Microsoft (MSFT) Buying Facebook Not As Silly As You Think

Sebastian said:

You miss two important things on this one:

1. Microsoft _does_ need profits. Their shareholders ware waiting for an acquisition that actually makes their online properties profitable.

2. Zuckerberg is in the position to make history. (The first of the Web 2.0 start ups to do a successful billion-dollars-IPO; the next internet-company in the ranks of the big guys (Google, Yahoo, probably IAC); etc.) As a subsidiary, no matter how independent he would be able to work, he wouldn't be able to achieve that.

Microsoft needs monetizable inventory or ad networks, not risky social networks (They will definitely make money, but will they make billions?). This was the reason why they wanted to buy Yahoo, this is the reason why they won't buy Facebook, if they are left with a tiny bit sanity.

Gordon said:

May. 08, 7:26 AM

i smell another bubble. someday we'll look back on all these social networking sites and wonder how the hell anyone thought they were worth billions.

this would be a bad deal for msft.

mike said:

May. 08, 7:33 AM

henry now you are just plain silly!

jenkins said:

May. 08, 7:34 AM

I completely agree with Gordon. FAcebook is a fad, not an operating system. That's media BS that gets spewed by people that don't really get things. Facebook's business is weak. Remember that they "pre-announced" a bad 2008. I think anything in the tens of billions is insane.

Henry Blodget said:

May. 08, 7:41 AM

Well, don't forget we're dealing with a desperate company here, one that shelled out $6 billion for aQuantive.

There is clearly a need for a Facebook, whether it's Facebook or some other company. And they'll likely figure out a business model eventually.

Don't forget that Google didn't generate a drop of revenue for three years before copying the model Overture discovered--which then became the most powerful advertising service in the history of the world.

No guarantees, obviously, but I think one of these social-networking companies is going to figure it out and get it right, and right now, my money would be on Facebook.

But if you're all right, then all the more reason why Mark Zuckerberg will listen to Ballmer's overtures.

Gordon said:

May. 08, 8:02 AM

reminds me of theglobe.com.

irrational exhuberance.

"those who forget the mistakes of the past are condemned to repeat them."

Zeleration said:

May. 08, 8:17 AM

What about eBay. Think of this ... instead of sellers paying ever increasing fees or buyers getting ripped off on S&H by sellers to cover fees MSFT could guarantee sellers and buyers that if they watch the advertisement at point of sale the advertiser would subsidize the transaction. It could maybe be a 10 second video or ecoupon etc for the sellers. The meta-data you could collect would be extremely valuable.

Does the LONG term economic model of paid online advertisements even work? Won't bigger companies just outbid the little guys until the little guys can no longer compete and thus spend their ad $$$ in better localized ways?

Neek said:

May. 08, 8:18 AM

They were almost in bed with NewsCorp with Yahoo!, so owning Facebook, then somehow jumping through the regulatory hurdles to combine it with MySpace and related properties would finally give them the grail they've been waiting for: losing even more money in the business of social networking notorious for being adverse to profits! Hooray!

Then again, Facebook's aura (halo?) feels superficial enough, and their valuation inflated enough, that, like AOL going for TWX just before it was about to tank and thereby securing their fortunes when they know it's about to go south precipitously, they may indeed just go for an MS deal just when their mojo runs out. It certainly doesn't make sense for MS, but it sure does for Zuck. Thereby securing his real genius: pwning everyone in a wile ride that mints him countless lotteries out of the ability to exploit a desperate suitor.

Then again, as web operating systems go, Facebook's "platform" (if you call it that), is one of the very few that has succeeded. And we all know MS's affinity for such wonderful things.

DP said:

May. 08, 8:18 AM

Wouldn't be surprised if FB doesn't put itself up for sale soon.

The recent exec hires from Google plus Andreeson (who's Ning is a FB competitor) joining the FB board. Sounds like a great way to get valuation up. Since these guys all probably have an acceleration clause for their options, their back gets scratched.

jenkins said:

May. 08, 8:31 AM

Henry,

By the time Google copied Overture it was clear that search advertising was very special. There's no evidence --- from data or anecdotal, that targeting people on social networks is anything but annoying. Facebook is good for one thing: bulk. If you want a lot of cheap impressions call Facebook or Myspace. They have lots.

