Will Microsoft Ask Facebook to Dance?

The long list of companies Microsoft (Nasdaq: MSFT) might acquire post-Microhoo includes such outré possibilities as Netflix, Cisco and Salesforce.com (NYSE: CRM). Facebook is also on that list -- but its potential as a Microsoft acquisition target is beginning to look less unlikely. In fact, it's looking downright plausible. According to a report in the Wall Street Journal, Microsoft has already approached the social networking site about a possible sale.

Clearly, Microsoft likes the company; it already owns a piece of it, having acquired a 1.6 percent stake for US$240 million last year.

Based on Facebook's effective $15 billion valuation, a full-blown acquisition would be costly to Microsoft -- and even more costly if were to set its sights on a buyout and once again fail. Still, the deal could work very well for Microsoft -- even better than the Yahoo (Nasdaq: YHOO) acquisition might have.

Tomorrow's Rules

Facebook's Web 2.0 model -- that is, social networking -- is what many believe to be the next big opportunity for online advertising, said N. Venkat Venkatraman, a business professor at Boston University.

Acquiring Facebook would demonstrate that Microsoft is trying to shift the basis of competition away from today's logic of online advertising to tomorrow's set of rules, he explained to the E-Commerce Times.

Right now, Yahoo represents the current way of advertising online. By acquiring Yahoo, Microsoft would have caught up with Google (Nasdaq: GOOG), he said, but it would not have overtaken it.

"Facebook -- along with MySpace and other social networking entities -- is striving to create an advertising platform that is based on social preferences," Venkatraman noted.

The basic logic is that people spend more time on social networking sites than on search engines such as Google or portals like Yahoo, he explained. "And the advertising can be tailored based on what one does on the social networking sites as well as on what one's friends do on the same social networking sites--such as similar tastes, preferences etc.

"Facebook's business logic is to mine the social network data to create more relevant, targeted advertising rather than simple key word based searches that we see today on Yahoo and Google."

A successful acquisition could also give birth to new and interesting products, Jordan Hudgens, CEO of VidShadow, an online broadcasting network, told the E-Commerce Times.

"An acquisition of Facebook would also most likely produce a desktop-based application that Microsoft could build into their Vista operating system to attract a large segment of the Facebook user base, which, in the past few years, has been migrating to Apple," he commented.

The Cons for Microsoft

Of course, a Facebook deal could also be a potential minefield for Microsoft, particularly if it were to sink $15 billion into the acquisition, Eric Litman, managing director of WashingtonVC, an early stage fund and incubator, told the E-Commerce Times.

"While many in the tech and media industry believe in the long-term potential for Facebook as a monetizable platform -- via ads or otherwise -- the company has yet to demonstrate this at scale that it can sustainably command high CPM (cost per thousand impressions) or CPA (cost-per-action) rates from advertisers," he said.

Moreover, Microsoft has brand perception issues among some of Facebook's key demographic that have the potential to disenfranchise users and decrease engagement, Litman pointed out. "That's likely to factor heavily into Facebook's management team's decision-making process, particularly if -- as would likely be the case -- the financial terms of the acquisition were predicated upon the company's post-acquisition performance."

He is not completely set against the deal, though. If Facebook can maintain its growth trajectory and simultaneously demonstrate to brands that their participation in the community delivers returns on par with ad buys on other premium Internet properties, Litman allowed, "the $15 billion price tag may prove to be the right number."

What About Facebook?

Of course, this debate may be completely moot, as there is no indication that Facebook CEO Mark Zuckerberg -- who has already rejected an offer from Yahoo for $1 billion -- would sell.

If Facebook were to reject such an overture, it would like be because it views its business model as too different from Microsoft -- even if its model is not yet fully formed, said Scott Anthony, president of consulting firm Innosight.

"It would be a bad move for Facebook," he told the E-Commerce Times. "Like many people, I still believe it needs to find its business model -- and it needs to iterate that strategy when it does." A Microsoft acquisition would squash this still-unfolding development, he said.

Boston University's Venkatraman, for his part, thinks having Microsoft as a corporate parent would be good for Facebook, provided Redmond doesn't meddle with the creative aspects too much.

"Facebook needs professional managers," he said, "and Microsoft can provide that."