Microsoft just bought 1.6% of cool glow for 240 million dollars from the current darling of social networks, Facebook. That priced the latter at $15,000,000,000 or five hundred times expected earnings for 2007!
Now I actually really like Facebook. It’s clean, the guys running it are smart, and tons of people I know are really into it. They got a great audience, growing fast, and all that jazz. But an evaluation of five hundred times earnings?! If that doesn’t taste like bubble gum, I don’t know what does.
Facebook is certainly to be commended for getting as high an evaluation as they can. Bravo to them. They look like masterminds here. But what does Microsoft look like?
A 500x evaluation doesn’t exactly position them as financially shrewd. No, it feels like they’re trying to make a statement that they too can hang with the cool kids regardless of the cost. Regardless of even an obscene cost.
I think Microsoft would be wise to remember that trying to buy cool has a tendency of making you look even more like a dork. I guess they have to try something — anything — to improve their image to investors, entrepreneurs, future employees, and the media.
Maybe that’s also what’s behind the previous hoopla about Microsoft looking at companies heavily involved with open source software. CNet even pitched that we’d make the perfect candidate for that run.
In any case, you’d think that there’d be more critical coverage of this transaction in light of eBay’s write-down of the Skype purchase. In comparison, eBay’s buy looked like a steal. They got a cool media darling with current revenues of $400 million/year for just $2.6 billion a few years ago.
But that’s exactly the opposite of the story being played in some quarters. Reuters frames it as Microsoft beats Google. No they didn’t. Google beat Microsoft with a goading stick and got them to buy-in at bubble gum numbers. It’s Google and Facebook laughing all the way to the bank, not Microsoft.
Robin Wauters
on 25 Oct 07Spoken like a true MSFT hater … meaning not outlining many arguments and being very opinionated (‘bubble gum’ etc.) without digging deeper.
Micheal
on 25 Oct 07Microsoft didn’t pay 500x earnings. 500x earnings would have been $15 billion.
Microsoft paid $240 million, which is 8x earnings for the exclusive right to advertise.
Now that sounds like a great deal to both Microsoft AND Facebook.
Facebook gets to set a high valuation which they have always wanted. Microsoft gets total control over ad revenue for only $240 million. Let me say that a different way, Microsoft will now get ALL ad revenue generated by Facebook for just paying 8x earnings.
How is this a bad deal at all? Both Microsoft AND Facebook are for the better now.
DHH
on 25 Oct 07Micheal, I said that the price VALUED Facebook at 500x earnings. And that’s the price Microsoft paid at to get 1.6% of the company.
And of course Microsoft won’t get all the ad revenue from Facebook. They’ll get to SELL the advertising on Facebook and they’ll of course get some sort of cut from that.
But getting all the ad revenue? What?! That’s the majority of Facebook’s business. Of course they’re not handing all the revenues from that over to Microsoft. That’s preposterous.
Paul M. Watson
on 25 Oct 07Michael, don’t forget to put “outside of the USA” on “exclusive right to advertise.”
FredS
on 25 Oct 07Uh, didn’t Google play $900 million for exclusive ad rights on MySpace?
Damon
on 25 Oct 07It’s a rich valuation for sure, but not $15B as everyone seems to think. That advertising deal is worth something, so you have to subtract that out. I don’t know what the ad part is worth, but I bet it’s a signfiicant chunk of the total price
Micheal
on 25 Oct 07@Freds
Yes, Googled payed $900 million for the exclusive ad rights on MySpace.
http://www.techcrunch.com/2006/08/07/google-pegged-to-search-myspace/
That’s exactly a reason why this Microsoft deal was so smart on their part.
The media is making this deal sound outrageous when in all reality, it’s one of the smarter Internet deal done.
Facebook gets a high valuation and Microsoft get access to an extremely well defined audience to market too. Microsoft will be able to give advertisers the ability to only display ads based on a persons: age, gender, personal interests (music, politics), heck even their relationship status … on of which, on the cheap. That worth A LOT of money. Where else can advertisers define their audience that well.
dave
on 25 Oct 07not to nitpick, but it’s 500x expected revenue, not earnings. Earnings = profit; facebook is at about breakeven (no profit yet, but not running a loss).
Anonymous Coward
on 25 Oct 07Dave, it’s 500x expected earnings. FB says 150MM in revenues, 30MM in earnings. 30MM x 500 is the 15 B number.
Ed Knittel
on 25 Oct 07For the “exclusive right to advertise” must mean not very exclusive. According to the folks at Wired who sat in on the conference call yesterday “Facebook says third party application developers can continue to monetize their ads with any ad network”
So, while Microsoft may get the exclusive right to advertise with Facebook’s ad maker/whatever it doesn’t sound to me like Google, et al. couldn’t have their ads still plastered about Facebook.
