Out Googled Microsoft & Facebook Team Up To Pull Stunt

The tech world's theatrical performance ended yesterday with Microsoft getting the girl and the girl getting a "public" valuation.

For Microsoft this is about search, advertising, and Google. For Facebook, it is about MySpace and Google.

Microsoft, out-Googled on all fronts, desperately needs to stay in the game. The company needs a vehicle to move ad inventory and is willing to pay to achieve this. More importantly, to be perceived as out-Googling Google.

Facebook, desperate to catch up with MySpace needs a partner with deep pockets to finance the endeavor. Facebook has always been envious of the Google/MySpace deal and has been unsuccessful at cutting a similar deal with Google. Facebook saw this as an opportunity to get cheap money to catch up to MySpace and show Google that it, too, is a valuable property to cut a special deal with. Hence, the fixation on valuation.

This is personal. It is a marriage of convenience. Microsoft and Facebook need each other for their own ulterior motives. The two actors carefully orchestrated this and played it out publicly to get maximum exposure in order to advance their own interests.

This deal expands Microsoft's advertising deal with Facebook internationally. Google does not need Facebook for international exposure as Google's Orkut is already king internationally. If anything, Google would be interested in the U.S. portion which Mircosoft has with Facebook through to 2011.

The financial terms of the deal have not been disclosed but I suspect the deal is similar to the Google/MySpace deal. The $240 million investment will accrue in the form of a payout as part of advertising deal. Microsoft would have given the money for no equity simply to secure the international rights. Microsoft is not paying for it, the advertisers are. However, Microsoft must be thrilled to get 1.6% of Facebook for $240 million and have advertisers pay for it. So for Microsoft, valuation is irrelevant. Valuation is everything to Facebook. The company plans to use the valuation metric to present itself as bigger than it is to attract larger advertisers and create a self-fulfilling prophecy.

Microsoft secured first right of refusal on any advertising related financing Facebook does in the initial agreement. Facebook knew that and used that to extort more money from Microsoft. This is a case where Facebook and Microsoft used each other to achieve their objectives. Next they will be using your data to do the same.