[25 October 2007]
San Jose Mercury News (MCT)
SAN JOSE, Calif. - Microsoft has acquired a minority stake in Facebook in a landmark deal that puts a stunning $15 billion valuation on the social networking Web business and highlights Microsoft’s intense rivalry with Google and Yahoo over the booming online advertising game.
Microsoft and Facebook, based in Palo Alto, Calif., jointly announced that the software giant would pay $240 million for a 1.6 percent stake in the three-year-old company that is invading the home-page turf of such Internet giants as Google, Yahoo, AOL and Microsoft’s own MSN.
Industry observers say Microsoft was willing to pay a steep premium to prevent Facebook from striking a similar agreement with Google or other suitors. While the deal does not put a formal value on the privately held company, Microsoft’s investment would suggest that Facebook is worth $15 billion, twice the market capitalization of chipmaker Advanced Micro Devices.
But Microsoft executives said they believed the “global partnership” will pay off in the long run by enabling it to leverage its advertising business across a social network that has nearly 50 million registered users ands is growing rapidly. One Microsoft executive said it is “in the realm of possibility,” that Facebook will eventually have 300 million users globally.
Executives for both companies said the deal would enable advertisers to better target consumers with relevant ads based on the data that comprises a user’s evolving digital profile.
The new deal expanded an agreement struck in August 2006 in which Microsoft secured U.S. rights to sell banner ads and sponsored links on Facebook. At that time, Facebook had 9 million registered users.
While pursuing new ad revenues, Facebook said it will be careful not to alienate users. “We want to make sure users don’t feel we violated their trust in any way,” said Owen Van Natta, vice president of operations.
In a conference call Tuesday featuring Facebook and Microsoft executives, Van Natta demurred from discussing the company’s negotiations with Google.
Google Chief Executive Eric Schmidt also declined to comment on Google’s talks with Facebook. But Schmidt hinted that Microsoft overpaid.
“We understand the math very well,” he said. “Some competitors might be willing to spend larger amounts of money beyond their ability to monetize.”
Facebook’s Van Natta said the $240 million investment would pay for the company’s expansion and continuing innovation. Facebook’s technology has enabled it to distinguish itself from rival social networks like MySpace and instead compete more with the likes of Yahoo, MSN and Google.
Van Natta emphasized that Facebook is a “technology company” that plans to roughly double its payroll by the end of 2008, to 700 people.
Internet industry insiders say Microsoft needed the deal more than Google, the dominant leader in both the online search and advertising markets.
The strategic value of Facebook allows Microsoft to pay more than another company might, said Chris Tolles, chief executive of the Palo Alto start-up Topix.
“Basically what this says is people are counting on Facebook building a money machine,” said Tolles.
Microsoft executive Kevin Johnson said the global online advertising is expected to grow to $80 billion within a few years.
But some observers are skeptical of Johnson’s suggestion that Facebook might grow to include 300 million users.
To meet Microsoft’s lofty expectations, Facebook must not only expand its audience but change the nature of the site, said Keith Benjamin, managing director at the venture firm Levensohn Venture Partners. People today go to social-network sites to catch up with friends and keep track of events - not to buy products, he noted.
Microsoft, Google and Yahoo have been building their advertising arsenals. Google in April announced plans to acquire Doubleclick for $3.1 billion cash, while Yahoo paid $680 million to gain full control of Right Media Exchange. Microsoft followed a month later with the announcement of a $6 billion acquisition of Aquantive, paying an 85 percent premium over the price of its publicly traded shares.
Those numbers dwarf Microsoft’s investment in Facebook, which makes Microsoft “the exclusive third-party advertising platform” for the site.
Facebook was founded by Harvard student Mark Zuckerberg, now 23, who dropped out of school and moved the business to Silicon Valley. Initially designed for collegians, its popularity surged after it opened membership to the broader public, and surged again in May after it opened up its development platform to outside developers. Thousands of application have been developed that enable Facebook users to personalize their pages in myriad ways.
Some analysts have portrayed Facebook as a new operating system that exists on the Web instead of hard drives.
The $240 million Microsoft is spending for its 1.6 percent stake may seem a pittance for a company with $23 billion in cash and short-term investments, but the $15 billion valuation it bestows on Facebook is monumental.
When Google went public in 2004, its initial $85 a share valuation put its market cap at $23 billion, numbers that stemmed from fiscal 2003 revenue of $1.5 billion. Facebook’s revenue is expected to reach $150 million this year, according to some reports.
Zuckerberg recently said years may pass before Facebook trades publicly. His reported 20 percent stake in Facebook would be worth $3 billion under the valuation set by the deal with Microsoft.
“I think this is a great day for us Web 2.0 start-ups in the valley,” said Tolles, the Topix chief executive.