There's something a little weird about last week's announcement that Microsoft has won the exclusive 3-year deal for managing display and text ads on Facebook. Here's why:
- To the best of my knowledge, Microsoft has no contextual product as of yet, and has never run any text ads on 3rd party content sites on any significant scale. As a result, it's impossible for Microsoft to have any significant advertiser base or ad coverage for content or experience in yield optimization.
- What this means, is that either Facebook or Microsoft are betting the farm on Microsoft's ability to build a successful product, to fill it with advertisers and get bid levels up extremely quickly. This is a pretty big bet[1].
- Question is - Who's making the bet? I think it's safe to say that Facebook ain't it. Thanks to Google writing checks to publishers quicker than they can take them, the online ad space is now an absolute seller's market. No reason for Facebook to assume any risk on this deal, let alone with a company that has no real product yet, has no advertisers yet, and has little experience in monetizing 3rd party content pages.
- Which means that if anyone is making a bet here, it must be Microsoft. And that's where things are getting a little suspicious. For what's gotta be a material deal, it's pretty strange that: a) "Facebook and Microsoft executives said they began their talks late last week", and b) that Microsoft, a public company, is not disclosing the terms of the deal.
Multi-hundred-million-dollar deals, especially when Microsoft is the one laying down the money don't normally close within less than a week, and once they are closed, they usually are disclosed.
Which leads me to speculate that maybe neither party has assumed any material risk with this announcement?...
How is that possible? Could the following *speculative* scenario be the answer?:
- Microsoft were in the final stages of acquiring Facebook.
- The MSN executives saw the MySpace-Google announcement, making them cringe in their seats about Google getting all the press and Wall St love again.
- Microsoft, wanting some badly needed PR wins, pushes Facebook to make an announcement about winning an "exclusive deal", noting that within a couple of weeks Facebook will be part of MSN anyway so they have nothing to lose.
- Facebook, eager to close their $1B+ acquisition while they are still in vogue and run to the hills, make nice to Microsoft and agree to a vague announcement.
This could definitely explain the suspicious announcement from last week. But does it make sense for Microsoft to acquire Facebook, which has reportedly declined offers to be acquired for $750M recently? I'll try to look into that in a separate post in a couple of days.
[1] How big of a bet? In normal times, this could be estimated by multiplying reasonable CPM's by traffic numbers. But thanks to Google, these are far from normal times and therefore the best way to estimate the size of the bet is by comparing it to the $900M MySpace deal. Considering that the MySpace-Google deal is almost a 4 year deal, while the Facebook-MS deal is a 3-year deal, we can adjust from $900M to $720M. The next discount can be made for user sizes (~100M for MySpace, ~10M for Facebook), so we can further adjust to $72M.
However, it is widely reported that Facebook users login to the site waaay more than MySpace users do (GigaOm reports that over 2/3rds of Facebook users login *daily*... pretty amazing...). And the Facebook users have credit cards, while most of the MySpacers don't. So how valuable is that traffic for advertisers? Facebook would probably claim that $720M or even more is the magic number. Microsoft would probably shoot for the $72M range. The real number, if there is a real deal here (and that's a big IF), is probably somewhere in the middle, and most probably in the multi-hundred-million-dollar range.
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