Some Comments on the Microsoft / Facebook Deal

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By: Stefan Kolle

Although we usually tend to steer clear from pure news related events, as these tend to be discussed in so many other places, I do want to add a few quick comments on the Microsoft / Facebook deal. (In the rather unlikely case you have missed it – here’s the story)

I’d like to make two seemingly contradictory obervations:
A. Facebook will be a disappointment in the long run, particularly from an advertisers perspective
B. Microsoft did a brilliant deal and will make it’s money back several times over.

In the comments raging around the blogosphere, we see two main lines of reasoning. Either ‘Facebook is going to be the new walhalla for advertisers, as it has so much information about its users’ or ‘users will abandon Facebook/ignore the ads’.

I think both are right to an extent – but I’d put my money more on the second statement.
Yes, Facebook can offer interesting new advertising models, with new heights of contextual and behavioural optimization. What will happen in reality though? The biggest problem we see all around is advertisers still thinking purely in eyeballs – "hey, I cant buy my way to heaven through GRP’s anymore, so how else can I get 6 OTS – oh I know, I’ll bombard them through any other means I have".
We havent seen anything groundbreaking, insightful, WOW-ing, happen in this field yet. A lot of traditionally thinking marketers will stampede into Facebook, and ruin the experience and potential for all of us. Users will either get annoyed with the commercialization, or simply turn blind to it, as they have turned blind to most other forms of advertising.

So, left or right, the advertising model is likely to fail. Whether it is because users balk at it, or simply ignore it – the endresult is the same, i.e. no results for the advertiser. But it will be at least two years before the full lashback comes.

Another thing I notice in the discussion is the heavy focus on the (hypothetical) valuation of Facebook through the Microsoft deal. IMHO this is the wrong way to look at it. Microsoft didnt pay 15 billion to acquire Facebook.
They paid 240 million for the exclusive right to sell ads on Facebook, and got thrown in 1.6% as a deal sweetener, a bonus so to speak.
So we only need to look at whether Microsoft will earn those 240 million back through the ads they can sell. Even though I predict a failure in the long run, I’m pretty sure they will make their money back before the big downfall. If only because they are now a player nobody can ignore – at least nobody that thinks that bombarding users with ads is a good thing to do…..

Does this mean Facebook is bad, evil, stupid or anything else? Of course not. Facebook is a company that makes as much money as it can – hopefully with a long term perspective. Will Facebook be a good marketing instrument? It definitely will be for the few smart, creative and insightful marketers that understand how to enter the conversation. We WILL see breakthrough new models (usually to be ruined quickly by the stampede…), where sponsorships, community support, conversational models and whatnot are unleashed and driven BY the community WITH marketers/brands.

After the downfall of advertising, there will still be a good deal of money to be made by Facebook (and the next great thing which we dont know yet but that will overtake Facebook in two years, just as Facebook is overtaking MySpace right now).
Will this money justify a 15 Billion valuation? Surprisingly, it probably will.
Is this relevant to Microsoft – not at all. They will make their money back on the 240 million in 2 years, and have positioned themselves far better then now. Anything else is a nice bonus.