Microsoft Buys a Bit of Facebook

Oct 25, 05:00 AM

Current Headlines: By Jon Swartz and Byron Acohido

Microsoft said Wednesday it would pay $240 million for a small slice of Facebook in a deal that values the red-hot social networking website at $15 billion.

In selling a 1.6% stake to the software giant, Facebook rebuffed a competing offer from search-engine giant Google. Google had no comment.

Microsoft also will sell ads on Facebook outside the USA, extending a marketing relationship that began last year. The deal, announced after several weeks of negotiations, is considered a coup for Microsoft as it slugs it out with Google for online ad sales. Facebook, founded in 2004, has more than 47 million users.

The hefty price paid by Microsoft validates the gambit by Facebook CEO Mark Zuckerberg to spurn a $1billion takeover bid from Yahoo last year. In 2005, News Corp., parent of Fox News, paid $580 million to acquire Facebook rival MySpace.

Microsoft covets the data Facebook collects about its members' tastes and preferences. Microsoft wants to sell ads based on those preferences, ads that appear when Facebook members use Windows Live services, Windows Mobile smartphones -- even its Xbox Live online-gaming service, says online search expert Kevin Lee, chairman of Did-it.com.

If Microsoft succeeds, it can charge advertisers a hefty premium. "But we're still in the first inning, with regards to targeting ads that follow you around from device to device," Lee says.

Microsoft shares its Facebook ad sales with Facebook. The deal is expected to add to Microsoft's online ad revenue, which rose 21%, to $1.8 billion, in its fiscal year ending in June. During the same period, Google's ad revenue was $13.3 billion.

Zuckerberg, 23, has indicated he would like to hold off on an initial public offering for at least two more years. Microsoft's money could be used to underwrite Facebook's ambitious expansion plans.

Facebook is expected to post a $30 million profit on $140 million in revenue this year, according to Robert Peck, an analyst at Bear Stearns.

But aligning with Microsoft is no guarantee of success. Microsoft acquired Great Plains and Navision to try to dominate the small-business software market. But those investments haven't paid off as expected, says Shahid Khan, analyst at IBB Consulting Group. "In the end, Facebook is the winner," Khan says.

Facebook's attempt to entrench itself already is under pressure from specialized sites catering to members who share common interests. "It's still experimental, and it still has a lot of learning to do," says Trip Chowdhry, analyst at Global Equities Research. (c) Copyright 2005 USA TODAY, a division of Gannett Co. Inc.