Microsoft acquires equity stake in Facebook, expands ad partnership

Updated 3:50 p.m. PDT: It's official: Microsoft will take a $240 million equity stake in Facebook during its next round of financing, valuing the company at a whopping $15 billion.

News.com's Ina Fried in her Beyond Binary blog reported earlier Wednesday that Microsoft had beaten out Google in the high-stakes bidding war for the slice of tasty Facebook cake. The final deal resulted in a 1.6 percent stake in the social-networking company, notably smaller than the 5 to 10 percent that had been talked about in recent weeks.

"We are pleased to take our Microsoft partnership to the next level," Owen Van Natta, vice president of operations and chief revenue officer at Facebook, said in a statement. "We think this expanded relationship will allow Facebook to continue to innovate and grow as a technology leader and major player in social computing, as well as bring relevant advertising to the more than 49 million active users of Facebook."

In a conference call on Wednesday afternoon with press and analysts, Van Natta and Kevin Johnson, Microsoft's president of platform and services, emphasized that this deal is all about the existing advertising partnership between the two companies, which has been going on for over a year now. Facebook founder Mark Zuckerberg, it should be noted, was not present on the call.

"It's a strong vote of confidence in the innovation that Facebook is doing," Johnson said of the deal, which was signed Wednesday. It's ironic, considering that just earlier this month Microsoft CEO Steve Ballmer brushed off Facebook and other youth-friendly social-networking sites as a "fad."

Under the terms of the new agreement, Microsoft will be the exclusive third-party advertising partner for the Palo Alto, Calif.-based social-networking site, and the Microsoft ads will expand beyond the U.S. to Facebook's international presence. So far, the advertising deal does not appear to have expanded beyond its current 2011 expiration date.

"It's pretty clear that Microsoft wasn't investing in this as an economic move. This is clearly not just about adding a company to your portfolio," Gartner analyst Andrew Frank told CNET News.com. "Microsoft is looking to anchor itself in the emerging ecosystem of social-media advertising, and getting this partnership with Facebook is a good way to get a structural advantage."

Developing a robust advertising strategy is clearly a pressing issue for Facebook, which has come under scrutiny in recent months for showing only lukewarm signs of long-term profitability. Earlier on Wednesday, Facebook confirmed rumors that it will be making a major advertising announcement on November 6 in New York.

Van Natta and Johnson stressed that Wednesday's deal, at least on the surface, doesn't go far beyond advertising and the "$240 million poke." There won't be any integration of Facebook into Microsoft services, nor will Microsoft's non-advertising properties--like Windows Live Messenger, for example--be worked into Facebook.

But Frank speculated after the call that the partnership could easily grow. "I think (Microsoft) may get more. I think that the language of the press release, which is always rather contrived, emphasizes what they agreed to emphasize at this juncture, but I think they left the door open for a whole lot more stuff down the road," Frank said. "Microsoft will continue to have influence beyond just being an ad platform."

But on the call, Van Natta and Johnson repeatedly referred to it as an expansion of an existing partnership. When asked what had happened with Google, widely rumored to be another major bidder in the Facebook stake competition--and which serves the ads for Facebook's chief rival MySpace--Van Natta answered that it was because the partnership with Microsoft was already in place.

"We were very fortunate to have a lot of folks that were interested in partnering with us around advertising," Van Natta said. "We've been working with Microsoft for over a year now in the U.S., and it's been a partnership that's been really great for both of us."

Google's reaction
Speaking to journalists near the end of Google's Analyst Day, Google CEO Eric Schmidt said that "it's not appropriate for us to comment without taking a look." He added that Google is "very happy to work with Facebook and anyone else," but when asked if his company had been in talks to acquire the stake, Schmidt said that he "would rather not talk specifically."

Google co-founder Sergey Brin had more to say to journalists, though he was not specifically speaking about Facebook. "Occasionally we've lost one here, one there," Brin observed. "Some of our competitors might be willing to spend very large amounts of money...and we're really interested in doing sustainable economic deals, so we would rather not participate in those sorts of transactions. But we definitely wish those companies well."

"Overbidding," Schmidt added, "always upsets me, and Sergey calms me down." (Again, Schmidt was not talking specifically about Facebook.) He then elaborated. "Sometimes people include a revenue guarantee, an absolute number, or on a per-ad basis or per customer...a guarantee (that they will pay the publisher)," Schmidt said. "And they do that to enter a market...It's perfectly legal as far as I can tell...It's essentially a subsidy."

Much of the fine print on the Microsoft-Facebook deal has not been disclosed, including the specifics of how the advertising strategy will work--which goes into the question of exactly how much Facebook user data Microsoft will have access to. "User trust is core to what it is that we focus on every day at Facebook," Van Natta said, but would not provide details.

The executives also asserted that there will be no new rules or restrictions on the thousands of developers who have been working with Facebook since the social-networking site opened its platform to third parties in May.

As for the rest of the social-networking world, Gartner's Frank said that even Facebook's competitors should consider the Microsoft partnership a good sign overall.

"Clearly a rising tide floats all boats, and so the fact that Microsoft is making a big commitment to the medium itself will probably help the overall sector because it gives it credibility, and gives it some long-term interest from a pretty serious company," he observed. "The effect on the sector probably outweighs any competitive effects because if the sector grows as fast as Microsoft seems to think it will, there should be a lot of room for growth for a lot of different players beyond Facebook."

But, Frank added, there's still some uncertainty involved. "There are still risks inherent in the category of advertising in social media. I think that no one has figured out the perfect formula for it...There's risk around trust factors and privacy that haven't really fully been explored. I wouldn't say that the market is anywhere near mature enough to call it risk-free."

CNET News.com's Elinor Mills contributed to this story.