Microsoft Deal Values Facebook at $15B

It's hard to determine what's more surprising about Microsoft Corp.'s investment in Facebook Inc. - the appraisal that valued a 3½-year-old Internet hangout at $15 billion or the rare snub of online search leader Google Inc.

The $240 million price Microsoft paid for a 1.6 percent stake in Facebook demonstrates just how badly the world's largest software maker wanted to deepen its relationship with a startup that doesn't even have $200 million in annual revenue.

By sealing the deal Wednesday, Microsoft finally trumped Google after losing previous high-stakes bidding battles involving a stake in AOL and ownership of online video sharing pioneer YouTube and Internet ad service DoubleClick Inc.

"This was a muscle-in from Microsoft," Gartner analyst Allen Weiner said. "It would have been a nice-to-have for Google, but it was certainly not essential."

Besides buying a stake in Palo Alto-based Facebook, Microsoft also will sell Internet ads for its Web site outside the United States, broadening a marketing relationship that began last year.

"This is a strong statement of confidence in this partnership and in Facebook," Kevin Johnson, president of Microsoft's platforms and services division, said during a Wednesday conference call with reporters and analysts.

Tim Armstrong, who oversees Google's North American advertising, declined to comment on the Facebook negotiations during a meeting with analysts Wednesday at the company's Mountain View headquarters.

"We have tremendous respect for them," Armstrong said of Facebook.

In 2005, News Corp. paid $580 million for outright ownership of MySpace.com, the only social network larger than Facebook. With its investment, Microsoft established Facebook's current market value at $15 billion less than four years after Mark Zuckerberg started the Web site in his Harvard University dorm room.

Already considered a whiz kid, Zuckerberg, 23, now looks even smarter for rebuffing a $1 billion takeover offer from Yahoo Inc. last year. And Facebook now should have more than enough money to pay for its expansion until it is ready to go public.

Although MySpace remains the largest social network, Facebook has been growing much faster in the past year.

Facebook attracted 30.6 million U.S. visitors during September compared with 68.4 million at MySpace. Microsoft's entry in the social networking arena - "Windows Live Spaces" - attracted 9.8 million U.S. visitors, according to comScore Inc.

Redmond, Wash.-based Microsoft is counting on Facebook's popularity to help it sell more online advertising - an area where it badly lags Google.

Microsoft also appears interested in Facebook's success with "widgets" - the interactive capsules that offer applications available on other Web sites. Outside developers have created about 8,000 widgets since Facebook began soliciting the contributions in May.

Johnson said Microsoft plans to work with Facebook in areas besides advertising but declined to elaborate.