By Sam Diaz and Catherine Rampell
Washington Post Staff Writers
Thursday, October 25, 2007
Microsoft yesterday announced a $240 million deal with Facebook, giving the technology giant a minority stake in the popular social networking site and the exclusive rights to sell worldwide advertisements that target Facebook's 50 million members.
Facebook, which is second to MySpace among social networking sites, in recent months has become a hot property as a magnet for Internet advertisers. Google reportedly sought a similar deal with Facebook.
In 3 1/2 years, Facebook -- a site that allows its users to exchange messages, share photos and showcase their network of online friends -- has won an audience big enough to bring in $125 million in ad revenue, the estimate for this year, according to eMarketer, a market research firm.
The companies did not disclose details but said the deal values Facebook at $15 billion.
Facebook said it would use the Microsoft investment to expand its workforce and grow internationally.
The convergence of these companies demonstrates Microsoft has evolved from its legacy business of selling software and how much it needs to connect with a new generation of Internet-based computer users. While both Microsoft and Facebook were started by Harvard dropouts, Facebook's 23-year-old co-founder and chief executive, Mark Zuckerberg, was born nearly a decade after Bill Gates set up shop.
For Microsoft, agreeing to a deal with a young company like Facebook that has the potential for anchoring new advertising revenue was critical. Microsoft had ceded ground to Google, which has made a bid to buy online ad giant DoubleClick, and last year invested $1.65 billion to buy the video Web site YouTube.
"Microsoft had lost a number of these," said Andrew Frank, research vice president for Gartner. "I think they were definitely feeling like they had to win this one."
Google declined to comment on the Microsoft deal. Facebook declined to comment on Google's possible interest.
Microsoft and Facebook already have a deal to distribute banner ads to Facebook members in the United States. Yesterday's agreement lets Microsoft distribute ads to Facebook members globally.
The investment comes just after Microsoft chief executive Steve Ballmer publicly played down the significance of social-networking sites.
"I think these things are going to have some legs, and yet there's a faddishness, a faddish nature about anything that basically appeals to younger people," Ballmer told England's Times Online in an Oct. 2 article. "There can't be any more deep technology in Facebook than what dozens of people could write in a couple of years. That's for sure."
But in a conference call yesterday, Microsoft praised the deal's advertising potential, while Facebook touted its status as the new crown jewel of the Internet.
"We had a lot of folks that had been interested in a partnership with Facebook, not just in the advertising space but in other areas as well," said Owen Van Natta, chief revenue officer at Facebook.
It is unclear how much of a victory the deal is for Microsoft, which has trailed far behind Google. Google dominates search-related advertising, and has struck its own pricey advertising deal with MySpace, which claims 200 million members.
Facebook began in 2004. Its use was restricted to college students at first, but increasingly it is used by older people to maintain relationships.
Facebook and sites like it, on which users establish profile pages, have gained importance as people spend more time in front of computers and less time watching television.
To date, Facebook has run relatively few ads. The privately held company's primary focus has been expanding its audience on a shoestring budget, adding features by allowing software programmers to design their own applications for the site, for example. It opened its site to non-students last year.
All those moves have been to build a huge audience that, according to analysts, could be sold to companies looking to use the information people publish about themselves to better tailor their ads.
But trying to reap too much out of sites like these, which can lose popularity as quickly as they gained it, is a challenge, analysts said.
The risk is turning users off with any advertising, Frank said. "There certainly are some pitfalls to be avoided there."
Brendan Barnicle, an analyst for Pacific Crest Securities said international exposure and distribution with Microsoft's backing was a good move for Facebook. But, he added, "it's just critical that they do it in a way that doesn't undermine the integrity for the site, at least as the current users see it."
Despite the similarities in their founders' backgrounds, Facebook and Microsoft started with very different business missions.
Microsoft made its fortune in an era when computing was just getting off the ground. Its primary source of income was from selling software, most notably its Windows system, used on about 95 percent of the world's computers.
Facebook grew from a pet project of putting Harvard classmates' photos and contact information online into a site that some use like a cross between e-mail, bulletin board and online photo album. It quickly gained popularity at Boston area and Ivy League schools.
The firm says an average of 200,000 new users register each day.