Facebook Won't Help Microsoft

A plan to buy a piece of the social-networking site reeks of desperation.
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Buying a piece of Facebook would represent yet another sign of desperation from

Microsoft

(MSFT) - Get Report

.

The Wall Street Journal

reported earlier this week that the software giant was considering a purchase of 5% of the popular social-networking site in a deal that would value Facebook overall at a staggering $10 billion.

According to the report, Facebook founder Mark Zuckerberg might be holding out for deals that would bring his company a valuation of $15 billion.

But a buy-in by Microsoft at those inflated valuations would simply herald the next chapter in the company's perpetually mangled Internet strategy.

Despite the hype surrounding Facebook, things are much less rosy for the site than is often assumed. And while a move by Microsoft is seen as a bold move against

Google

(GOOG) - Get Report

-- "Microsoft fires volley at Google in ad battle," the

Journal

titled its story -- it just shows just how far ahead the search giant is when it comes to all things Internet.

Want more? Check out TheStreet.com TV video. Vishesh Kumar discusses Microsoft and Facebook with Alix Steel.

The hallmark of Microsoft's Internet strategy seems to be to throw money around. In March, the software giant announced a plan to offer a variety of rebates to businesses whose employees would use Microsoft's search engine at work. Despite offering what in effect amount to bribes, Microsoft continues to lose ground to Google in search.

In August, Google commanded about a 64% share of the search market compared with 60% a year ago. Microsoft, meanwhile, dropped to 8% from 12% over the same period.

Then came the battle between Microsoft and Google to push further into the online display advertising market. After Google swooped in to acquire the ad-serving firm DoubleClick from under Microsoft's nose for $3.1 billion, the software giant resorted to reaching deep into its pockets to shell out $6 billion for the online ad firm aQuantive, a sum that valued the company well over twice where its stock was trading at just the day before.

Now comes Facebook. Indeed, the stratospheric valuation of $10 billion exceeds even what Facebook insiders could have hoped for only a few months ago. "If we got an offer from someone for $10 billion, we probably would listen to them," Peter Thiel, a venture capitalist who has invested in Facebook, said in a media interview in July. But Thiel went on to concede that "I don't think we're going to get that offer, and we're not going to solicit it."

It's true that Facebook's is expanding rapidly: It grew 132% year over year with 26 million people visiting the site, according to data from research firm Compete.com. Traffic on Google's YouTube, meanwhile, was up only 97.6% over the same time frame, with 46.8 million people visiting the site.

But unlike YouTube, which recently introduced a clever and widely well-received

way to monetize its site through discreet ads on some videos, Facebook is still struggling to find a revenue model, and advertisers remain skeptical about placing their ads next to the kind of user-generated content available on sites like Facebook.

Another issue is the flood of this kind of advertising inventory through the rapid growth of other popular social-networking sites such as Hi5, LinkedIn and Bebo -- among others. This will likely result in Facebook only charging dismally low rates for ads on its site.

Most published estimates of Facebook's revenue put the figure at $150 million for 2007. A $15 billion valuation means that Microsoft is willing to value the company at 100 times the current year's

revenue

.

Growth in traffic aside, it's next to impossible to justify that valuation after a more careful evaluation of key metrics. The average stay per visitor on Facebook grew only 8.9% year over year to 14 minutes, according to Compete. For YouTube, the average stay was up 79.7% to almost 18 minutes over the same time frame.

This suggests that YouTube users keep watching more and more videos; this bodes well for a company that has finally found a way to make money in tandem with how many videos are watched. Facebook, which is already struggling to find a way to make money, is having a hard time even getting its users more interested.

And keep in mind that Google paid $1.6 billion to acquire

all

of YouTube, about one-tenth of what Microsoft might value Facebook just for a 5% taste.

Far from a thrust at Google, a Microsoft investment in Facebook would just be the latest sign of panic as the software giant struggles to make sense of the Internet.