Facebook and Microsoft

So it has happened (WSJ paid). What to make of it? I was in a meeting in the Valley when this went down, so I'm late to the analysis party. I have no idea if anyone has said this yet, I am sure someone has. But – if there…

So it has happened (WSJ paid). What to make of it?

I was in a meeting in the Valley when this went down, so I’m late to the analysis party. I have no idea if anyone has said this yet, I am sure someone has. But – if there is not insight/boxing out/exclusivity into the new Facebook Social Ads platform as part of this deal, I don’t get it.

If there is, it’s a slam dunk. Or maybe for Microsoft, it’s worth the valuation just to keep Google from having the remnant ad deal in Europe. But I doubt it.

I want to know what the terms are, and by that, I don’t mean the financial terms. I mean the stuff that is not being announced – the agreements to work together on the upcoming Facebook platform, the ability for Microsoft to sell into the Facebook domain proper, etc. At the very least, some guarantee that Google can’t work with Facebook on any future ad platforms that might be developed. And of course, search distribution, which was not confirmed in the conference call, from coverage I could find.

Maybe it comes down to this: Microsoft won, Google lost. If that’s the case, OK, but…the real winner here is Facebook. At least, until it has to earn into a $15 billion valution. Good luck with that if social ads doesn’t pan out. On the other hand, well, congratulations for getting money so cheap.

The long and short of it for me is, the more insight into Facebook’s core business this buys Microsoft, the better it is for Microsoft. How much did they buy with this? No idea. But to think that Microsoft isn’t prototyping exactly what Facebook is already building (social advertising) is to not be thinking – it’d be criminal to not be in this game if you are Microsoft, or Yahoo, or Google. You have to be. So how do those two things square – an investment in Facebook, and a commitment to develop an advertising platform that competes with Facebook?

The Journal’s point of view on this is …. instructive. I think no one in the mainstream press has truly grokked what Facebook has a shot at doing – Adsense driven not by search queries, but by personal profile. It could be a major, major new platform, if we, as a culture, take to it. It’s not a given, but it’s a very compelling vision.

The high valuation for Facebook is the latest sign of a renewed exuberance in Silicon Valley over Internet companies with lots of users — even if those users haven’t yet translated into a lot of revenue — and is reminiscent of the Internet bubble that ended in 2000. Microsoft and Facebook say the valuation is justified and that Facebook is starting to find ways to monetize its rapidly growing user base.

Well, sure they are. The big question is this: will Microsoft get to see what they are doing, and work with them, or are they going to be relegated to selling secondary banner inventory? I have no idea. Do you?

16 thoughts on “Facebook and Microsoft”

  1. I don’t, but with that valuation, I would think that they got some sweet inside access. MS may not be the brightest in terms of social networks, but they are good at this stuff, I think.

    Just how much access they got, we will likely not know for some time. Still, i guess it really all depends on this new ad network, but getting the mainly younger population there to click ads up to a 15 billion valuation will not be easy.

  2. Hi John, I think Microsoft is waisting their money really. Makes me wonder if Google was in there just to see Micrososft pay too much money for a small stake. But Facebook will not be able to monetize that value using advertisement. They will increase ad pressure on users that are in a walled garden. It won’t take long before better, more open alternatives will come along, making the user walk away from Facebook just as fast as they came. I’m starting to countdown already:

  3. For Microsoft, I’ll bet the valuation didn’t really matter. The stock is incidental; what they’re after is a relationship. Even if the agreement doesn’t guarantee them anything sweet, they’re still in bed and (for now) kept Google and others out.

    One aspect I haven’t seen discussed (though I could easily have missed it): is this Microsoft’s play to become relevant to a younger audience? i.e. the college crowd (and just beyond) may be more open to a positive image of Microsoft than those of us who watched what they did to the PC business. If so: will it backfire if these folks associate Microsoft with annoying ads that have degraded their Facebook experience?

  4. Dear John,I’m from china and I have just read your book.Have to say it’s a wonderful ride!Like it so much!Keep going man!

  5. Here is what I think. FB already has their social ad platform ready to be unveiled. They had this ready before they chose MSFT over Google.
    They had leased LookSmart’s AdCenter last year as announced by LookSmart in July 2006.
    It would be a stretch to believe they would ditch their new platform and install the MSN adCenter.
    When it comes down to it I have to think Microsoft is in it for the investment and the display deal.
    Oh, and to keep Google out of FB of course.

  6. I for one am concerned about it;
    Facebook is still a young company that represents some good innovations like their use of AJAX.

    I am worried that if Microsoft gets a larger stake in Facebook they may begin to muscle in with THIER systems .NET etc…

    Not that you can’t do AJAX etc with the .NET platform but that good usability and new ideas rarely come from companies that have such a vast selection of products.

    This is just my conjecture but I fail to see how MS can benefit the social networking world.

    Am I quoting the obvious, being cynical?

