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Why Microsoft Friended Facebook

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The blogosphere is abuzz with news that Microsoft picked up an equity stake in Facebook, which—in case you haven't picked up a newspaper, read a magazine, or gotten poked lately—is kind of hot right now.

The software megalith paid $240 million for a 1.6 percent equity stake in the fast growing social network. That's a lot of money, but the real reason for the Facebook brouhaha is the valuation: $15 billion dollars for a company that has revenues estimated at $150 million, profits of approximately $30 million, a flip-flop wearing 23 year old of a CEO. The idea that Facebook might be worth $1 billion—let alone $15 billion—seemed like near insanity only a year ago, which makes Microsoft's investment a huge coup for Mark Zuckerberg.

But look beyond the numbers, and you'll see that this deal has very little to do with valuation. It's about advertising. Buried underneath the headlines about Zuckerberg becoming really rich, is the fact that Microsoft became Facebook's exclusive advertising partner as part of the deal and will now be responsible for all of Facebook's third party ads. This expands upon an earlier agreement, signed in 2006, that made Microsoft the U.S. provider of banner ads.

I'm not sure how much the right to serve third party banner ads is worth, but it's definitely substantial. The 2006 deal provided a significant portion of Facebook's revenue—maybe as much as $75 million. When MySpace signed a similar deal with Google, it pocketed $900 million over three years. Facebook's international traffic may seem small now, but it's growing quickly, which makes what Microsoft got—guaranteed ad revenue and a small equity stake—look like a bargain.

So what do you think about the Facebook deal? Is the company really worth $15 billion?

Last updated: Oct 25, 2007




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