I do think that this is Microsoft, the Old Man, trying desperately to look cool and hip to the young crowd.
Matthew Smith
on 25 Oct 07I think MS has bought a lot of cool by producing good products such as the 360. I do not see how facebook is much “cooler”. Please explain.
dave
on 25 Oct 07You’re right—I stand corrected!
pwb
on 25 Oct 07“didn’t Google play [sic] $900 million for exclusive ad rights on MySpace”
No. Google guaranteed MySpace at least a $900m cut of the ad revenue generated over a 4 year search deal. Google paid $0 for the rights to the deal.
“Microsoft paid $240 million for the exclusive right to advertise”
No. Microsoft bought a 1.6% equity stake and the rights to be the “exclusive third party advertising platform partner”.
There is no doubt that Facebook will sell a ton of its own advertising. And anyone is still allowed to sell their own advertising on the network.
Phil McT
on 25 Oct 07The question becomes…would the owners of 37S sell for 500 x earnings? :)
Andrew
on 25 Oct 07“Google beat Microsoft with a goading stick and got them to buy-in at bubble gum numbers.” I think that this may well be the way it turns out. The real winner is Facebubble, not Microsoft.
Marc
on 25 Oct 07Well if there was ever a huge, glaring, neon sign showing just how faulty Facebook is as a company (especially with the new F8). Facebook is trying to be the new platform. What they and Microsoft don’t understand (as MS has proven many times before) is that the web IS the platform. Google fundamentally understands that and thus their complete lack of interest in Facebook.
Financially a great deal for the current owners of FB. They’re making out like bandits. But they do so at the cost of betraying their own users.
Quix
on 25 Oct 07Microsoft’s desperate attempts at hipness are truly sad. Perhaps it should shave its head, legally change its name to M, and start wearing hoodie/blazer combos?
Nah, didn’t work for Allard either.
Note to self: look for a new social network to participate in. Way to hop in the sack with the bad guy, Facebook.
booyaya
on 25 Oct 07$240mil is super cheap for the exclusive rights they just purchased. AND they get 1.6% of the company on top of that.
ps… $240mil is 9 days of msft profit.
macsayz
on 25 Oct 07marc sayz ‘complete lack of interest in Facebook’, but that doesnt explain why google was in the bid too. sorry marc, you get the long pointy hat today.
pwb
on 25 Oct 07“the current owners [are] making out like bandits”
No one makes a nickel until there is a liquidity event.
Tony
on 25 Oct 07Facebook’s new app. platform has the potential of becoming a monopolistic force on the internet.
In a very similar way Windows was the monopolistic platform of desktop computing.
Microsoft wants a piece of that.
marc
on 25 Oct 07further to DHH’s ebay-skype point, they got a much better deal than MS have with Facebook, the social-networking industry is far too competitive, their simply aren’t enough barriers to entry for any particular site to dominate the market for too long. Anyone can make a site like facebook especially using something like Rails (respect to DHH) ive have experience of building one in Rails which had numerous advantages over facebook.
Once people get bored of facebook (i know i am already) other players will rapidly emerge to fill the void.
skype however is more than a website in a crowded marketplace, its a revolutionary technology which is sure to become more desirable to a generation of wi-fi enabled iphone users, why pay for calls when u can have video chat for free anywhere in the world?
Jason
on 25 Oct 07My guess is the deal includes a large percentage of software and services and much less cash. This may be a ploy to garner a large valuation and pitch others for funding.
opinionated
on 25 Oct 07The whole deal seems kind of classic.
Facebook could use some money so they start a bidding war for a reasonable share in the company, but nothing that would allow said buyer influence over the company. They end up getting a price that values the company as a whole 5 billion higher than the insane price the founder said he would sell it for a few years back when it was just a place for college kids to organize their next kegger.
MS, not knowing their ass from a hold in the ground near a Silicon Valley startup, decides they are “gonna win this one”. MS doesn’t know internet business and their most recently successful innovations have been by small companies they’ve bought (see Halo), so they make a move as a company to pursue the next thing that comes along. Then ended up paying a retarded amount of money for a piece of Facebook big enough to get them in the financial presses.
I think google has zero to do with it, maybe Microsoft “feels” this is a slap at google - they think everything is a move against google. Google could care less - they have money to make and people to hire.
Meanwhile Apple takes another bite out of windows market share while the M$ eye is on google. Gotta love a sinking ship.
Scott
on 25 Oct 07Can you really call a company that has $15B in net income (not revenue) a “sinking ship”? Google and apple COMBINED have less than have of that.
