Facebook Is Trapped

It is time for a reality check. Look deeper and you will see that Facebook is in bigger trouble than it appears. The company needs all the hype and buzz as a distraction from reality and creating a frenzy to rope investors before it becomes apparent.

1) Facebook is a closed system. That is how it began and that is what it is today. The company is embracing "openness" (semi openness) at this moment because it needs more users, to increase traffic and be more attractive to advertisers. If the company was not in this weak position they not be embracing "openness".

2) Most of Facebooks's revenue comes from its exclusive advertising deal with Microsoft which runs through 2011. This is a money losing deal for Microsoft and hugely profitable one for Facebook. When Facebook signed the deal it made all the sense in the world. However, today as Facebook's traffic increases and with more money to hire engineers (thanks to Microsoft), Facebook feels they can better monetize its user base. The issue however is that Microsoft controls Facebook's advertising inventory and platform. The earliest chance Facebook will get to test its system publicly is in 2011. In the meantime Facebook keeps falling behind and thus the huge urgency to raise lots of money to buy out of the Microsoft deal.

3) Microsoft's interest in Facebook is purely to move ad inventory. For Microsoft, this is about catching up with Google, being perceived as web savvy, relevant, increasing search and advertising market share. The lock that Microsoft has on Facebook gives Microsoft CEO Steve Ballmer the confidence to call Facebook a "fad" a tactic deployed to disinterest potential investors from driving up the price as Microsoft maintains "first rights of refusal" in future investments in Facebook. That is why, Facebook is creating all this buzz in the hopes of finding a white knight that is willing to pay a handsome sum much richer than Microsoft is willing to and sufficient enough to buy out of deal with Microsoft.