Friday, October 26, 2007

Interpreting the Microsoft-Facebook Deal...

Yesterday Microsoft announced that it was paying $240 million for a 1.6% stake in the social networking site Facebook. That's right, only 1.6% of the company, which for all you math majors out there amounts to a $15 billion dollar value. Meanwhile, Facebook doesn't even bring in $200 million in revenue, let alone that too-often disregarded thing called profit.

What can we make of this development? First of all, Mark Zuckerberg is a genius. The 23-year-old who created Facebook out of his dorm room only 3 years ago was offered to be bought out by Yahoo last year for $1 billion dollars - and he rejected it. Seriously, what 23-year-old kid has the chutzpah to turn down a billion dollars?! But now that Microsoft has essentially appraised the firm as worth $15 billion and considers it to have a substantially positive outlook for future growth, Zuckerberg's decision has been completely validated. He's a genius, not for his technical skills (heck, even I could develop the software behind Facebook), but for his business acumen, and this is what ultimately sets him apart from other Internet dormroom superheroes (see Shawn Fanning of Napster).

Second, the next Internet bubble is officially upon us. The first dot-com bubble, you might remember, was defined by investors paying ridiculous sums of money to websites that didn't even turn a profit. Where have you gone Pets.com, Webvan, and Etoys? Now that MySpace has been purchased by Rupert Murdoch and Microsoft invested so heavily into Facebook, these social-networking websites are the new speculative gold rush. This Web 2.0 bubble is sure to only be in its early stages, and Del.icio.us, Digg.com, and Reddit can expect to be next.

Third, Microsoft is getting desperate. As this Wired article describes, almost more surprising than the amount of the Facebook deal is the way in which Microsoft "double-downed" by going for broke in order to outbid Google. Sure, Microsoft has plans for using Facebook to enhance its online advertising business and a few other things, but this approach illustrates how the software giant sees itself as both vulnerable and as lagging behind the rest of the industry, and it wreaks of desperation.

On the other side of the coin, however, one blog has gone against the grain and suggested several reasons why Microsoft actually paid so little for its 1.6% stake in Facebook.

Financial speculative concerns aside, what tends to get obscured are the facts. Facebook is wildly popular and growing quickly, but its underlying programming is nothing exceptional and can be easily emulated, and it has yet to turn a profit in proportion to its current market value. Sometimes its important to re-examine the trees after looking at the forest for so long.
  

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