I'm not saying that Facebook can't be better over time. I just don't think it ever grows into the microsoft-inspired valuation.

hmmm said:

May. 08, 8:47 AM

As stated earlier

hmmm said:
May. 06, 7:36 AM
The real interesting investigative blogging would be around looking for what MSFT is gonna spend that $50B that is burning a hole in their pocket.

I get the feeling that we could see one of the most aggressive rollups of internet properties in history.

Linkedin, Digg, Facebook (not to sure about this one) the usual suspects and the not so usual suspects, tivo, webmd, etc

The VC's are going banannas I am sure and thinking about how to position their portfolio co's as worthy of a piece of that $50B

Upside is that MSFT could buy a lot with that kind of cash, the downside is that it may require more integration and resources as none of the properties (speaking particularly about the startups, not tivo, webmd, etc) could stand on their own and allow for a slow transition.

That is why tools like digg and linkedin make sense, but more dynamic sites like facebook, etc, not so much. If a site relies on employee creativity and dynamic founders/employee input (as in if they leave company can easily lose its way), it usually wont work, but plug and play tools can do fine

Just as much of a problem is that the founders and employees of startups 1) tend to have "startups" in their DNA so the likelihood that they would be in for the long haul as a "Softie" is minimal 2) MSFT would have just given the emps enough through the acquisition $$ to be able to bail after the acquisition and still have financial security as opposed to a mature buyout where the most of the employees are still slaves to the clock

thoughts

I will add to this the possibility that MSFT could by Facebook for $15b and then Yahoo for $30-$35b those getting both companies for $50b (what yahoo wanted in the first place)

If social networks end up being crap, and if MSFT can get Google to overspend on a facebook because Goog cant buy Yahoo and doesnt want FB with MSFT(which could be a strategy), they can start to kill 2 birds with one stone. Remember, MSFT has the $40b in the bank and generates more cash in one quarter than goog does is a year. MSFT can afford to screw up, goog cant.

I am beginning to think that MSFT strategy to take down goog is not totally a head on assault.

IMHO MSFT has
1) brought goog under the microscope of the FTC
2) tried to buy goog competitor (forcing goog to expose itself as "evil" further, with this $1b joke)
3) now that goog is in a tizzy and schmidt is starting to have flashbacks of Novell (what happens when you wake the Redmond giant) MSFT takes aim at something Goog prob wants and can legally buy in an effort to rope them into overspending
4) then go buy Yahoo for $35b (and others with the $15b saved) when goog has hands full and a taste of reality

more thoughts on this chess game to come

Anyone else have thoughts

james said:

May. 08, 8:53 AM

"And they'll likely figure out a business model eventually."

I love bubbles.

Dwight Merriman said:

May. 08, 9:00 AM

Microsoft does not, per se, need search advertising revenue. It needs a strong online presence with users. This whole question is a strategic one for Ballmer, not about profits the next year or two.

While they are at it, they can sell MSN to YHOO to recoup a few dollars.

Tantrum said:

May. 08, 9:03 AM

Facebook will lose the ability to attract top talent the moment it gets acquired. It ain't gonna happen.

R Man said:

May. 08, 9:07 AM

If Mr. Zuckerberg could extract $15B from MSFT, he should take the money and live to see another day. While he might be creating the "platform" of the future, the cards he is holding today say potential fad + no progress on monetization. If he needs advice, I might suggest a quick phone call to Mark Cuban. Mr. Cuban sold a similar High RPM/Low Torque business to Yahoo back in the day, and I suspect he wakes up every morning and says a prayer to the Greater Fools God. If that conversation doesn't motivate him...he might then want to call down a list of people made up of the founders of Excite, Lycos, Friendster, and Pointcast.

lll.do said:

May. 08, 9:07 AM

how many fb users will like msft?
tons will leave ...
fb is kind of fashion, kind of SV, kind of anti-msft, kind of itune,iphone,goog

msft? hehe, check hotmail. fade away...

please , please msft buy FB,

Steve-oh said:

May. 08, 9:25 AM

@lll.do - Your comments are as blinded and out of date as a dodo. You really think Facebook is anti-msft, really done your extensive research haven't you. Being pro-new tech is not anti-msft.