David
on 25 Oct 07I think you’re missing one of the big benefits to MS in giving that kind of cash to Facebook: Google already has a problem with many of their best moving to Facebook, and that kind of money is going to speed that flow up considerably.
marc
on 25 Oct 07despite current financial data suggesting the contrary M$ is definitely a sinking ship. think about it, it makes nearly all of its cash from two products: Windows and MS Office. Both products are sold at a monopolists extortionate premium, hence the 15B. But this monopoly will soon be at an end, google’s docs and spreadsheets will force MS to become price competitive, wiping out much of its profit, forcing redundancies, downsizing etc. Same too with Windows, which is brought about by numerous factors, popularity of linux, popularity of mac’s and the bloated flop that is vista.
David, when you were on Wikipedia looking at net profit for MS did you also notice the amount of employees M$ has compared to apple and google? in a more competitive environment they will have to shed some of that extra overhead, which isnt going to look good.
uhhuh
on 25 Oct 07“despite current financial data suggesting the contrary”
ok, i love that debate style. lets throw out everything that is credible, provable, and generally agreed to as fact. AND THEN after all of that is tossed aside… let me tell you the way it really is.
some people are hillarious without even trying. marc is in that group.
Scott
on 25 Oct 07This is news on MS from today….
“For the quarter ended Sept. 30, the software maker’s profit climbed to $4.29 billion, or 45 cents per share, from $3.48 billion, or 35 cents per share, during the same period last year.
The results topped Wall Street’s expectations. Analysts, on average, had forecast a profit of 39 cents per share, according to a Thomson Financial poll.
Revenue grew 27 percent to $13.76 billion from $10.81 billion in the year-ago quarter. Analysts were looking for $12.57 billion in sales.”
So much for google’s docs “wiping out much of its profit, forcing redundancies, downsizing etc”
Scott
on 25 Oct 07I think this article says it all. Especially the last paragraph.
http://bits.blogs.nytimes.com/2007/10/25/microsofts-30-billion-vista-bump/
Jon
on 25 Oct 07Whether or not Microsoft can buy “cool” from Facebook depends on whether or not they will use their influence to change it. Grant it, a 1.6% stake is not much. Hopefully what we are seeing is the beginning of more aggressive moves by Microsoft in dealing with Google. Hats off to the Directors at Microsoft for finally taking a somewhat hardline http://www.newsvisual.com/newsvisual/2007/10/microsoft-diver.html
Ed Knittel
on 25 Oct 07Scott, I also liked the 2nd to last paragraph
So yes, Microsoft “the company” seems to be doing well over all. Just not this particular important area that the rest of the world is heavily interested in.Terry Sutton
on 26 Oct 07Microsoft already owns Facebook – methodologically speaking anway.
Facebook is SO bloated with garbage now that its like a darling Microsoft product.
Pop
on 26 Oct 07I’m still in shock that this kid doesn’t cash out and sit on a beach for the rest of his life. Facebook is cool but it’s not important.
Jack
on 26 Oct 07“Google fundamentally understands that and thus their complete lack of interest in Facebook.”
what a childish and retarded nonsense! Please explain to me why YouTube beat out Google’s own video offering.
Please, everybody understand what the web is about. YouTube beat out Google video despite Google video was much better quality because YouTube have over billion people watching video on YouTube. It’s not about web, less feature or design or whatever Apple eye candy. It’s about who can get most users on their site the longest. Like TV show is competing who can attract the most eyeballs to watch their show thus the commercial!
Why do MS bought a small stake on FaceBook? Facebook got more people on it than any of MS’s current web properties and MS can’t get that many users at a short time thus MS buy their way in.
You Sir need to go back to Business 101!
Jack
on 26 Oct 07“it makes nearly all of its cash from two products: Windows and MS Office. Both products are sold at a monopolists extortionate premium”
MS’s backend (business software like MS SQL, CRM and developer tool like Visual Studio…etc.) is doing very well. Windows and Office may still bring in lot of cash for them but MS’s business software is growing much faster than any opensource offering.
Jack
on 26 Oct 07btw, this post by DHH feel like a bitter view and typical MS hater. Don’t get too obsesse with MS. Not every move MS make is success nor failure. It’s only bad for your health if you keep interperting every little move by MS.
$240m is a small price to pay for 1.6% of Facebook ownership. Hummm… i recall Bill Gates pay more than that to save Apple.
uhhuh
on 26 Oct 07Good point jack. also important to remember that msft’s investment into apple was while apple was declining QUICKLY. And facebook is polar opposite.
IOW, the investment was 1) strategic, 2) not for the 1.6% but rather to lock up the international ad sales.
Scott
on 26 Oct 07So, I guess the answer to david’s original question is: no. Either you already like MS or you’re always going to hate it.
Marc Love
on 27 Oct 07First of all, I wrote the first “Marc” post, all the other “marc” posts are somebody else.
