FACEBOOK GETS $240M FROM MICROSOFT; SITE NOW HAS $15BN VALUATION (WSJ, VAR, BW, NYT)

By Nancy Vialatte

Microsoft Corp. has made a $240 million investment in Facebook which now places a $15 billion valuation on the social networking site. The move, says the Wall Street Journal, represents a huge bet that the online advertising boom will continue and that Facebook will be among the biggest beneficiaries.

Microsoft said yesterday that it would buy a 1.6% stake in Facebook, beating out Google. Facebook expects to break even this year with revenue of $150 million, according to people familiar with the company.

Rumors of the deal have been swirling for some time and came to a head yesterday. The New York Times reports that Microsoft and Facebook executives said they had met in several cities over the last month and moved toward consummating the deal by sending text messages to each other while Steven A. Ballmer, chief executive of Microsoft, was speaking last week at the Web 2.0 technology conference in San Francisco.

�There were a lot of twists and turns, as there always are in these things,� said Owen Van Natta, chief revenue officer of Facebook. Final negotiations were completed Wednesday morning in Facebook�s offices in Palo Alto.

The high valuation for Facebook is the latest sign of a renewed exuberance in Silicon Valley over Internet companies with lots of users -- even if those users haven't yet translated into much revenue -- and is reminiscent of the Internet bubble that ended in 2000. Microsoft and Facebook say the valuation is justified and that Facebook is starting to find ways to monetize its rapidly growing user base. (WSJ)

Business Week reports that Facebook grows by 200,000 registered users every day and according to Web tracker Hitwise, it received nearly 1% of all Internet visits in the week that ended Oct. 20. Over the last year, its traffic has more than doubled. The valuation for Facebook makes the $580 million News Corp. paid for MySpace look like an outright bargain.

"We're pleased with the economics of this deal," said Kevin Johnson, president of platform and services at Microsoft, adding that Microsoft and Facebook have "both learned a lot" from their experience with Facebook ads.

Facebook has become the latest Internet darling given that in recent years, advertisers that once focused their spending on television, newspapers and other traditional media have started shifting their spending to a host of Web sites.

Indeed, Facebook presents a huge opportunity for online advertising, largely because it collects detailed information about its users which can be used to place highly targeted ads.

Facebook sells ads on its own and also struck a deal last year that allows Microsoft to broker display ads on Facebook's U.S. site until 2011. Facebook is also planning on opening non-English-language versions of the site in the coming months, probably starting in Europe.

Facebook has more than 49 million users with 59% of them residing outside the US, notes Variety.

But the online-advertising market is less mature and more fragmented abroad than it is in the U.S. In 2007, advertisers are expected to spend $900 million advertising on social-networking sites in the U.S., compared with $335 million on such sites abroad, according to research firm eMarketer Inc. In planning its global expansion, Facebook initially worried about how it would make money outside of the U.S., say people familiar with the matter. (WSJ)

The cash injection from Microsoft will also give Facebook funds to invest in new services, buy equipment, make acquisitions and hire engineers. Facebook in coming weeks plans to unveil a new advertising system of its own that will let advertisers visit an automated Web site to place targeted ads on Facebook and elsewhere on the Web, say people familiar with the matter. Meanwhile, Facebook's Mr. Zuckerberg has said he plans to expand from more than 300 employees today to about 700 employees a year from now. (WSJ)

The Facebook deal could also help lift morale at Microsoft which has fought hard and lost to Google in a string of deals with companies including AOL and DoubleClick.

But Google executives, at a meeting for analysts on Wednesday, didn't comment directly on the Facebook deal. Business Week reports that they rather highlighted the merits of Google's own social networking technologies, including its site. Sergey Brin, Google co-founder and president of technology, said, "We don't feel we need to own everything that is successful on the Internet."

Meanwhile, the NYT reports that Google CEO Eric Schmidt suggested that Google would be open to collaborating with Facebook. Google already makes money on Facebook indirectly, by selling ads inside third-party applications that run on the site.

Facebook and Microsoft, however, left several questions unanswered. Facebook hinted that it had other investors, but declined to say who they were or how much money they had injected into the company.

Related Links

Microsoft Bets On Facebook Stake And Web Ad Boom (WSJ, sub)
Facebook gets big investment (VAR)
Microsoft and Facebook Hook Up (BW)
Microsoft Buys Stake in Facebook (NYT)