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October 24, 2007

Microsoft Nets Piece of Facebook

Rob Hof

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 theprivately held social networking service at a stunning $15 billion. Microsoftwill invest $240 million for the 1.6% stake and exclusively handle ads around the world forFacebook to complement its current U.S. ad deal.

The long-expected deal puts Microsoft on the map in the hotInternet service of the day, social networking. That gives it the potential torecoup much lost ground on the Net from Google, which was believed to be acontestant for the deal, Yahoo, and a raft of other companies. But given thelimited scope of the deal, it’s uncertain how much benefit Microsoft willderive from paying what is by all accounts a huge sum for a piece of a companywith 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."

The deal leaves Google, which has also lagged insocial networking, to come up with another way to participate in socialservices. Its social network Orkut, which has been an also-ran for years, hasrecently grown quickly in some countries such as Braziland 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 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 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.

04:08 PM

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