Let's face it, for an enormous company Microsoft is not lining up many hits today. Its Vista operating system has had tepid reception at best, the EU has brought it to its knees on monopolistic practices, its Zune portable is praying for a second life this holiday season and the Xbox's shaky quality record makes a win for the new Halo 3 game a must to be kept in contention with competitive platforms. Ouch. But with oodles of cash and a well-focused online advertising strategy Microsoft is gearing up to exploit the gaps in Google's game plan that will give it a leg up in online content markets.
One of Google's key gaps to date has been social networking. While its Orkut platform has been successful in Brazil and certain other countries and rumblings of a greater social networking plan for Google grow larger, it's Facebook that's attracting both college-age folks and seasoned professionals who are willing to hang their hats up online on Facebook's increasingly robust social media platform. As noted by The New York Times and others, then, Microsoft's USD 240 million investment for a mere 1.6 percent of Facebook ownership is a significant win for Facebook and an opportunity for Microsoft to regain some sorely needed lost ground. The transaction scales Facebook's ultimate market value to a breathtaking but highly speculative USD 15 billion, making Rupert Murdoch's USD 583 million investment in MySpace seem like a bargain basement transaction in retrospect.
The New York Times article notes that the initial investment will secure Microsoft a platform for its ad network's growth, which is certainly a key component of making sure that it can leverage the highly valuable contexts available in social media. With the high level of personal endorsement and interaction available in Facebook Microsoft advertisers will be very pleased to find an alternative to search engine results and typical media outlets through which to build relationships with their markets. But the real underlying move by Microsoft is to have a dibs on Facebook's evolving social media-oriented computer operating system environment, a must-have for Microsoft in light of Google's evolving plans to have a Web-oriented OS of its own that will help drive its social media plans.
With more people than ever using the Web as their primary repository for both personal content and their own publishing endeavors Microsoft is at a dangerous juncture in its evolution, perhaps even more dangerous than when Netscape's browser began to threaten the supremacy of Microsoft's PC platform as a staging ground for content applications. Facebook has demonstrated with its rapidly growing array of embeddable applications that whole classes of content infrastructre that are at the heart of Microsoft's long-term cash flow may be rendered moot by social media environments such as Facebook's that enable people to build and share highly personalized portals with no or limited technical expertise. Applications such as its Business 3.0 module enable B2B communication that may provide a new way for businesses to develop 1-to-1 relationships via Facebook in ways that will make today's B2B advertising and supply chain management seem very ill targeted over time. All in all, Microsoft needs to get a revenue stream from social media badly - far moreso than either Google or Yahoo.
Will Facebook wind up being the dominant social media platform for both personal and business personal publishing? Once people set up shop in a social media environment there's a certain entropy that sets in which is likely to discourage any radical shifts: you want to keep your "peeps" around you as much as possible, and Facebook offers an increasingly compelling environment to enable open publishing and content integration. Most importantly unlike some other social media environments Facebook is designed for people's true identity as opposed to any number of avatars or pseudonyms that they may use in other social media environments. The emphaisis in Facebook is on knowing who you know, not gaming them for PR or other ulterior motives. This makes environments such as Facebook and LinkedIn that enable people to present their real selves the hottest marketing environments available in social media. By contrast, what's the value of selling to someone wearing green wings and fishnet stockings in Second Life? Good for a quick buck, but not relationship selling by any degree.
Realistically Facebook is by far the greater winner in this deal, having established an awesome figure for its market value and strong leverage for any other subsequent deals to help it gain market momentum. It's perhaps not as one-sided as the deal that Bill Gates cut with IBM to get rights to sell Mircosoft's PC operating systems on other platforms, but it's about equally clear who's behind the curve and who is able to help them get back in the game. And like that earlier deal this may be a sign that Microsoft is waning in its ability to influence electronic publishing effectively. But with an advertising strategy that is well-adapted to playing on multiple platforms to service multiple ad networks the Facebook deal is as good a shot a any that Microsoft is likely to have to use social media as a leverage point for future revenues. Don't expect miracles from either partner as a result of this alliance, but to expect their competitors to sweat it a little harder to get a foot in the door of compelling online communities.