Rav said:

May. 08, 9:45 AM

Great Idea!! If MSFT pays $15-20B for a fad (Mr. Ballmer's words, not mine), then MSFT will hasten its demise. It would be even better if they buy both YHOO and facebook in all cash deals. All that cash would be good in the market and can you guess where all of that would end up?

Cem Dalgic (URL) said:

May. 08, 9:55 AM

Additional points for a "no":

1. FB is using MySQL - a non MSFT product
2. FB is based on PHP - useless for MSFT as social network OS
3. MSFT needs profitable business to acquire or at least one it can be as Sebastian wrote
4. With that amount of money it's easier for MSFT to turn Hotmail and MSN users into a HotSocial network.

jenkins said:

May. 08, 10:01 AM

Microsoft needs to tread carefully. They are in trouble. Small companies are now using Google apps for nearly all their needs. This is an terrible trend for Microsoft.

Steve-oh said:

May. 08, 10:04 AM

@ Cem Dalgic - MySQL and PHP not an issue. MSFT acquired Danger, and they do not use Windows Mobile. If the idea is any good and can't be changed, MSFT will unwillingly accept it in the short term. FB does not necessarily have to be profitable stand-alone, but the value it can add to other services could justify it. And no money (even with a substantial user base) can re-create a successful social network, think so, ask Google, they tried with Orkut.

Dobby said:

May. 08, 10:05 AM

It would be a big mistake to buy Facebook. This statement is ridiculous:

"Unlike any other potential Facebook acquiror, Microsoft doesn't need revenue, so that little problem Facebook has right now--no real business--is irrelevant."

MSFT should be buying companies that have strong earnings right now, not gambling or hoping for earnings revenues in the future. These social networks are fads. They are popular until something better comes along. MSFT should be buying companies that will be relevant 20 years from now. NWS just reported earnings and they are having a very difficult time making money on their MYSPACE purchase. Turning views into cash is very difficult. MSFT should be doing what ORCL is doing... buying top notch software companies. Companies like INFA, CTRX, LWSN, SY, ARTG, SPSS and ITWO. They should also focus on buying smaller, vertical internet sites. Buying Facebook or MySpace would be a huge gamble and is not worth the risk. Google envy is destroying MSFT.

Gordon said:

May. 08, 10:06 AM

Microsoft - There's no sign of a slowdown for the tech industry's most profitable company. Stronger-than-expected global personal-computer sales helped generate $14.1 billion in profits for Microsoft on sales of $51.1 billion last year. The software giant must continue to maintain strong profit margins, which rose 12% in 2007.

Dobby said:

May. 08, 10:17 AM

The best thing that can happen for MSFT is that Google wastes billions buying Facebook instead. Google still hasn't made money on Youtube. Maybe they'll make the same mistake again buying Facebook.

Rav said:

May. 08, 10:36 AM

@Dobby

I don't think GOOG is stupid to consider buying Facebook at the current bubble prices, when its having enough headaches monetizing myspace. Besides it already has Orkut which is very popular in fast growing overseas markets.

Regarding Youtube, it should be considered a long-term strategic buy and the growth rates of Youtube have vindicated that it was indeed a very good buy. With DoubleClick and Youtube working together now, monetization is not as far in future as most people think.

Thomas said:

May. 08, 10:36 AM

Henry,
You nailed it on this one. Facebook's new clothes are starting to show their worth and Zuckerberg knows that taking advantage of Microsoft's desperation could be the escape hatch he needs. One can easily see a storyline over the next couple of years where Facebook settles into obscurity because A. their platform isn't long-term compelling enough to retain users, and B. their JVness starts to show. What better way to avoid the crush than by selling out a la Broadcast.com? Zuckerberg is not the new Gates; he's the new Cuban. Are the Golden State Warriors for sale?

