Microsoft Takes $240 M Stake in Facebook

This afternoon, Microsoft won the apparent battle for an equity stake in social networking applications provider Facebook, making a $240 million equity investment in the company. In exchange, Microsoft will become the exclusive third-party supplier of Facebook's advertising platform.

During a conference call Wednesday afternoon, Facebook Chief Revenue Officer Owen van Natta and Microsoft platforms division president Kevin Johnson revealed few specific details. In fact, they worked hard to draw a clear line around those items they would not reveal any details about. For instance, would the partnership enable new forms of Microsoft applications on the Facebook platform? Won't say. Will Facebook branded applications appear on Microsoft properties? Won't say.

Will other advertising partners become involved in the agreement? Although Kevin Johnson repeatedly called the agreement a "win/win/win situation," he and his new partners refused to disclose just who the third "win" belongs to. He did say that if you're a financial analyst, you should be able to take a look at the future evaluation of the advertising market over the next few years, and validate Microsoft's belief that its equity stake will eventually (though the number of years is indefinite) be evaluated at $15 billion.

Update ribbon (small)

6:58 pm ET October 24, 2007 - Arguably, the provider of an advertising platform such as adCenter would not have had to purchase a stake in its own prospective client in order to do business with that client, unless that was the only option available to it to keep that client from doing business with someone else. In that case, the question becomes whether that business will be more valuable than the investment?

"The overall advertising is projected at about $40 billion, and it's going to grow significantly over the next two to three years to an over $80 billion marketplace," Microsoft's Kevin Johnson told a CIBC World Markets analyst today. "That's number one; this online advertising industry is a big industry. Number two, the equity stake that we're taking in Facebook is a strong statement of confidence in this partnership. It's a statement of confidence in the fact that our ad platform is going to get stronger and stronger and help [in] monetizing Facebook, [and] it's a strong vote of confidence in the innovation that Facebook is doing to deliver on the social networking experience."

If you do the math on the $240 million, Johnson went on, given the possibility that Facebook could at some point acquire "200 million users, 300 million users - which we believe is certainly within the realm of possibility, on the path that they're on," then add back in what Johnson calls "the monetization opportunities" which would total a modest average revenue per user per year, one would quickly arrive at the $15 billion forecast evaluation number that Microsoft projected this afternoon.

Since Facebook is not a public company, its revenue and income figures are generally unknown. What we do know about the company comes from outside analysis. Though Facebook is the #2 social networking site on the Web in terms of usage share, Web ratings service Hitwise gives Facebook just over 10% of that share, with #1 site MySpace reigning in well over 80%.

In terms of advertising dollars spent, however, the margin is actually narrower: Market analysis firm eMarketer projects that when the year is done, $125 million in advertising will have been spent on Facebook, with $525 million spent on MySpace. For next year, the firm projects $215 million spent on Facebook versus $820 million on MySpace. Of course, this projection assumed flat growth rates for both sites, and was made before Microsoft's equity investment.

In other words, Microsoft just spent $240 million for an equity stake in a company that could still reap less than that amount in revenue for all next year. Exactly what percentage of $215 million adds up to $15 billion on Kevin Johnson's calculator seemed unclear.

Technology blogger Om Malik made that much clear, in his question today saying the numbers "sound a little ambiguous." But that plea bounced off of Microsoft's and Facebook's joint stonewall this afternoon, with Kevin Johnson saying, "There are certain aspects that are part of the business arrangement" about which he could not provide further details.

Could a big chunk of the value proposition for Microsoft be explained by Facebook's subscriber data being made available? Specifically, could Microsoft use Facebook's data demographically, to fine-tune its adCenter platform? The change in the flavor of the ambiguity was noteworthy.

"User trust is core to what it is that we focus on every day," Facebook's Owen van Natta told the questioner from AdWeek, "and making sure that we are both able to provide a highly relevant and targeted advertising experience, not just in terms of what ads to what users but also in terms of the context of those users seeing those ads and consuming that information, that's what we focus on every single day. But we also at the same time want to make sure that users feel like we don't violate their trust in any way, and we certainly think about that in terms of how it is that we use information that they provide to target advertisements, and we think even more deeply about how it is that information might be available to third parties.

"So there's certain details of the partnership that we're not disclosing today in terms of how it is that we're piecing this all together," van Natta continued. But then he struck a very intriguing note: "But consistent with what it is that I just said, we're going to be innovating around how it is that we find the best way to target ads...adCenter is a big platform with massive scale, and they do targeting on many, many sites across the Web. And the ability to leverage that scale is core, I think, to that overall strategy. So I would imagine that a lot of the things that Microsoft is able to do with adCenter on other sites is going to be leveraged in terms of how it is that they're able to do that on Facebook."

In other words...yes?

Kevin Johnson picked up the baton. Referring to some of the features of the adCenter platform, he remarked, "We've got a significant amount of opportunity to utilize those assets in a complementary way to what we're doing with Facebook, to deliver on that goal of highly relevant, targeted ads to the Facebook user base."

So the door appears to have been left open for Microsoft to be able to use Facebook's user data to help tune its advertising platform for everyone else. That could very well provide Microsoft with a new selling point in its direct combat with Google's AdWords, in one of the rare markets where Microsoft has consistently found itself the underdog.

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