Is Facebook working on a phone? (update: No.)

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A report from TechCrunch today claims that Facebook may be working on a phone of its own to compete in the ever-warming smartphone race. According to a "source who has knowledge of the project," the social networking site has put two high level employees to the task of creating a smartphone which will allow deep integration with Facebook contacts. Apparently, says the source, Facebook has been concerned that Apple and Google represent some kind of threat as competitors, though there is rather deep Facebook integration in the Android platform, and even the iPhone app allows for contact merging. Additionally, the site speculates that the device could be targeted at the low end of the market ($50 or less), which would not place it as a direct competitor to anything but featurephones. The article goes as far to suggest that Facebook and Spotify investor Li Ka-Shing (who apparently had a hand in the Spotify featurephone with INQ) may have started putting those efforts and relationships into the Facebook handset. But, INQ's been down this road with Facebook already.

Still, TechCrunch says that Joe Hewitt and Matthew Papakipos are "secretly working on the project," which is being kept tightly under wraps; even Facebook employees are in the dark about the plan. Hewitt and Papakipos have certainly both worked in this space: the former created the Facebook iPhone app, and the latter was head of Google's Chrome OS team until June. But the article strangely leaves out what could be the most telling piece of the puzzle -- the departure of Android's lead project manager, Erick Tseng. After leaving the company in May, he went directly to Facebook to take on the job of head of mobile products. Keep in mind, Erick was high-up enough at Android to act as a spokesperson for the brand -- even appearing on the Engadget Show to talk about the platform.

But does this make for a Facebook Phone in our future? That's not so clear -- the idea that the company would see an opportunity in an already overcrowded smartphone marketplace is questionable, and if it's truly worried about the major players, it wouldn't be targeting a low end handset. We also may be giving the company a little too much credit to think that it can pull off being a heavy hitter in the social networking space (platform and all), and make a dent in the hardware and services game (remember, the competition is Microsoft, Apple, Google, RIM, and Nokia). Like all rumor and speculation in the gadget world, take it with a grain of salt, but you can be sure we'll be putting our feelers out to get a concrete answer on this one.

Update: Facebook wasted no time today shooting the idea down: "The story, which originated in Techcrunch, is not accurate," a spokesperson told Mashable. "Facebook is not building a phone." The company told the publication that it's focusing on "deep integration" with existing mobile platforms, but that "building phones is just not what we do."