The illusionist said:

May. 08, 11:00 AM

Completely plausible.

Microsoft is now the "banker of last resort" its cash horde is a drag they'll either give it away as special dividends or use it to buy Google-fighting-armor.

You have a flaming out business that can boost searchballs (made up short for search eyeballs), pitch it to Microsoft.

$20 billion for Facebook as ridiculous as it sounds will be a footnote 10 years from now because it will have very little negative impact on Microsoft. It's the cost of "missed opportunities" that's hurting them the most.

In retrospect if YouTube was still out there today their valuation would have been in the double digit billions as well.

Gius (URL) said:

May. 08, 11:01 AM

Like a baby in a shop "Mom, I want that!!!". What kind of business plan is buying everythings is based in Santa Clara Valley!?!?! Are facebook and Yahoo! so similar?? I don't think so^_^
So, if there are any smart people out there, found a company, pump it with millions and wait until Big M knoks at your door with billions $$ in a bag!

Angela said:

May. 08, 11:02 AM

Facebook = Broadcast.com

Zuckerberg = Cuban

He should SELL

Anton said:

May. 08, 11:06 AM

MSFT needs an Internet growth play(or plays). They *do not* need to acquire a company who curently has a strong balance sheet or profits. They need a company who has a bright future (maybe FB does, maybe it doesn't).

They have poured millions into their net efforts and have *nothing* to show for it. They need to acquire some good old-fashioned Internet DNA. Now, if they do so, there's little guarantee they won't screw it up but they need to at least try.

Hank Williams (URL) said:

May. 08, 11:42 AM

Yes, I am late to the party, and this is really just adding to the chorus. But if Microsoft offered 16-20 billion for Facebook, balmer should be shot, shot I say!

I love ha Henry, but this is crazy, crazy, crazy talk!

stone said:

May. 08, 11:52 AM

Geocities, Facebook, Myspace, Broadcast.com. Time will tell.

stone said:

May. 08, 11:52 AM

Geocities, Facebook, Myspace, Broadcast.com. Time will tell.

DNO said:

May. 08, 12:10 PM

I think youve got a good point Henry. 10 plus billion will put microsoft strongly back in the online game. There's alot more synchronicities here than with Yahoo!, revenue model isn't quite as solid/established however if there is success in the walled garden objectives of FB then opportunitie$ will take care of themselves. So for Zuck it comes down to the Cuban top dollar cash in OR the glory/risky IPO. But lets face it, the worst day in any valuation in the foreseen future will still leave Zuckerberg a billionaire.

Goober said:

May. 08, 12:34 PM

Guys,
comScore audience figures:

Facebook: 35MM and flat/slightly declining month over month

Yahoo!: 130MM+ and slightly growing

This is not a substitute deal by any stretch. This is MSFT grasping for a shiny object to save some face. The key thing to remember is once display is search-ized (becomes a DIY business that the long-tail of the business world can participate in), audience size and diversity will be key. Facebook is moderately sized (25% of Y!) and it is loaded with young dudes. The CPGs and Financial Services companies of the world will be spending a lot more both proportionally and absolutely with audience platforms (let's retire "portals")like Y!, Googleclick, and Platform A than they will with shiny objects like Facebook, MySpace, and Second Life. Paying anywhere near 10-15B for Facebook would be a blunder of epic (and comic) proportions 2 years down the road.

DNO said:

May. 08, 12:44 PM

I think youve got a good point Henry. 10 plus billion will put microsoft strongly back in the online game. There's alot more synchronicities here than with Yahoo!, revenue model isn't quite as solid/established however if there is success in the walled garden objectives of FB then opportunitie$ will take care of themselves. So for Zuck it comes down to the Cuban top dollar cash in OR the glory/risky IPO. But lets face it, the worst day in any valuation in the foreseen future will still leave Zuckerberg a billionaire.

