Fifteen Bbuhbuhbuhbillion Revisited
About a month ago, I commented on a potential Microsoft investment in Facebook that would give the social networking company a $15 billion dollar valuation. Today, the Wall Street Journal reported Microsoft has confirmed their $240 million investment to purchase a 1.6% stake in the young company which hopes to break even this year with revenue of about $150 million.
Why? How?
Why is fairly easy to recognize, if not rationalize. Sillycon Valley has the fever again over web sites with lots of users, as well they should: Facebook signs up an amazing four million new users every day. Even if they lose 90% of those people within a month, those are amazing numbers. How do you monetize them? Advertising, and this is the germ behind the fever. As the almighty advertising dollar is rapidly shifting from print and TV to the Web, new fortunes are being made. I reference Google, that little company with a $209 billion market cap, built on web advertising. As Microsoft and others attempt to get a piece of that monstrous pie, Facebook is the most delectable slice. So GOOG and MSFT have been fighting over Facebook all summer.
How involves more conjecture than observation. One theory is that 23 year old Facebook founder Mark Zuckerberg (Harvard drop-out, now billionaire - sound familiar?) thought up the most outrageous sum he could. Hell, if Yahoo was willing to pay $1 billion for the company last year (how glad is he that he turned them down?), perhaps people would bite at $10 billion. They did! $15 billion was probably the apogee of the ridiculosity curve. Somewhere, somehow, there's some numbers jockey in Microsoft's corporate development group that can justify the evaluation and investment cost based on cash flow. I must not have taken enough Accounting courses in business school to figure out how.
The other theory about how, and these are not mutually exclusive, is that this is about face:
Microsoft to Pay $240 Million for Stake in Facebook
"We are now stepping outside what is typically a business decision," said Rob Enderle, the founder of the strategy concern Enderle Group. "This was almost personal. I wouldn’t want to be the executive that’s on the losing side at either firm."
-- New York Times 10/24/2007
The exec on the losing side was probably my old 3DO colleague, Omid Kordestani. I'd assert it was rational to let this go. In fact, I'd surmise, getting Microsoft to shell out that kind of money for the right to sell Facebook's advertising (the core of the deal) was a hell of a strategy. Go Omid. Time will tell.
I have a feeling I'll be blogging more about advertising on the web, particularly as it relates to selling adds for video-on-demand. To quote the kids, its just a "sick" market (meaning, crazy wicked hot).