Is Facebook vulnerable to takeover?

If you believe the latest news stories doing the rounds, Facebook's growing niche in the social networking market is down to class. Although it was arch rival MySpace that was anointed as the future of social networking, positioning that saw it swallowed by Rupert Murdoch's News Corporation in a big money deal, it's suddenly Facebook that's the site, it seems, of choice.

At least it is for the more grown up, the more mature and - hell, why not? - even the snobbish social networker. If you are fed up with being bombarded with adverts for bands they'll never see, and with requests from so-called friends whose names were no more familiar to them than the inner workings of a big rocket, these people moved over to Facebook, where - as things stand - friends lists are seemingly more selective. As more than one person has observed, MySpace is for pretend friends, Facebook is for real friends.

The numbers don't lie. MySpace has the higher user count, and according to a Hitwise analyst, in April of this year, nearly 80 per cent of all social networking site visits were to MySpace, which subsequently provided a quarter of the traffic for the rest of its competition through referral links. Facebook trailed a long way behind in second place, capturing just 11 per cent of social networking traffic. That's a substantial lead by anyone's standards.

Yet suddenly the momentum has shifted to Facebook. So quickly moving is this particular sector of the web that the proverbial pendulum is almost swinging in freefall, and a site that was being written off by many earlier in the year is now seemingly the online place to be. Bluntly, the impetus is with Facebook, while MySpace is looking dominant, but vulnerable and tired.

Humble beginnings

Facebook didn't start out as a competitor to MySpace and its ilk in any real sense. Founded in 2004 by Mark Zuckerman along with a handful of his friends, it was originally a social networking site firmly limited to academia, Harvard University at first. If you didn't have a US college email address, you couldn't get in.

But so successful was the site in the US academic system that it began to migrate from its original Harvard roots across to other schools, colleges and higher education facilities. By the end of its first year, it had its first million users, and they just kept coming.

And so it continued, expanding across academic sites across the world, until registrations were finally opened up to all in September last year. It wasn't a popular decision with its core users, who to this day are probably instrumental in forging the class divide perceptions.

Facebook pressed ahead anyway, and user numbers have subsequently erupted. Over 25 million are now registered with the service, and that number is growing. With MySpace sitting around the 60 million mark, the gap is closing quickly: it's estimated that Facebook's user numbers are growing at a rate of three to one over MySpace's.

Up For Sale

Facebook, though, has arrived at what is potentially a big turning point for the service. The rumour mill has, as is the case with any successful dot com business, been quick to offer up stories of potential buyers for the business, and it's hardly surprising.

An analyst at Pali Research, Robert Greenfield, has been blunt and to the point. Facebook, he says, is something "every big media company should want to buy". His argument is that there is barely a media company on the planet who couldn't benefit from the reach of Facebook. And he might be right.

Also, if that class divide really does exist within its user base, that too has to be a significant selling point. There is informed thinking that the users of Facebook are a dream demographic: large numbers, they're intelligent, and they are a more educated group with likely - and crucially for any owner or advertiser - more disposable income. That's the theory. All this from a site that really hasn't started to tap the revenue potential of its user community, and you have an enticing opportunity for any buyer, whether it is a tech company or even private equity.

In Greenfield's analysis of Facebook, he goes on to say that "Assuming Facebook's growth trajectory continues as we expect, the knowledge that could be harvested from controlling the Facebook platform would appear to be the most valuable data in the history of the media world". Not bad for a company with a turnover - not even profit - that is estimated to sit below $100m a year.

Past suitors

So who's interested? Well, believe the never-confirmed reports, and several companies have already been snooping around. In March 2006, it was widely reported that the Facebook creators, led by Zuckerberg, had turned down a $750 million (£375 million) bid for the business. It was further reported that the asking price required to trigger a deal was $2 billion. Given that was over a year ago, you can imagine where the price tag is heading now.

Nothing formal was ever announced regarding a bid or potential sale, although there was consistent speculation that media giant Viacom - owners of Paramount Pictures, MTV and VH1 - was also in the running.

Today's suitors

It's simply hard to rule too many people out. If the much-rumoured stock-centred sale of MySpace to Yahoo falls through, then new Yahoo chief executive Jerry Yang may wish to make his mark quickly with a decisive investment. Facebook may just be it. It wouldn't, it seems, be the first time it'd tried either. Yahoo is believed to have failed last year with a $1 billion deal, and social networking is clearly very much on its agenda.

Let's not entirely dispel News Corporation either, even if that avenue looks very unlikely. Would Murdoch farm off a service at its peak to fund the purchase of one that - on paper - seems more desirable?

There're also recurring, although hardly deafening, Microsoft rumours. You can't help be see the logic in a Microsoft/Facebook tie-up. Certainly it would plug an obvious gap in Microsoft's web portfolio, and it's a firm with the cash available to fund such a major buy.

Finally, there is Google. Its aggressive acquisition streak has bolstered it to the point where it's the web company everyone seems in fear of. With Facebook in its portfolio, linking with services such as Gmail and YouTube, it would be pretty bullet-proof, at least in the short to medium term. Such a deal might see it fall foul of regulatory authorities that are also becoming concerned about Google's growth.

Selling up

There is still the unanswered question of whether Facebook is actually for sale at all. Unlike the last entrant in our series, Yahoo, it's hard to describe Facebook as a vulnerable company. It has, by wide consensus, a healthy period of growth ahead of it, and a real chance to cement itself as the social networking site of choice. There's not even the slightest hint of a fire sale here: the next few years are set to be very rosey for Facebook indeed.

Countering that is the argument that its bubble might be finite, as it has been for major web names before it. Few would argue that News Corporation got a bad deal when it snapped up MySpace for $580 million (£290 million) at the end of 2005, but its investment could well have peaked already in the light of the increased, fierce competition. Perhaps that's why Rupert Murdoch is reportedly looking to use MySpace as bait to snare different fish.

If Facebook was sold now, with its potential still relatively untapped, the asking price could well be staggering. Expect at least the $2 billion that was being asked for last year, if not more. Given that it was formed by a handful of college students, that kind of money is very, very tricky to resist.

Turning the argument on its head, though, there's another possibility that's being overlooked. And that's that Facebook could itself go on the acquisition trail. Suitors are swarming around another social networking service Bebo, and the professional network LinkedIn would also be an interesting fit with the Facebook user base. Could it be that Mark Zuckerberg and his team hold their nerve and attempt to build up a formidable media giant themselves? You wouldn't rule it out, given that right now, they are the group of people negotiating from a position of almost unparalleled strength.

It's a tough one to call. Certainly there's logic in selling now, with web companies fetching healthy prices and a growing number of suitors with itchy cheque books. We're effectively in the midst of another dot com boom of sorts, albeit with Web 2.0 services right at the heart of it, and there's at least a good six months left of big prices being paid for sites making very little, if any, money.

Our guess? That at some point, Facebook will be sold, but we'd be loathed to predict when. The market is ripe for such a deal, and is likely to look favourably on the suitor whose name appears on the eventual invoice. But the sheer cost of the deal comes with the obvious, potential sting in the tail.

Given the way that aforementioned pendulum is erratically swinging where web services are concerned, buying Facebook is undoubtedly a gamble. There are some companies out there, though, who simply can't afford not to be seen at the betting table...

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