Microsoft-Facebook: 'A True Bubble Deal'

After the software giant struck a deal valuing the social networking site at $15 billion, commentators from around the Web are weighing the implications

It didn't take long after Microsoft (MSFT) agreed to take a stake in the social networking site Facebook (BusinessWeek, 10/25/07) for the comments from readers to start pouring in. Most of them focused on the price the software giant paid, a $240 million investment that values the fledgling company run by the 23-year-old Mark Zuckerberg at an astonishing $15 billion.

"Can anyone else feel the '.com-Bust' coming again? Sell you idiot!" one person wrote on, under the screen name Allison.

"Facebook worth $15 billion? Insanity!" said another.

"I am so sick of these nonsense valuations. I've surveyed a lot of my friends and none of us pays any attention to online advertising. I wish there would be a global wake-up call on this," wrote a third.

And finally, from one reader who uses the screen name Random: "A deal that values Facebook at 100x cash flows and 500x profits is a true bubble deal. Let's call this one what it is. Microsoft is buying real estate for ads and Zuckerberg simply drove the price sky-high based on nothing more then his charisma. That's all there is to it."

Imagining the Possibilities

Of course, not all the comments from around the Web were so skeptical. In the blogosphere, a number of people saw plenty of promise in Microsoft's deal. "While many students find Facebook both an obsession and an inane distraction, few can dispute the powerful medium, the 'social utility,' as its slogan reads," writes student Molly Kenney on the Ivory Towerz blog. "High school students, college students, and 20-somethings from around the world are gathered in one cyber-place for advertisers' taking, doling out personal information and exchanging consumer preferences freely. Facebook creator Mark Zuckerberg, and the advertisers who line his pockets, probably know more about my generation than we do about ourselves, and Microsoft knows that getting its foot in the door is one step closer to controlling that knowledge—and Facebook."

Some of the most experienced industry insiders also saw potential in the deal. John Battelle, one of the founders of Wired magazine and the Industry Standard, now runs Federated Media Publishing, an online advertising network. "I think no one in the mainstream press has truly grokked what Facebook has a shot at doing," Battelle wrote on his blog, "Adsense (Google's (GOOG) advertising platform) 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."

But he pointed out there are still questions about the deal that Microsoft and Facebook will have to address. "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?," Battelle wrote. "I have no idea. Do you?"

Microsoft Can Afford the Risk

The bloggers at Microsoft's hometown newspaper also saw a mix of potential and risk. "Facebook is like a prosperous new suburb, a place with lots of opportunities for a developer like Microsoft to build and rent space to companies," wrote Brier Dudley at the Seattle Times. He continued: "What I have trouble reconciling is the scarcity of inventory and the difficulty Web startups have breaking into the major leagues. I guess users are limited in the amount of personal-time inventory they have, and hot sites like Facebook are allegedly where they spend more of that time."

Microsoft's defenders included those who looked at the deal in the context of the company's plentiful cash. The $240 million that Microsoft is paying for its stake is about 1% of the cash that the company has on its balance sheet. With money like that, shareholders likely would be upset if the company weren't taking a few chances to grab growth opportunities for the future.

Over at the snarky Silicon Valley site Valleywag, commentators suggested that Microsoft wasn't the real loser in this deal. Instead, it may be the Internet portals Yahoo! (YHOO) and Time Warner's (TWX) America Online, which had long been the first stop for people on the Web. "Both [AOL and Yahoo] could have owned the social network space through their vast user base and IM and e-mail products. Instead, AOL is laying off thousands, and Yahoo's executive team is shrinking daily," writes Nicholas Carlson at Valleywag. "Want a loser? Don't look to Facebook and Microsoft competitors MySpace or Google. Look to the companies the whole industry is leaving behind."

But the $15 billion valuation is simply tough to ignore for those who witnessed the dot-com bubble burst. BusinessWeek's own Bruce Nussbaum wondered in a blog posting whether Facebook + Microsoft = AOL + Time Warner? "Even Google is trading at "only" 53 times earnings while Facebook, with just $30 million in profits on $150 million in revenues, is trading at 500 times earnings. Wowie. Are we jumping the shark here—or just watching the new world of social networking and advertising evolve? Is this AOL-Time Warner or…just what?"

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