaller screens.

When it was still a private company, Facebook could afford to sort of ignore this glaring red flag. After all, any business that builds a user base of 900 million in just eight years must be doing something right.

But many of those investors who got in on Facebook's IPO price of $38 earlier this month – a price that seems like a distant memory now – don't care about user numbers if the company can't provide a decent explanation of where its revenue is going to come from. To justify its wildly lofty valuation, the social network would have to stumble onto a grove of money trees, or build something as profitable as, say, an iPhone. As long as it doesn't do any of these things, Facebook's stock price will probably continue to drop.

But building a phone isn't easy. Sure, Facebook recently dropped a billion dollars on a smartphone camera app in the form of Instagram, and a lot of Facebook's social functionality would work great on a mobile platform. But building a smartphone requires that all these software tools play nice with the phone's hardware. It also requires a stable operating system and an appealing physical design. Facebook doesn't have much experience doing any of this.

But RIM does. Sure, when it comes to market share, Canada's tech giant has spent the past couple of years doing an uncanny impression of a skydiver without a parachute, but it still has value. The company's assets include some of the best keyboards, most secure e-mail networks and richest customers on Earth.

One of the reasons RIM hasn't been able to translate these assets into something resembling an iPhone-beater is because the company's roots are firmly planted in the enterprise world – it started out catering to serious corporate clients and it has had an incredibly hard time repositioning itself in an Angry Birds world.

Facebook has the opposite problem – its closest business ally is Zynga, a company that makes money off virtual sheep. A Facebook-RIM partnership would give the smartphone maker a social side, and the social network some serious hardware.

There are plenty of reasons to think Facebook shouldn't try to acquire RIM. If the BlackBerry maker really is a company in freefall, then anyone who tries to buy it risks overpaying – after all, why not wait a few months and pay even less?

But over time, that argument becomes weaker. RIM is already incredibly cheap, and somebody is bound to consider it a bargain at some point. And it's not like the social network has a cash problem – the Facebook IPO alone generated about three times RIM's current market cap.

But why should Facebook buy what many critics see as a dying brand? The simple answer is, Facebook doesn't buy brands. In fact, Instagram marked perhaps the only time that a Facebook purchasing decision was influenced by the brand power of the company it bought. Most of the time, Facebook buys companies because those companies employ smart people. And RIM employs plenty of smart people.

To build a decent smartphone, Facebook will likely need some sort of partner. Apple is out of the question, since the iPhone-maker isn't going to give anyone a piece of its hyper-profitable mobile hardware line (and, anyway, Facebook and Apple have never gotten along).

Google is out of the question because it is Facebook's primary competitor. Even though Google's Android operating system is virtually free to use, Facebook would be aiding Google's dominance in the mobile space if it released an Android phone.

Microsoft is a possibility. However the mobile version of the Windows operating system hasn't gained much traction. And regardless, both Google and Microsoft don't really do mobile hardware, which is Facebook's biggest challenge.

This leaves RIM. What other company has such a large stockpile of hardware, software, engineering talent and overseas presence – and can be bought at such a discount?

Of course, Facebook could still decide to go it alone. It could poach talent from other smartphone makers and build yet another entrant in an already crowded market, making RIM's life even worse.

Or it could look to buy its way in. A Facebook-RIM acquisition may never happen. But if it did, it would make sense.