Home Is Microsoft Better Off With Facebook?

Is Microsoft Better Off With Facebook?

In October, Microsoft CEO Steve Ballmer said the company planned to acquire 20 companies per year for 5 years, with acquisition prices ranging in size from $50 million to $1 billion. Ballmer’s statement came at the Web 2.0 conference in San Francisco and presumably the acquisition strategy he was talking about would focus on Internet companies in an effort to compete with Google. 4 months later, Microsoft made a nearly $45 billion offer to acquire Yahoo! — hardly the right way to start off on the 20 companies per year route promised by Ballmer.

After being turned down by Yahoo!, and seeing Yahoo! begin talks with News Corp. about a possible deal to keep the portal out of Microsoft’s hands, Redmond is reportedly weighing its options. The Guardian’s Richard Wray writes, “Microsoft was deciding last night whether to raise its offer for Yahoo or walk away and use its cash to buy a number of web 2.0 companies after learning of Rupert Murdoch’s interest in the online search and content company.”

One of the alternative options Microsoft might have is to try to buy a larger stake in Facebook, or purchase the company outright. Microsoft invested $240 million in the social network for a 5% stake that valued the social network at $15 billion. That would be a pretty hefty asking price for a company that is only made $150 million last year and is expect to have a negative cash flow in 2008.

But what Facebook offers, is the potential key to a larger share of the search market, the strongest available (if it is available) foothold into the social networking market that everyone is clamoring for a piece of, and invaluable marketing data for about 60 million users. All at an asking price that is far below Yahoo!’s.

We wrote in October when rumors of Microsoft’s investment in Google broke that perhaps Google should fear Facebook (for a dissenting opinion see this post). Our reasoning was that by adding Microsoft Live search to Facebook, Microsoft could potentially significantly increase their search share. Further, we are beginning to understand that searches are easier to monetize than social networking pages because searches display intent — the searcher is already looking for what is being advertised. So while social networking may never be able to fulfill its promise as a killer ad platform, search within social networking sites just might be able to.

Last July, Facebook was already serving 600 million searches per month, putting it in the top 20 of search engines. These searches were mostly for people, groups, events, and applications within Facebook. But that indicates that users of the site are already well trained to use its search engine. Would they use whole web search if it were baked in?

We think they might. Further, Microsoft could use Facebook as the platform for its web based software initiatives. Facebook is already a must have account on college campuses in many Western nations. Microsoft could launch online versions of its staple desktop software through the Facebook platform and bring up a generation of students attached to its offerings — students who will one day influence the enterprise software purchase decisions are major corporations.

They could also roll their email application into Facebook’s in site messaging center and integrate the Windows Live Messenger, truly giving people no reason to leave the site (granted, those changes would be a bit more difficult to push out than rolling web search into Facebook, but certainly doable).

These are of course mostly things that Microsoft could do without the purchase of Facebook. But by buying the social network, they could ensure that all of that search advertising revenue goes into their pocket. While purchasing Facebook wouldn’t make Microsoft nearly the web behemoth that purchasing Yahoo! would, nor would it give them the immediate bump in search share that they’re pining for, it would give them what I think could be a strong launching pad for creating a very important web operating system and for a fraction of the cost.

What do you think? Does it make sense for Microsoft to purchase Facebook? Or should they up their offer for Yahoo!? Maybe neither is a good fit? Let us know your thoughts in the comments below.

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