Facebook is building a mobile phone, says a source who has knowledge of the project. Or rather, they're building the software for the phone and working with a third party to actually build the hardware. Two high level Facebook employees – Joe Hewitt and Matthew Papakipos – are said to be secretly working on the project, which is unknown even to most Facebook staff. Both have deep operating system experience.
It was when Google revealed Nexus One says the source, that Facebook first became concerned about the increasing power of the iPhone and Android platforms. And that awesome Facebook apps for those phones mayn't be enough to counter a long term competitive threat. Specifically, Facebook wants to integrate deeply into the contacts list and other core functions of the phone. It can only do that if it controls the operating system.
We're also not discounting possible partnerships around this. Spotify was said to be working on a phone with INQ last year based on a shared investor, Li Ka-Shing. It turns out Li Ka-Shing is also a sizeable investor in Facebook. So an INQ/Facebook partnership on a phone certainly wouldn't be a surprise.