KEY POINTS:
The wires are buzzing with news of Microsoft's $US240 million investment in social networking website Facebook, a deal that nets Microsoft just 1.6 per cent of the company.
The internet start-up operating out of a small building in the centre of Palo Alto you'd barely notice as
you passed by, is now valued at US$15 billion ($NZ20bn) based on the deal.
But as Wired's blog says, that valuation is as "pretentious as a monocle" and doesn't really mean anything because Microsoft wanted the deal much more than anyone else, including Google.
Understandably suffering an insecurity complex when it comes to the online space, Microsoft really needed to tighten its online advertising tie-up with Facebook.
The figure is more an inflated entry fee into the world of hot internet real estate, small change for Microsoft, but not for Facebook's owners and founding investors who have been looking to sell part of the company for months, before the sizzle goes out of the second dotcom boom. Microsoft certainly didn't underpay for Facebook as Wired claims. That's a ludicrous suggestion.
Sure, Facebook has a claimed 50 million active members and that amounts to a pretty big audience to target. The slightly more mature profile of the average Facebook user means it's a lucrative market for advertisers going after that 18 - 34 year old demographic.
Its user base is doubling ever six months, which means Facebook could have 200 million users very quickly if its growth rate continues. For sure, there's money to be made from advertising on social networks. But is the size of the Facebook market this valuation suggests realistic? I don't think so.
There's not really any real evidence yet that social network advertising is the cash cow that, say, Google's search-based advertising is.
These are still early days for that particular market, which still has to prove itself as a sustainable outlet for advertisers over the long term.
Yes, I might click on an advert occasionally or buy a premium service through Facebook, but what would the average revenue per user have to be to justify a US$15 billion valuation? Most people using these social networking websites ignore the ads and expect everything to be free.
The problem also is that the social networking community is so fickle, the barriers to entry so low for new players setting up rival websites, that the audience could be whittled rather quickly as people move on to the next best thing on the web.
That's okay for advertisers, they simply follow the crowd. But it's not so good for the investors who paid inflated prices for a piece of the action based on current buzz and growth projections.
After eBay's recognition of the fact that it paid too much for Skype, which would seem to be a company in the box seat when it comes to making money from the growing VoIP revolution, the cheque being paid for a tiny sliver of Facebook seems to have one zero too many on it.
