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Microsoft gets 'must win' with Facebook

In a deal that values social networking Web site Facebook.com at an extraordinary $15 billion, Microsoft Corp. on Wednesday said it agreed to invest $240 million in the site as part of an expansion of their advertising ties.

The agreement allows Microsoft to handle advertising on Facebook in international markets, where Facebook is experiencing tremendous growth. Previously, Microsoft handled advertising for the site in the U.S. market.

The investment, which gives Microsoft a 1.6 percent stake in a company that was born in a Harvard University dorm room three years ago, was a deal Microsoft had to make in order to keep pace with Google Inc.'s growing might on the Internet

"This was a must win for Microsoft," said Allen Weiner, an analyst with Gartner Inc. who follows the big technology firms. "It would have been a nice win for Google."

In recent years, all the wins have been going to Google. Last year, Google bought YouTube for $1.6 billion and this year it purchased pioneering Internet ad firm DoubleClick for $3.1 billion, both properties Microsoft was believed to have had a serious interest in purchasing, Weiner said.

Google also has an advertising relationship with Facebook rival MySpace.com.

"Microsoft needed to pay whatever it took to win this," Weiner said. "The credibility this gives Microsoft in the marketplace is pretty big."

Both Google and Microsoft operate services that use sophisticated computing tools to place advertising on Web sites, and they are battling for significant accounts.

Google is far ahead in terms of generating ad revenue. According to The Associated Press, Microsoft's online ad revenue was $1.84 billion for the fiscal year ended in June, far below Google's $13.3 billion for the same period.

A hot commodity

Facebook is a big catch because it is currently the hottest property on the Internet. On Wednesday, the company said it had nearly 50 million users with a user base that is doubling every six months.

That rapid growth kicked in last year when Facebook allowed anyone to join the social network. Previously, it had been open only to students with a ".edu" e-mail extension.

Then, in May, the site opened its development platform so third-party softwaremakers could create interactive applications, called widgets, specifically for Facebook. There are about 6,500 applications available for Facebook users after only four months; it launched with just a handful.

"We'll use the capital to fund all the innovation and growth we're seeing today," Owen Van Natta, Facebook's chief revenue officer, said in a conference call. "That's what we'll be focusing on."

International presence

Facebook is averaging 200,000 new users each day, with almost 60 percent of those users coming from outside the United States.

With this deal, Microsoft will now have more exposure to those international users. Facebook's previous agreement with Microsoft's AdCenter advertising platform, signed last year and extended this year through 2011, was only for U.S. banner advertising.

Kevin Johnson, president of Microsoft's platforms and services division, said the Redmond, Wash., company did not pay too much for a relatively minor stake in Facebook.

"If you believe [Facebook] can get to 200 million, 300 million users," he said, "you can easily get to that level of monetization."

Considering Facebook's current rate of growth, "I could see them getting to 200 million to 300 million users," said Michelle Warren, a senior research analyst with Info-Tech Research Group.

"My belief is that Facebook is popular now, but will it be popular in two years?" she asked. "Will kids want to go there if there parents have a profile on Facebook?"

MySpace remains the giant in the social networking field, with more than 100 million users, but it has lost some momentum to Facebook, which is adding users far more rapidly. Facebook had 134 percent more users in September than a year ago, while MySpace increased 12 percent, according to Internet tracking firm Hitwise.

That's one reason why Rupert Murdoch, whose News Corp. owns MySpace, said last week that his social site will open its platform to allow outside developers to create the same type of applications popular on Facebook.

The Microsoft investment was important for Facebook because it is considering an initial public offering, analysts said. Van Natta would not comment on "an IPO at this time," saying there has been a lot of speculation about Facebook's financing.

Company's valuation

"Facebook wanted a base to value the organization," Warren said. "It looks like they may have gotten an extra $5 billion [in valuation] from Microsoft," assuming that published reports over the last month were accurate in valuing Facebook at $10 billion.

Yet it's unclear if Google was even involved in talks with Facebook since it already has an advertising deal in place with MySpace.

"I'm not sure Google would have done something with Facebook," she said.

Van Natta would not comment about potential suitors, but he did say there were "a lot of folks interested in partnerships."

MySpace declined to comment on the deal, and Google did not reply to a request for comment.

Even if Microsoft paid too much, Weiner said it was a wise decision.

"They are in the game, which is what they needed," he said.

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ebenderoff@tribune.com

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Face value

- Facebook.com was the ninth most-visited Web site in the U.S., receiving 0.96 percent of all Internet visits for the week ended Saturday.

- U.S. traffic to Facebook .com has increased 102 percent in the past year.

- Among a custom category of leading social networking Web sites, Facebook.com received 15 percent of U.S. visits last week. That was the second most among social networking sites, behind MySpace.com, which received 76 percent. Windows Live Spaces received 0.4 percent for the same week.

Source: Hitwise

Copyright © 2014, The Baltimore Sun
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