That mind-boggling Microsoft/Facebook deal

October 26, 2007
by Latitude

The mega-deal that I wrote about in September has gone through, almost one month to the day that I blogged it. Microsoft will take a $240 million equity stake in Facebook’s next round of financing at a $15 billion valuation.

It didn’t take long for the questions, proclamations, and speculations to start mounting. After the jump, some of the more notable points to ponder.

* Mark Zuckerberg, the 23-year-old Harvard drop-out who is now reportedly worth nearly $5 billion, didn’t say a word about the deal in the corporate press release. Is this the deal he was hoping for?

* In light of revelations that Facebook’s growth is no longer the 3 to 3.5 per cent per week that company execs had been claiming for many months, how likely is Microsoft to get burned on this deal?

Even at 2.8 percent, Facebook will grow rapidly. But the drop in growth calls into question the whole compounding assumption. What if Facebook grows not exponentially but in a straight line from here on out? Will Microsoft’s math still stand up? And what will happen to Facebook’s plans to double its staff to 700 people by the end of next year?

* There have been two different but similar reactions reported from Google co-founder Sergey Brin, one of which is more defensive than the other. Depending on which sources you believe, he either said, ”We don’t need to own everything to be successful on the Internet” or ”We don’t feel we need to own everything that is successful on the Internet”. The latter sounds more genuine to me, and just as true as the former.

* But which of the giants who didn’t get this deal should be hurting most from their exclusion? Hint: Not Google and not MySpace.

For a real loser in this deal, try portals AOL and Yahoo. Both could have owned the social network space through their vast user base and IM and email products. Instead, AOL is laying off thousands, and Yahoo’s executive team is shrinking daily.

Pali Capital analyst Rich Greenfield told me more than 40 percent of AOL and Yahoo portal visits start with email. Instant messaging drives that figure above 50 percent. But those eyeballs are going away, he says, because the gabbing that goes on over Facebook and MySpace is already eroding the use of IM and email. Microsoft’s investment, despite CEO Steve Ballmer’s mid-courtship negging, confirms this erosion isn’t a fad.

Want a loser? Don’t look to Facebook and Microsoft competitors MySpace or Google. Look to the companies the whole industry is leaving behind.

Ouch. Harsh but fair, and an even hotter fire lit under Yahoo CEO Jerry Yang and AOL chief Randy Falco, two blokes who probably thought that their days of being envious of twentysomethings were over.

Mark Zuckerberg – in all his student-y, fleece-clad glory – is living proof that only so much in this industry is predictable…no matter what investors like Microsoft may like to believe.

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