DNO said:

May. 08, 12:46 PM

Apols for double msg..

dan said:

May. 08, 12:59 PM

If taking on Google is what MSFT wants, what about buying where the real opportunity in search lies: internationally. I think msft should buy up as much as they can of Baidu (what is max for foreign ownership, 40%?) (bidu), which has 60% of the chinese search market (compared to Google's 25%). China is now the world's largest market of internet users (according to some) and bidu currently dominates it (like Goog here).

As art of the deal, bidu would agree to use msft's ppc platform to deliver ads against searches at baidu.com. Search is a proven model, and China is an enormous and rapidly growing market. I'd much rather MSFT buy their way to leadership there, then mess with facebook. Their stake wouldn't cost them more than what, $12B? Maybe they could do both.

Thomas said:

May. 08, 1:00 PM

First of all, there is absolutely no way that Facebook is a global leader. Are you telling me that people in Japan, China, Europe, are going to this crappy website, versus going to their home localized versions? No way! Yahoo has a far nicer appeal than this social site - which looks like a kid-developed social network with a certain lack of style and sophistication.

Secondly, the anticipated valuation of this company should be an embarrassment to Microsoft. This is simply a fad. Nobody that I know has even heard of Facebook, let alone using it. From a pure financial perspective, it reads like MySpace - hot one minute, extremely cold the next. If you are pinning your future web hopes on social networking, then you must have money to burn. Everyone can see that cloud computing (software as service) is the future - and Google is far ahead of anyone else. Yahoo! has the eyes for a spectacular starting point... hint, hint Steve and Bill.

dan said:

May. 08, 1:08 PM

by the way from what I can tell on a valuation basis, bidu would be a better deal.
08 projected revenues - ~$326M
market cap of ADR's: $12.4B

Facebook 08 revenues (from what I've heard here):$350M?
valuation $15B

am I way off here?

Mark Sigal (URL) said:

May. 08, 1:09 PM

Henry,

I could not agree with you more. After all, Microsoft's best days were when they were able to execute on three things:

1) Everything's a platform
2) Win the hearts and minds of developers
3) Embrace and extend the innovations of others

In this case, Facebook may not be an OS but it is decidedly a platform, and ala the way Visual Basic was simple enough to pull in a mass of developers creating a virtuous cycle/halo effect, Microsoft could exploit the simple aspects of Facebook's F8 platform by building tools that enable virtually anything to be a developer, and build deeper APIs for real developers to build rich, high function applications.

Finally, they could embrace, integrate and extend the most popular applications and usage patterns into their products, giving them the R&D mojo that they are lacking these days.

Food for thought.

For some counter-perspective, I have blogged on the halo effect currently playing out for Apple leveraging strategies that once made Microsoft all powerful.

Here is URL: http://thenetworkgarden.com/weblog/2008/04/holy-shit-apple.html

Check it out if interested.

Mark

Oli Burgess said:

May. 08, 2:00 PM

I agree with others that Facebook is a fad; I'm not knocking it - I have an account myself. However, it'll be only a short while before it is superseded (as with myspace), and they have trouble monetising it. Yahoo has much more potential for revenue growth, its eyeballs in combination with Microsoft's provides scale and there are more so-called synergies.

Chip (URL) said:

May. 08, 3:11 PM

I think your point about synergy with the operating systems carries a lot of weight. Part of Microsoft's core (the OS and Office suite) are at risk, with Google gunning for them. A deal with Facebook would allow it to solidify a growth curve in the social application and audience arena, and allow its people to focus on transporting the old (Microsoft desktop apps) to the new (Interactive and online apps).

Plus, it could leverage aQuantive more on the ad side to fill in and take advantage of what Microsoft's technical resources build...and users, use.

Facebook feels more complementary, with a smoother integration than Yahoo.

Yahoo is a media company, which, culturally might be more of a stretch for Microsoft (build useful apps, and find a way to grow ad revenue).

