Microsoft Wins Faceoff

Thursday, October 25, 2007

Microsoft has won a high-profile technology industry battle with Google and Yahoo to invest in the social networking upstart Facebook.  The two companies said on Wednesday that Microsoft would invest $240 million for a 1.6% stake in Facebook.  The investment values the three-year-old Facebook, which will bring in about $150 million in revenue this year, at $15 billion.  Last year, Microsoft struck a deal with Facebook to run banner ads on the site in the United States through 2011…..The deal turns Facebook’s founder, Mark Zuckerberg, into a paper billionaire at the age of 23.  He created the site, originally called, in February 2004 by uploading photographs from Harvard yearbooks to help his college peers keep in touch with each other.  Initially restricted to school and college students, Facebook opened its doors to all comers a year ago and has rapidly become a global phenomenon, with 49 million regular users, including 5 million in Britain, and new registrations at a rate of 250,000 a day.  The website’s future financial backing has pitted Silicon Valley’s top companies against one another.  Mr Zuckerberg turned down a takeover offer of more than $1bn from Yahoo! a year ago, but indicated that he wanted investment to expand the venture and fund acquisitions, prompting a furious struggle to win his favour.  Google and Microsoft emerged as the front-runners this month.  They have been anxious to build a relationship with the site because it is increasingly being chosen as a home page by internet users, coming up automatically when they log on to their computers, something that has traditionally been a strong point for Google’s search page and Microsoft’s…..Microsoft will get exclusive rights to sell advertising on Facebook, which currently has little revenue-raising content and is expected to make modest profits of $30m this year.

The astronomical valuation for Facebook is evidence that Microsoft executives believed they could not afford to lose out on the deal.  Google appears to be building a dominant position in the race to serve advertisements online.  Fearing it might lose control over the next generation of computer users, Microsoft has been trying to match and in some cases block Google’s plans, even if that effort is costly.  Representatives of Facebook say the investment will allow it to add employees, expand overseas and aggressively develop its own advertising system that will tailor ads to the personal preferences users make public on their Facebook pages…..Mark Zuckerberg, the 23-year-old Facebook founder who dropped out of Harvard to build the company, owns a 20% share which is now valued at $3 billion.  Accel Partners, the venture capital firm that invested $12.7 million in May 2005 and owns 11% of Facebook, now holds stock worth $1.65 billion.  The high valuation also represents a belief that Facebook is creating an important new operating system — one that exists on the Web instead of on personal computers.  In May, it opened its platform, inviting other companies and third party developers to create tools for the site and share in the advertising revenues.  The move unleashed a flurry of activity around the social network.  More than 4,000 applications, like games and music-sharing tools, have since been created for the site, which in turn has accelerated Facebook’s membership growth…..”Once a social operating system takes over a country it’s like it becomes the native language of that country,” said Lee Lorenzen, a venture capitalist who is bullish on Facebook and notes that Google’s Orkut dominates Brazil, Friendster dominates the Philippines and Facebook is becoming the dominant forum in the United States, Canada and Western Europe.  Facebook boosters say that social networking represents the future of online activity.  Advertisers are attracted to these properties because they offer an opportunity to aim ads to particular users interested in their product or service.  Lorenzen and other Silicon Valley investors are often dismissive of MySpace, Facebook’s larger rival, which has more than 110 million active users and is owned by the News Corporation.  “MySpace is not based on authentic identities.  Facebook is based on who you really are and who your friends really are.  That is who marketers really want to reach, not the fantasy you that lives on MySpace and uses a photo of a model,” he said.

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