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Late yesterday software giant Microsoft and rapidly rising social networking company Facebook announced an  agreement in which Microsoft will pay $240 million to purchase a 1.6 percent equity stake in Facebook, an investment that values the Web company at $15 billion. Microsoft won the battle with Internet search leader Google to garner a share in Facebook, and will sell banner advertisements on the upcoming global versions of Facebook. Google is purported to have been in negotiations with Facebook until the announcement, however Microsoft has now gained what is seen as a valuable position for online advertising with Facebook. Expanding on Microsoft's Existing Facebook Agreement The online advertising industry has been abuzz with speculation over the past few months about the future of Facebook, the three and a half year old social networking firm founded by then 19-year-old Mark Zuckerberg. The company's Web site now boasts nearly 50 million users and claims 200,000 new registrations each day, growth more rapid than that of its main rival MySpace, the site purchased by Rupert Murdoch's News Corporation for $580 billion in 2005. MySpace remains the largest social networking Web site, with about twice as many registered users as Facebook. Microsoft's new stake in Facebook augments an existing agreement between the two companies which grants the desktop software giant the right to display online banner advertisements within Facebook user Web pages through 2011, and splits the profits between the two. Facebook's Rapid Growth The $15 billion valuation of Facebook that Microsoft's $240 million stake suggests comes from the investors  behind Facebook, which include Greylock Partners and Accel Partners, who are reported to have held out for an especially high stake price. While the valuation is notably high for such a young company which is expected to take in only a rather modest $150 million in revenue this year, and a even smaller $30 million in profit, it appears to show how much confidence Microsoft has in Facebook's future. The meteoric rise in Facebook's pre-Initial Public Offering (IPO) valuation would value stock purchased in the company by Accel Partners in May 2005 for $12.7 million at close to $1.65 billion now. Microsoft CEO Steve Ballmer played an active part in courting Facebook before the deal was penned Wednesday morning in the Palo Alto, California offices of Facebook, according to executives from both companies. Microsoft's Future Facebook Plans Microsoft's president of platforms and services Kevin Johnson sees the agreement as a sign that his company's online advertising is headed in the right direction. "The equity stake that we are taking in Facebook is a strong statement of confidence in this partnership," Johnson said in a conference call with analysts and journalists according to a recent New York Times article. "It’s a statement of confidence in the fact that our advertising platform is going to get stronger and will help monetize Facebook," said Johnson. Yahoo appears to have been seeking a stake in Facebook as well. Facebook's chief revenue office Owen Van Natta told reporters, "We were very fortunate to have a lot of folks interested in a partnership with us around advertising," according to the New York Times. In expanding their advertising partnership, Microsoft and Facebook appear willing to jointly tackle Google in the online advertising market. "We are pleased to take our Microsoft partnership to the next level," Van Natta said. "We think this expanded relationship will allow Facebook to continue to innovate and grow as a technology leader and major player in social computing, as well as bring relevant advertising to nearly 50 million active users of Facebook.” Microsoft's Johnson sees opportunities in working with Facebook, noting that: "We have partnered well over the past year and look forward to doing some exciting things together in the future. The opportunity to further collaborate as advertising partners is a big reason we have decided to take an equity stake, and is a strong statement of our confidence in the long-term economics of this partnership," said Johnson, who also used the agreement announcement to highlight the potential global implications of the deal. "Making this investment and expanding this partnership will position Microsoft and Facebook to better take advantage of advertising opportunities around the world, and is a great win for not only for our two companies, but also our collective users and advertisers," said Johnson. With 60 percent of Facebook users living outside the U.S., Microsoft has gained access to the rest of Facebook's audience, adding to its August 2006 agreement to deliver advertising to Facebook's U.S. audience through 2011 Facebook Workforce to Double Facebook allows registered Web users to easily create their own online personal space and to interact socially with friends. Initially the service was developed to serve college students, however just over a year ago the system was opened up to allow in a wider audience. The $240 million from Microsoft is expected to help pay for a doubling of Facebook's work force, from just over 300 today to roughly 700, according to Van Natta, who also expected the influx of money to help purchase the technology hardware and facilities needed to expand both in the U.S. and abroad. Facebook has been developing its own advertising system for displaying ads on Facebook.com, and the company plans to introduce the system next month in New York. How this will affect Microsoft's alliance with Facebook is unclear. Google Has Own Facebook Ties While Google may have lost out on this opportunity, it already has an indirect relationship of its own with Facebook, through displaying ads in many third-party applications developed using Facebook's open Application Programming Interface (API). More than 5,000 such applications have been developed for Facebook since the company opened up its API in May. Google offered no immediate comment on the agreement between Facebook and Microsoft. Online advertisers see opportunity in using Facebook's information about its members' interests and preferences to display highly targeting ads. Internet search marketing industry insiders such as those who post messages at the WebmasterWorld forums, generally view the $240 million strategic alliance between Microsoft and Facebook as a relatively small price for Microsoft to pay in exchange for greatly expanded advertising on Facebook.  Microsoft Invests $240 Million in Facebook Last year Zuckerberg is reported to have turned down a $1 billion offer by Yahoo to purchase Facebook, a move which now appears to have been a good one. Zuckerberg has also indicated that a Facebook IPO is at least two years off. During the fiscal year ending in June, Microsoft's online advertising revenue increased by 21 percent and totaled $1.8 billion, figures the company hopes will get even stronger with the Facebook agreement in place. With leader Google racking up a hefty $13.3 billion in online advertising revenue it appears that Microsoft has a long way to go before threatening Google. Yesterday's announcement however places Microsoft in a position which may help it narrow the gap. Related Links:
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10:54 am on Oct. 25, 2007 (utc 0)