The Difference Between Sense And Nonsense: Trying To Make Sense Of Microsoft's Facebook Deal

from the hint:-it's-nonsense dept

Sure, it had been rumored for over a month now, but the news that Facebook actually convinced Microsoft to buy a stake at a $15 billion valuation still makes you do a doubletake. Microsoft put in $240 million for a tiny 1.6% of Facebook. This is less than the $500 million originally rumored, but it tips the scales in terms of totally ridiculous valuations. We had thought that it was Skype who had played the game the best in its insanity inducing ascent to getting bought. Despite only having revenue under $10 million per year, the company started spreading rumors that it was worth over $1 billion. This was helped along by a reporter who confused millions and billions, and suddenly we were off to the races. Suddenly, without any real change in business prospects, we were told that the company was worth $3 billion and then the suitors really started showing up until eBay coughed up $2.6 billion with earnouts that could have brought the deal to $4.3 billion. Of course, we all know how that game ended: eBay just evaporated $1.43 billion of that deal. Last year, it was YouTube who played the same game, riding the hype and whispers to a Google buyout for what now appears to be a paltry $1.65 billion (plus legal headaches). That was merely around $3 million for every day the company had existed.

However, in 2007, we clearly have a new champion at this game. Facebook is most certainly a popular and viral site. However, there are still plenty of questions about how much money the site can really generate long term. When Yahoo apparently tried to buy Facebook last year for $1.62 billion, the math still seemed ridiculous and hard to support. To then make the case for a valuation 10x only a year later goes into fantasy territory. Also, there's a big question about what Microsoft gets out of this. It's hard to see them getting a huge return on the investment. Yes, Facebook is growing and there are some interesting possibilities there -- but we've also seen every other social network before Facebook grow rapidly, peak, and then fall off the map pretty quickly as well. And, even with the growth rate and adoption for Facebook, the rumors concerning how much revenue it's bringing in make it next to impossible to for this valuation to make any sense. About the only rationale that seems to make sense is that Microsoft just threw away $240 million to block Google from getting the deal. Maybe that's worth $240 million (pocket change) to Microsoft in the grand scheme of things -- but it's difficult to see Facebook ever being able to justify that kind of valuation unless something massive changes in the near future. Still, it's great news for Facebook and Mark Zuckerberg who were able to play this game better than anyone we've seen before. Meet your new valuation insanity champion.


Reader Comments (rss)

(Flattened / Threaded)

  1.  
    identicon
    Larry V, Oct 24th, 2007 @ 6:39pm

    It's OK with me...

    If very large, over funded, incompetent, clueless companies want to make somebody else rich, why would I complain? ESPECIALLY if it's M$!

    (First)

     

    reply to this | link to this | view in thread ]

  2.  
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    Joel Coehoorn, Oct 24th, 2007 @ 7:18pm

    More than just the stake in the company

    For their money Microsoft supposedly got more than just a stake in the company, but also the rights to do advertising on the site as well. This could be worth quite a bit to them and justify the investment.

     

    reply to this | link to this | view in thread ]

  3.  
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    Uncle Rob, Oct 24th, 2007 @ 8:49pm

    Whats facebook?

    What the dickens is this facebook? You say its not worth it, but Microsoft payed $240 million for it? I think Microsoft is smarter than whoever you are. I'm gonna check it out.
    |-_-|

     

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  4.  
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    Aaron Farnham (profile), Oct 24th, 2007 @ 9:52pm

    They invested for the ad deal

    I think the MS investment is purely to have a large customer using their ad system. It gives them something to point to when trying to sell the ad system other than a big fat zero.

     

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  5.  
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    Mike (profile), Oct 24th, 2007 @ 10:01pm

    Re: They invested for the ad deal

    I think the MS investment is purely to have a large customer using their ad system. It gives them something to point to when trying to sell the ad system other than a big fat zero.

    I agree it's basically an ad play -- and if they think of it as basically subsidizing $240 million worth of ads with an outside shot of making back that money (or even getting more from that investment) then maybe that works... But that's an awful lot of money to give up for an ad deal on a property that may not be all that important.

     

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  6.  
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    Shohat, Oct 25th, 2007 @ 3:00am

    Here is what it is

    Lycos was bought for Billions coupla years ago.
    Tripod/angelfire were big deals

    They are worthless now. Because after all these are not real businesses, these are just websites, advertising space.

    Small online retailers easily bring 2-4 million a month in profit, and Facebook is just a site no one will remember in 3 years.
    Sure, it might be worth arond 80-170$ million, but not much more.

     

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  7.  
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    OverSizeAlpha, Oct 25th, 2007 @ 5:37am

    A self-liquidating investment

    So, Microsoft invest $240M in Facebook and the following day their stock is up by 1%. As there is no other real news associated with Microsoft, it is logical to assume that the markets approve of the Microsoft investment. A 1% increment in the MS stock EASILY pays the $240M - a self liquidating investment then....

     

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  8.  
    identicon
    Evostick, Oct 25th, 2007 @ 8:17am

    The money isn't for access to Facebook's profits.
    The deal gives Microsoft access to Facebook's data.

    $240m for all the data that facebook users are willing to share, and the way that data is organised socially. Sounds like a bargin to me.

     

    reply to this | link to this | view in thread ]

  9.  
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    Mike M (not Mike Masnick), Oct 25th, 2007 @ 11:51am

    Invest in me

    Hi Microsoft,

    My name is Mike. I have a small social network of 2 friends, I'll wear a "Microsoft Rulez" whenever I am around them. Please invest 2 Million dollars in me...I'm sure I can get one of them to buy Microsoft products and give you a nice return for your investment.

    Thanks.

    Mike

     

    reply to this | link to this | view in thread ]

  10.  
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    Josh, Oct 25th, 2007 @ 8:01pm

    Re:

    I disagree that Mircosoft is paying for the data, at least partially. After all, data that people make public is available on Facebook for free (with a membership). For the cost of some web developers, they could probably dig up quite a bit of info.

    That being said, I think $240 million is way too much for Facebook. Not enough revenue, even with the ad space (which isn't exactly a sure bet anyway).

     

    reply to this | link to this | view in thread ]

  11.  
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    Sam, Oct 25th, 2007 @ 9:24pm

    Hype is king

    Every time a new networking site notches up lot of users, the biggies start losing sleep. Soon the hype starts and then it's like an auction.
    What needs to be studied is:
    + How many of the users who use Facebook also use other networking sites?
    + How many users who used other sites switched to Facebook?
    + What's the potential spending power of these users?
    + How many of them are really interested in ads?
    + If so what kind of ads?

    Without answers to these questions it's very difficult to make a reasonable call on how much a site really is worth.

     

    reply to this | link to this | view in thread ]

  12.  
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    nicky williams, Feb 18th, 2008 @ 10:34am

    math

     

    reply to this | link to this | view in thread ]

  13.  
    identicon
    nicky williams, Feb 18th, 2008 @ 10:34am

    math

     

    reply to this | link to this | view in thread ]


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