Posted by: Rob Hof on October 24
OK, the deal’s done: In one of the most anticipated tech deals in recent years, Facebook just forged a deal with Microsoft Corp. that values the privately held social networking service at a stunning $15 billion. Microsoft will invest $240 million for the 1.6% stake and exclusively handle ads around the world for Facebook to complement its current U.S. ad deal.
The long-expected deal puts Microsoft on the map in the hot Internet service of the day, social networking. That gives it the potential to recoup much lost ground on the Net from Google, which was believed to be a contestant for the deal, Yahoo, and a raft of other companies. But given the limited scope of the deal, it’s uncertain how much benefit Microsoft will derive from paying what is by all accounts a huge sum for a piece of a company with unproven prospects.
The hope by social sites, advertisers, and investors is that social networking sites will be able to target ads more precisely to users’ stated interests and activities on the sites. But so far, the amount of ad revenue on social sites vs. search engines, portals, and other Web sites is minuscule. Facebook is expected to post about $150 million in sales this year, about half from a deal with Microsoft to place untargeted ads on Facebook profile pages.
Some observers even speculate that Google stayed close in the bidding to force Microsoft to pay up for the deal. Google execs at the company’s analyst meeting today were circumspect about the rumors before the deal was announced. Tim Armstrong, president of advertising and commerce for North America, said in response to an analyst’s query: “I don’t think we’ll comment at this point. We have a tremendous respect for them as a company. We have a tremendous amount of social networking on our properties.”
For Microsoft, there seems little downside to the deal, especially given that it’s putting up less than some had suggested–as much as $500 million. The $240 million is a very small fraction of Microsoft’s stash of cash. The downside is that a 1.6% stake implies virtually no control over Facebook, so this could prove to be more of a straight business deal than an entry into social networking. Just speculating here, but I wonder if such an investment could end up giving Microsoft no control but effectively prevent it from pursuing its own social networking initiatives.
The deal leaves Google, which has also lagged in social networking, to come up with another way to participate in social services. Its social network Orkut, which has been an also-ran for years, has recently grown quickly in some countries such as Brazil and India, but it’s still a distant competitor to Facebook. It also recently indicated it would provide ways for Facebook application developers to place Google ads on their apps.
It’s hard to blame Facebook for raising money when it can, since it will be enough to give it plenty of money to expand prior to an expected IPO as early as next year. The trick will be to avoid the common problem of spending too much on projects that are not laser-focused on the core utility of the site, instead of keeping heads down and improving the site.
Update: Google cofounder Sergey Brin, answering a question on how Google will participate in social networking, noted that Orkut is “one of the leading social networks” worldwide. “We don’t feel we need to own everything to be successful on the Internet,” he said. He noted that Google has an ad deal with MySpace, and “we’re very happy with that,” as well as partnerships with 20 other social networks.
Mike Arrington at TechCrunch kindly liveblogged the press call, which I couldn’t listen to because Eric Schmidt was talking at the Google analyst day. More detail and commentary too at Silicon Alley Insider.
Update 2, random musings: I can’t help thinking that everyone’s focus on the $15 billion is kind of off the mark. Nobody’s paying $15 billion for this company–since it’s not being sold–so does that valuation really mean anything? Even if Facebook did an IPO next year, would investors give it a $15 billion valuation? As valuable as I think Facebook is, and can be, I don’t think so. Too soon, and too many risk factors, like potentially fickle members and uncertain ad potential. As Todd Dagres of Spark Capital told me only semi-jokingly a couple weeks ago, Facebook’s IPO could end up being a down round.
In fact, Microsoft’s investment is almost certainly driven not by what it thinks it is worth but almost entirely by its strategic value: For pocket change, really, it locks up the Web’s hottest property for more than four years, boosts the profile of its ad system, keeps Google away, and learns a lot about the future of the Web.
On the other hand, did Google really lose all that much? The Microsoft deal doesn’t include search ads on Facebook, so that door is ajar, if not wide open. Google’s ad machine clearly isn’t hurting, either, judging from its latest quarter. And I wouldn’t count out its potential to make a play in social networking.
The picture will become clearer by Nov. 6, the day Facebook will announce its “SocialAds” network–and a day after Google is rumored could announce a way for software developers to get access to social data on Google’s Orkut social network and iGoogle, its personalized home page.