The $10 billion fight for Facebook

Microsoft is reportedly in negotiations for a minority stake in social networking service Facebook. But why, and what are the ramifications likely to be for the industry and for users?

By Simon Brew, 1 Oct 2007 at 12:09

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The dramatic rise and continued growth of social networking service Facebook has, as we've already discussed at IT PRO, already made it a target for several potential investors. But in the past week, it's now become clear that Microsoft has decided to ramp up its interest and get its cheque book out. The water is well and truly about to be tested.

Of course, with 24 million active users worldwide, and an increasing reputation for being the social networking site where you actually go and converse with your real friends (as opposed to the 'whose got the most' philosophy that seems to grab most MySpace users), Facebook has been the source of frenzied investment speculation all year. The fact that another three million users a month are joining (to a service that has already multiplied its member numbers by six in 2007) has helpfully added bountiful amounts of fuel to the talk.

But what's put most people off thus far actually making any kind of bid has been the price tag. Facebook creator Mark Zuckerberg has seemingly put a $10 billion (£5 billion) asking price on the service (with some reports even citing as much as $15billion), and at a point in time where a worldwide credit crunch has made the cost of borrowing large amounts of money unattractive (and borderline impossible), that's been enough to fend off a good deal of interest. Reported suitors such as News Corporation, Viacom and assorted venture capitalist investors have been quiet, and it was becoming increasingly likely that there'd be no movement until the worldwide economy had become a little more stable. A deal in 2007 simply wasn't likely to happen, at least, until Microsoft stepped in.

Appreciating that Facebook had already proved its bargaining strength by reportedly turning down a near-$2billion (£1 billion) offer from Yahoo for the business last year (when numbers were far from the level they sit at now), it is now believed to have entered talks with Microsoft for the sale of a five per cent stake. And to the surprise of many, the finances involved - Microsoft is reportedly looking to pay between $300 million (£150 million) and $500 million (£250 million) for such a small piece of the pie - would match Facebook's $10 billion valuation. This alone has sent alarm bells ringing.

Boom and bust

The key cause of concern is that this may sit at the start of another era of boom and bust for the dot com industry. If Facebook pulls this deal off, then many of its rivals are all but set to follow suit.

Granted, News Corporation has already snapped up MySpace at a price that looks like an outright bargain, given what it paid for 100 per cent of MySpace is a similar amount that Microsoft's Facebook stake would cost. But the likes of Bebo, Digg and LinkedIn, to name but a few, are other examples of services that would potentially welcome a deal. It could lead to a window of opportunity for a number of businesses to garner deals that far exceed the book value of their work, and it's inevitable that many of them have a heavy interest in how the next few weeks will pan out.

So what, then, would Microsoft be getting for its hundreds of millions of dollars? Already it has an existing deal with Facebook, inked in 2006, that sees it provide advertising services in the US market. But Microsoft would surely seek to solidify this arrangement and to make it global, while keeping its key rival Google away from the service. In short, if it could pull the deal off, it would surely shut Google out of the Facebook system altogether, and give Microsoft a clear run at arguably the biggest growth sector for online advertising.