Chip (URL) said:

May. 08, 3:11 PM

I think your point about synergy with the operating systems carries a lot of weight. Part of Microsoft's core (the OS and Office suite) are at risk, with Google gunning for them. A deal with Facebook would allow it to solidify a growth curve in the social application and audience arena, and allow its people to focus on transporting the old (Microsoft desktop apps) to the new (Interactive and online apps).

Plus, it could leverage aQuantive more on the ad side to fill in and take advantage of what Microsoft's technical resources build...and users, use.

Facebook feels more complementary, with a smoother integration than Yahoo.

Yahoo is a media company, which, culturally might be more of a stretch for Microsoft (build useful apps, and find a way to grow ad revenue).

Ooops said:

May. 08, 4:22 PM

Mark Zuckerberg has already been crowned the "next Bill Gates" ... by whom? for what? why?

"Beacon has flopped (at least so far),
+ Social-networks are increasingly perceived as nearly worthless inventory
+ Facebook's growth is slowing"

Yeah, these are perfect reasons to buy. You're rightt.

Ooops said:

May. 08, 4:23 PM

Mark Zuckerberg has already been crowned the "next Bill Gates" ... by whom? for what? why?

"Beacon has flopped (at least so far),
+ Social-networks are increasingly perceived as nearly worthless inventory
+ Facebook's growth is slowing"

Yeah, these are perfect reasons to buy. You're rightt.

Alex Schleber (URL) said:

May. 08, 8:48 PM

While nothing is certain, this is already a much better idea than the Yahoo deal. Given what's going on right now with MySpace adopting Google's OpenSocial, and making deals with Twitter et al. to use MySpace data/resources on their systems, MSFT could actually try to preempt Google from running away with social networking:

Buy Facebook and VERY QUICKLY post a competing standard to OpenSocial to open up the "walled garden" of Facebook. Facebook apps are starting to lose developers from what I hear, many of which may be moving to OpenSocial API app development. this could stop the slowing/bleeding, if developers had a sense that big MSFT $ were now behind things to put the pedal to the metal...

The longer term question is not IF social data will become complete openly exchangeable on the Web, but when. There is no need to have the same things stored/replicated in 1/2 dozen places/systems.

Alternatively, MSFT/Facebook could just adopt OpenSocial, and then look to gain more influence on the standard, out-flaking/out-innovating MySpace/Google. No good if MSFT let's Google run away with it in yet another area.

The social network issue, even though many on here seem to denigrate the whole idea, in fact is very telling how far Yahoo has been behind, and how Micro-hoo would have been far from getting any traction in this area: go check out Yahoo's two in-house social developments, Yahoo 360, which is hanging in limbo (view their more or less orphaned dev blog here:
http://blog.360.yahoo.com/product_360 ), and Mash, Dev blog also apparently abandoned:
http://blog.mash.yahoo.com/

I have it from inside sources that Yahoo also killed a very innovative social-cum-wiki type project just before the MSFT bid, apparently that was too forward-thinking...

So anyone that want to say that FB is completely worthless should look at the sophistication of their platform a little more closely. There is a lot more there technically for those with the eyes to see it. I am not arguing that anyone should like/love Facebook, but give them at least a little credit for the tech side of things. Noone else is even close.

Also, FB social ads do have quite a bit of potential as there are many more demographic targeting angles available than on Google. In throwing up ads with social properties or (YouTube) videos, context is everything. Get the context just right, and someone might actually click on an ad.

[BTW, the idea with the forced video views on e.g. eBay mentioned above is actually already being done in Japan: Soda machines dispense a soda for free in return for the consumer watching 1-2 30 sec. videos first on the face of the machine...]

So, all in all, could be a decent idea, though it would all be in the execution... and MSFT not trying to rename things "Windows Live Facebook" :)

exaoler said:

May. 08, 9:51 PM

I've said it before, and I'll say it again: MSFT should buy Research in Motion. They have real revs, real profits and fit extremely well with Microsof's business and corporate culture.

exaoler said:

May. 09, 1:09 AM

I've said it before, and I'll say it again: MSFT should buy Research in Motion. They have real revs, real profits and fit extremely well with Microsof's business and corporate culture.