Facebook Inc. (FB), owner of the largest social network, is working with HTC Corp. to build its own smartphone for release as soon as mid-2013, people with knowledge of the matter said.
The companies had intended to release the device as early as the end of this year, and pushed back the timetable to give HTC more time to work on other products, said some of the people, who requested anonymity because the plans aren't public. Facebook is also developing a modified operating system for the device and has assembled a team of former Apple Inc. (AAPL) programmers to improve its iPhone application, people said.
More than half of Facebook's 900 million users access the social network via mobile devices, while none of the $3.15 billion in advertising sales last year came from ads on phones. Chief Executive Officer Mark Zuckerberg could use a Facebook phone, with social-networking features built-in, to woo marketers and assuage concerns dragging on the company's shares.
"Usage is shifting to mobile, and they have not been able to monetize mobile," said Victor Anthony, an analyst at Topeka Capital Markets Inc. "To the extent that it's a device you own and carry around with you at all times, and it ties into the Facebook experience, it will be beneficial. They could then put a lot of ads onto the platform."
Sally Julien, a spokeswoman for Taoyuan, Taiwan-based HTC (2498), declined to comment.
Facebook stock has tumbled 23 percent since its initial public offering on May 17. The decline came in part due to concerns that the company isn't making enough money from mobile advertisers. The stock climbed 3.1 percent to $29.34 as of the close yesterday in New York.
"Our mobile strategy is simple: We think every mobile device is better if it is deeply social," Menlo Park, California-based Facebook said in a statement. "We're working across the entire mobile industry; with operators, hardware manufacturers, OS providers, and application developers to bring powerful social experiences to more people around the world."
Former Apple staff hired by Facebook to work on mobile are: Greg Novick, who helped develop the touch-screen user interface; Tim Omernick and Chris Tremblay, who also worked on the device's software; and Scott Goodson, who helped create the stock-market application, according to people with knowledge of the hires.
Last year, Facebook also bought Push Pop Press, a digital publishing software maker co-founded by Apple alumni Mike Matas and Kimon Tsinteris, two designers who helped build the look and feel of the iPhone and iPad software. Matas is credited with creating the battery logo that shows on the iPhone screen when it's charging. A longtime BlackBerry user, Mark Zuckerberg converted to an iPhone in the past couple of years.
This team from Apple has been primarily focused on rebuilding Facebook's iPhone application, which has been criticized by users for being slow. An initial release could be announced within a couple of months, with another broader overhaul of the iPhone app coming next near, one person said.
The company also hired several key staffers who worked on the Palm operating system for mobile phones.
Zuckerberg said earlier this month that bringing Facebook's features to handheld gadgets was difficult because the user experience is so different than on desktop computers.
Asked in an interview at the Allen & Co. media conference in Sun Valley, Idaho, about his greatest challenge right now, Zuckerberg said it was "the shift to mobile."
The New York Times reported in May that Facebook had hired a team of former Apple engineers with the goal of releasing a phone by next year. AllThingsD reported in November that a Facebook phone would debut between late 2012 and mid-2013.
Facebook started offering mobile ads in March and hasn't provided statistics on their impact. Facebook has said ad growth won't keep pace with user gains. The company is scheduled to report second-quarter results after the close of trading today.
While Facebook already has applications that run on Apple's iOS devices as well as Google Inc. (GOOG)'s Android mobile operating system, it is looking to embed its features deeper into mobile devices to grow advertising revenue.
While that would put Facebook into direct competition with Apple and Google, it could also help protect Facebook from their influence, said Brian Wieser, senior research analyst at Pivotal Research Group.
"The fear is, Apple might extract a toll from your users," Wieser said. "Apple could tell Facebook, We are making Google+ the default. What is it worth to you to make it otherwise?"
Facebook could use a modified version of Android for its smartphone. Android, unlike Apple's iOS, can be modified by mobile phone manufacturers or wireless carriers.
Facebook had been working with mobile device makers such as Britain's INQ Mobile Ltd. to create phones that made it easier to use social websites such as Facebook and Twitter. The new work with HTC will allow for deeper integration of Facebook features, the people said.
HTC and Facebook have collaborated closely before. Last year, HTC began selling "ChaCha," an Android-based phone with a dedicated Facebook button to share music, photos and messages.
Struggling against larger competitors in the U.S., HTC had seen its global smartphone market share shrink to 4.8 percent in the first quarter, down from 8.9 percent the year before, according to IDC.