I must be turning into a sceptic in my old age. I simply could not believe my eyes when I read that Microsoft had invested $US240 million for a 1.6 percent stake in Facebook. This effectively valued Facebook, which anticipated revenues this year of just $US150 million, at $US15 billion dollars.
That’s a crazy valuation. I can only conclude that it was based less on the actual dollar value of the underlying equity stake, and more on ensuring no other player (specifically, Google) got the deal.
Viewed in this light, the deal has an element of logic to it:
1. Microsoft takes a ‘blocking stake’ in Facebook (while such a small holding would not in and of itself amount to a blocking stake, you could be quite confident the terms of the investment would ensure that this is so).
2. Facebook locks in a stratospheric valuation which significantly enhances its fundraising capabilities (within days, Facebook was rumoured to have secured two investment deals with unnamed hedge funds valued at $US500 million).
3. Facebook secures a partner to take care of ‘making money’, while its management team focuses on attracting and retaining users, and implementing its “platform strategy”.
Microsoft already had an existing deal with Facebook to run banner ads on the site in the United States through 2011. The terms of the investment allows Microsoft to sell the graphical banner ads appearing on Facebook outside of the United States, splitting the revenue with Facebook.
On the basis of the revenue sharing deal alone, given how intensely popular social networking sites are (in terms of time spent viewing), Microsoft should be pretty confident it will “make” its money back (and then some) from its share of ad sales revenue. In a sense, this is a re-working of the Murdoch acquisition of MySpace – the purchase price looked way out of the ballpark, until he on-sold advertising rights to Google which effectively ensured he would make his money back within 3 years.
The critical issue for Microsoft now is how else it can extract value from the deal. You can expect to hear more about how Microsoft will leverage its product and technologies portfolio to ‘unlock’ Facebook from the Web, and enable users to access both Facebook and the growing suite of 3rd party Facebook applications via mobile devices.