  7. I know a little start-up in Vancouver Canada that has patented some things that will blow facebook and Google ads out of the Water. The Future is not any of these current trendy things like U-Tube or Facebook, or old tired companies like Google and microsoft – they are just the prelude to the real Consumer-driven Web revolution that is coming. What is needed is small innovative companies to create the mechanisms, methods and Means by which that revolution will be kick-started and I have seen at least one of those in Canada. Whoever owns it is going to be worth Billions ! The Best is yet to come

  8. I think that FB is clearly over-valued, to me, this deal smacks of the dotcom boom era, until I remind myself of the fact that Microsoft have stumped up the cash.

    The ‘typical’ FB user appears to be remarkably fickle, and is often an ex-Myspace user that hasn’t touched their Myspace account in a couple of months, using their FB one in preference.

    I wouldn’t expect Microsoft to be interested in monetising the FB users by ad means – there’s insufficent revenue potential, also, there is a risk of users objecting to being beseiged by advertising, and that they would jump ship to the next big social networking ‘thing’ (a la Myspace)

    It’s got to be a technology thing.

  9. On the analyst call, while Microsoft and Facebook would not comment on data sharing they did keep coming back to enabling more relevant advertising which I can only infer means that Microsoft will get access to user data – at some level.

    Microsoft got lock out, some kind of access to massive amounts of social data, and a portion of the ad revenues until 2011 from a site that is growing really fast. I think they got a bargain…and they probably don’t care too much about the total Facebook valuation except to the extent that it will lock others out (given that Facebook probably wasn’t interested in being bought).

    Facebook and Google, as you explained, have very different ad models. Facebook is taking a bet on linking ads to users rather than on contextual content as Google does…and that enables more high margin brand advertising… if it works it could in fact be more powerful than the Google advertising solution and with a $240M shot in the arm, they’ve got the investment that will give them the ability to compete.

    Is Facebook worth $15B…we’ll see… but this deal is not really about the valuation.

  10. Some good comments from your readers John. Is the $240m they paid or the $15b valuation too much? I’m assuming they must be getting some insight into how Facebook works and perhaps more imporantly, their users work. Sure they will get a peak at the millions of social graphs too.

    So, too much? I would probably say so but MS are smart cookies so they have their reasons. I think there’s an element of paying a bit over the odds to keep out your competitors. I’m sure they wouldn’t want to lose out on another property to the big G, esp if they are to be taken serious as a competitor in the online marketing space which is still dominated by Adwords.

    We’ve talked about whether Facebook will last on our website; Facebook: Fad or Future?

  11. Facebook apps + audience is why. Think of excel, word and powerpoint as FB apps with collaboration links. That’s why MS has to play or it will lose a lot


  12. Well, Microsoft paid just $6 for each Facebook user, so I believe they will be at least some of the guys who will benefit from what Facebook has to offer, and that is personal profiles.
    Now, the big question is how much access they’ll have to those social profiles. Investing six bucks in every Facebook user is not onerous, but this depends on what MSFT will manage to do with those profiles.
    OTOH, investing $300 in every Facebook user as the $15mld valuation would request would be, err… folly.
    So Microsoft did what it had to do: pay the right amount of money to get access to information, and rising the stake for anybody else. If Facebook will fail as a business model, I believe it cannot make MSFT lose money, because by that time they would already managed to make enough money out of it to make a profit. If Facebook will succeed, than MSFT will cash in.
    It’s a win-win situation for MSFT, and everybody else (except Facebook) loses 🙂

  13. Microsoft + Facebook = Facesoft is watching you! John you say ‘Adsense driven not by search queries, but by personal profile.’, in terms of ad deployment this is a logical next step, as for whether it’s desired is a wholly different debate – the thought of a crawler reading my news feed and deploying contextual ads based on it is downright creepy. Contextual ads based on Search are different,we the user seek out the information, but when the information is interpreting our social stream, it’s unwarranted and spam by another name.

    In our totally ad centric economy, how about we look outside the box, charge FB users a $1 per week for the less creepy version (without ads), 40 million users, it starts to ad up, eve make the $1 compulsory. When did we come to expect everything for free and an economy, ever more fragile based on serving ads that people are increasingly blind to?

    I go into more detail and touch on the concept of appvertising over at Fat Man blog, http://fat-man-collective.com/blog/

  14. As someone commented earlier, Microsoft have paid $6 per Facebook user and the Facebook user base is still growing at an alarming rate. I reckon Microsoft will have some kind of access to the 42 million (and growing) profiles. As to how they’re going to get each user to part with $7. $8 or $9, …I don’t know.

    One thing is for sure, if they manage it, the money will go to Microsoft and not Google. Microsoft aren’t stupid, they’ll have a strategy for getting hold of 10 bucks per user. So for me, …more than likely a good investment, but I’m not buying Microsoft shares based on it!! 🙂

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