Microsoft's Facebook in the Mirror

Joe Wilcox In July, I explained why a Microsoft acquisition of Facebook would be a bad idea. Would a stake in the company be any better? Perhaps an acquisition would make more sense after all.

Yesterday, the Wall Street Journal reported that Microsoft is seeking a 5-percent minority stake in Facebook. Companies talk deals all the time, and many of them lead absolutely nowhere. When talk hits the streets, there often is some agenda at work. Given the fierce competition between Google and Microsoft and the number of companies which business they competed for, the minority stake information likely was leaked by somebody on either side of the negotiation table.

Leaks like this one have occurred before, and they usually worked against Microsoft. Good examples are AOL and MySpace ad deals and the DoubleClick acquisition, all of which went to Google. Talk of the talks with Facebook probably isn't in Microsoft's best interest. Somebody may be applying a little outside pressure on the negotiations, seeking to churn up competitive bidding or looking to woo other suitors.

Microsoft would have more to gain buying Facebook than taking a puny stake in the social networking company. I suppose that contradicts what I said in July about an acquisition being a bad move. My reasoning: The software giant would ruin its acquisition by taking its typical integration approach and so hooking Facebook into Live, Office and Windows. But Microsoft could possibly make something of Facebook, by setting it free—at least for a while.

Reflections of Microsoft
Facebook is like Microsoft, only the social networking company's platform is built on the Internet.

Windows is widely regarded as a platform, but that's a misnomer. The PC is the platform. Windows is nothing without the PC. Windows is a platform, but secondary to the PC platform. Similarly, the Web is a platform (and, yes, arguably secondary to hundreds of thousands of servers). Web 2.0 platform companies like Google operate on the Internet platform.

But Facebook is different from Google. Facebook is not a Web 2.0 operation; rather it's more like Desktop 1.0 than Web 2.0. Since May, when Facebook opened up to outside developers, the service increasingly has morphed into an Internet operating system. Like Windows, Facebook is an enclosed platform, and one where people can install applications, post and share digital content and communicate with friends, families or others in ways they might do with Windows on PCs.

Facebook is also a lot more like Microsoft than it resembles Google, because it's so-called openness is more of a one-way street. Information goes in, but it doesn't easily come out. Developers write applications for the one platform, which is different from, say, tapping into Google APIs (application programming interfaces) for use elsewhere. Facebook and Google both take platform approaches, but Facebook's way is more like Windows than Web 2.0.

From the perspective of platform and operating system in the clouds, Facebook has got to appeal to Microsoft executives. Then there is an existing relationship, where Microsoft is the ad provider.

I've somewhat backed off my position stated in July, because so much has changed in just two months (but I still see too much risk Microsoft would ruin Facebook). The platform approach is working; Facebook has successfully wooed developers—and new users with them: 3,000 applications and 42 million active users to date. But Facebook has advanced little in terms of becoming a big profit-generating business. Right now, Facebook's tract is raising more capital than it's actually making. There is too much about Facebook that resembles countless failed Web 1.0 startups.

Another Dot-Com Has Been?
For starters, there has been marketing blog buzz this summer about brand advertisers getting disappointing results from their Facebook ad campaigns. Social networks would appear to be great ad buys because of their stickiness. And Facebook's customer stickiness will only grow as developers release more applications for the platform. Translating that stickiness into ad dollars is something else. In August, IDC estimated that social networks only generated revenue of about $400 million in 2006, with expectations around $1 billion this year. The big revenue draw is advertising.

According to IDC: "Only advertising scales well enough to make social networks interesting for portals and major media companies. So far, however, little advertising can be found on social networks. And while the issues underlying slow ad sales may eventually be solved, some services may never be able to attract brand advertisers on a large scale."

Facebook is employing a number of new advertising tactics, which could include targeted ads connected to user profiles. My suspicion: Facebook's demographic profile, while seemingly good for big media campaigns, will be a hard sell.

The way I see it: Facebook is playing hard to get because future prospects, including a potential billionaire-making IPO, are so rosy. But are they? Many social networks have risen and fallen in popularity. Like others, Facebook could be just a way station to another social community destination. Facebook's theoretical value is one thing; it's real value in profits is another.

From that perspective, Facebook needs Microsoft more than Microsoft needs Facebook. The operating system in the cloud concept has potential, and Microsoft has the know-how and experience to make the platform successful. Microsoft also has a corporate culture capable of ruining Facebook, too.

Related Posts:

• Live Hotmail: Teen Sensation, Microsoft Watch, Sept. 20, 2007
• Microsoft's Face in the Book, Microsoft Watch, July 16, 2007
• Why Google Succeeds, Part 2, Microsoft Watch, June 15, 2007
• Why Google Succeeds, Part 1, Microsoft Watch, June 15, 2007
• One Redmond Way | Razorfish, Microsoft Watch, May 21, 2007
• Why Microsoft Wrote aQuantive a Big Check, Microsoft Watch, May 18, 2007
• Top 10 List: Why Microsoft and Yahoo Couldn't Marry, Microsoft Watch, May 5, 2007
• Will Microsoft Yell Yahoo?, Microsoft Watch, May 4, 2007
• DoubleClick and Microsoft's Thrift Culture, Microsoft Watch, April 16, 2007
• Will Microsoft See Double(Click)?, Microsoft Watch, March 28, 2007