Microsoft to Pay $240 Million for 1.6% Stake in Facebook

By BRAD STONE

SAN FRANCISCO, Oct. 24 — 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 percent 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.

The deal ends two months of jockeying between three major Internet players for the right to invest in and forge close ties with Facebook.

As part of the deal, Microsoft will sell the banner ads appearing on Facebook outside of the United States, splitting the revenue with it. Last year, Microsoft struck a deal with Facebook to run banner ads on the site in the United States through 2011.

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.

“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.”

A Google spokesman said the company had no comment. Facebook is planning to comment on the deal later today.

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. Facebook is expected to introduce such an ad network at an event in New York next month.

The Microsoft investment throws the value of the holdings of Facebook investors into the stratosphere. Mark Zuckerberg, the 23-year-old Facebook founder who dropped out of Harvard to build the company, owns a 20 percent 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 percent 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. The company says it now has more than 42 million members and will exceed 60 million members by the end of the year.

“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.

Mr. 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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Small/Medium Businesses Don’t Yet See the Value of Web 2.0

When it comes to taking advantage of Web 2.0 tools to obtain business management information, small and medium businesses (SMBs) are clearly taking a wait-and-see approach. This is one of the many findings in a new study released today by Bredin Business Information, Inc., which sought to gain a clearer understanding of how SMBs perceive the value of online tools such as blogs, social networks, wikis and other emerging formats.

The study asked over 300 U.S.-based SMBs to assess the importance of various Web 2.0 formats as sources of business management information over the next five years. Only 14% expect that blogs will be very or extremely important, with similar ratings coming in for wikis (21%), social networking sites (22%) and webcasts (31%). At the same time, more traditional methods of delivering resource information ranked high, with 49% rating email newsletters as very or extremely valuable over the next five years, and 46% giving that ranking to interactive tools such as quizzes or calculators.

Despite the hype surrounding Web 2.0, SMBs are not yet sure how these tools are useful in locating business-related information. The survey asked SMBs how their attitudes toward certain online tools had changed over the past several years. Interestingly, 41% said they were more positive about interactive tools and email newsletters, and 30% were more positive about community forums. Other Web 2.0 formats fared less well. While 19% were more positive about social networking, 21% were less positive. Blogs (18% more positive/16% less) and wikis (17% more positive/14% less) had similar results.

BBI simultaneously surveyed marketers at companies that sell to SMBs to rate the value of these tools for marketing purposes. The disparity between marketer’s plans to offer these tools with SMB interest in using them is striking. For example, 39% of marketers rated blogs as very/extremely valuable over the next five years (25 percentage points more than SMBs), and 67% rated webcasts as very/highly valuable (31 points higher than SMBs).

“SMBs are telling their vendors it is the message, not the medium, that matters,” said BBI CEO Stu Richards. “It is not surprising that SMBs have not yet warmed to Web 2.0 – they are typically not early adopters. While these formats offer tremendous potential to enhance relationships with SMBs, the challenge for marketers to use these methods effectively is to provide SMBs with relevant, actionable and easy-to-access information and advice. Whatever format marketers choose to roll out, they should test it on a limited basis, and manage expectations for adoption. In the meantime, the research shows that they should consider reaching SMBs through email newsletters and interactive tools if they do not already.”

Among other key findings from BBI’s report on SMBs and Web 2.0:

• SMBs don’t yet see the value of many Web 2.0 tools. When asked why they don’t use blogs, 57% said they don’t see the value, and 54% don’t see the value of social networking sites.
• Regardless of the information format, SMBs most commonly look for information on accounting and finance (63%), technology/software (50%) and industry trends (46%). The least-sought topics were international business (20%), entrepreneurship/innovation (30%) and law (32%).
• SMBs look to their vendors first for tools and information to help run their businesses. 31 percent said they would be very likely to seek this information from their vendors’ websites, as opposed to the sites of trade associations (20%), government/non-profits (18%), colleges/universities (15%) and the media (13%).
• Nearly half of SMBs (48%) begin their search for business help on a search engine. 33 percent go to sites they know have good resources, and 19% go straight to the sites of their current vendors.

Source: Bredin Business Information