@Jack – YouTube beat out Google’s own video offering because YouTube emphasized the community and sharing aspects of its site. What the hell does that have to do with Facebook though? If you’re comparing YouTube to Facebook, then you (like Microsoft) don’t understand the new economics of the web. YouTube is open, it gives users the ability to share what they want on whatever sites they want. Facebook is closed and controlling. Facebook is trying to become the new platform for web apps. Who needs Facebook to be a platform? Web apps already have a platform, THE WEB!
Jack, I got news for you SIR, Business 101 is the best way to learn how to drive your new company into the ground. Business 101 is teaching 20th century economics… the same economics that tells the RIAA that its time is best spent squeezing a couple hundred thousand dollars out of a single mom while its entire industry and business model is dying. Its the same economics that makes you think that you can “buy” users.
Sean
on 27 Oct 07You are right. This is just the latest and most egregious example of Microsoft not knowing what the hell to do with all its cash and trying to pretend that it is a growing, vibrant, innovative, nimble company. It’s not. Which is not a bad thing. Being a mature, hugely profitable, cash generative business is nothing to be ashamed of; but it does take a completely different approach to management and the balance sheet. The right thing for Microsoft (at least for its shareholders and employees) to do would be to embrace its maturity, break itself up, tighten up financial management, restructure the balance sheet (lots more debt, much less equity) and run the core cash cow businesses well…for cash! With all the money this releases, you could fund a thousand potential facebooks. More here. It’s like the corporate version of a 50 year old trying to pretend they are still 20. It doesn’t work and usually ends up looking embarrassing. Embrace 50 Bill – there’s nothing wrong with it. You’re wiser richer, and probably better looking now too! ;)
Dan Grossman
on 28 Oct 07What, are you people high or something? This has nothing to do with buying cool. It has everything to do with spending $240 million to get Live search in front of Facebook’s 30 million users so they realize Google’s not the only choice. $240 million to take a chunk out of Google’s only successful business? Fuggin’ steal.
Jack
on 28 Oct 07“YouTube beat out Google’s own video offering because YouTube emphasized the community and sharing aspects of its site.”
That’s exactly what i said. Here is my word in case you miss it. “YouTube have over billion people watching video on YouTube.”
YouTube beat out Google video because it have a huge user base! That’s exactly what FaceBook have. You have no business sense. Re-read what i wrote. Microsoft is buying the FaceBook users base.(for a very small amount of money) Just like Google buying YouTube for its user base.
what the hell does that have to do with “cool”? what the hell does that have to do with “getting” the web?
“Who needs Facebook to be a platform? Web apps already have a platform, THE WEB !”
Of course the web apps already have a platform. Why do you buy into what FaceBook say in the press and what does Facebook wanna be the platform have to do with MS’s investment? MS is simply buying the FB’s user base like Google buy YouTube for its user base. Jeebus.
Marc
on 28 Oct 07@Dan – I haven’t seen anything about Live Search being a part of the FB deal, but even if it is, do you really think FB users who use Google are going to switch to Live Search just because its integrated into FB? Give me a break.
@Jack – Having a huge user base isn’t a reason you beat a competitor, its an indicator you beat your competitor.
You talk about users like they’re inanimate objects you can buy, trade and control. If you consider that good business sense, then go right ahead and keep on thinking it. It creates more opportunities for those of us who truly value each one of our customers for just how real and human they are.
“What does Facebook wanna be the platform have to do with MS’s investment? MS is simply buying the FB’s user base like Google buy YouTube for its user base.”
It matters to MS’s investment because they’re buying into a flawed business model. And the only reason they don’t see the flaws is because MS itself shares the same flaws … thus the irony. Here’s some food for thought Jack: Microsoft is trying to buy FB’s users; Google didn’t buy or try to buy any YouTube users, they simply bought YouTube, the application.
Jack
on 29 Oct 07@Marc
man, you seriously don’t know anything about business. Google didn’t buy YouTube, “the application”. Google bought YouTube for its users. Stop kidding yourself.
Read up on the network effect. http://en.wikipedia.org/wiki/Network_effect
If no one user your “application” then who care about how good your application.
this is my last reply. you obviously doesn’t “get” the web.
Marc
on 29 Oct 07@ Jack – The irony in your response is delicious. Thanks for that.
andrew
on 30 Oct 07@ Marc – Hehehehehehehehehehehe
mj
on 30 Oct 07Jack writes ”$240m is a small price to pay for 1.6% of Facebook ownership. Hummm… i recall Bill Gates pay more than that to save Apple.”
Nope. That was $150 million of non-voting stock. Which was sold two years later for a large profit.
This is Microsoft throwing money at a problem – their problem is that none of their higher-ups GET the Internet. For all of his faults, they didn’t pay Scoble enough.
This discussion is closed.