Facebook: $10 Billion Social Network?

The hugely popular site seeks funding at a jumbo valuation, and Microsoft is nibbling. Yahoo and Google could be craving a piece as well

by Catherine Holahan, Robert Hof and Spencer E. Ante

For Mark Zuckerberg, it has to be hard not to gloat. When the 23-year-old turned down Yahoo's (YHOO) $1 billion offer for his social networking Web site Facebook, some Silicon Valley veterans openly questioned his sense. Was Zuckerberg really that egotistical—or childish—to think a site where kids post photos and shoutouts was really worth a third of, say, the New York Times Co. (NYT)? But now Facebook is seeking investment that would value the company at around $10 billion—more than twice the market cap of the Times.

So far, Zuckerberg is keeping any I-told-you-sos to himself. His company refused to comment about a Sept. 24 Wall Street Journal (DJ) report that Microsoft (MSFT) is attempting to buy a 5% stake in Facebook for as much as $500 million. A person with knowledge of Facebook, however, confirmed that Facebook seeks investment at a minimum $10 billion valuation.

Hungry Marketers

This is hardly Microsoft's first sign of interest. The software maker tried to buy Facebook for as much as $1.3 billion earlier this year, according to a source familiar with the matter. Microsoft already has the lock on the lucrative business of placing ads on Facebook pages. Now, with Facebook seeking funding of $50 million to $250 million and possibly more, Microsoft wants to ensure that it is the investor.

Other tech companies may want their share, too. Yahoo and Google (GOOG) could want a piece of the second-largest social network after News Corp.'s (NWS) MySpace.

Why all the fanfare over Facebook? For starters, it's popular. The company has more than 40 million users, who on average spend more than three hours a month on the site. Moreover, unlike other social networks that saw their popularity plummet after becoming mainstream, Facebook's cachet has only increased with size and age.

Such popularity guarantees marketers will want in. The company is estimated to have generated anywhere from $150 million to north of $300 million in advertising revenue so far this year. At the high end of that range, Facebook could fetch a value of as high as $11 billion in an initial share sale, says Paul Kedrosky, a partner with Ventures West and a former technology equity analyst. "It is growing quickly, which is always nice, and people spend an inordinate amount of time there," says Kedrosky. "Time plus page views creates an advertising market."

Time Advantage

David Sze, a Facebook board observer and a partner at Facebook investor Greylock Partners, says Facebook is more profitable than leading social network MySpace, which was purchased for more than $580 million in 2005. Fox Interactive Media, the parent company of MySpace, generated a $10 million profit on $550 million in revenue during the fiscal year that closed June 30. News Corp. CEO Rupert Murdoch has said he "would be surprised" if FIM did not break $1 billion in sales this year, with $800 million coming from MySpace. Even if MySpace hits those lofty financial targets, Sze says "they would still be less profitable than Facebook."

Perhaps more important to its valuation than Facebook's current profitability and popularity is its potential for future growth.