If you snorted a little coffee out your nose when you read that Microsoft had paid $240-million (U.S.) for a 1.6-per-cent stake in Facebook, don't feel bad. Your reaction was probably shared by a lot of people - perhaps even most people - who haven't been following the rapidly climbing valuation of the social networking site.
A little more than a year ago, Yahoo reportedly offered Harvard dropout Mark Zuckerberg $1-billion for control of the three-year-old company. Mr. Zuckerberg - who is 23 and looks five years younger - and his team reportedly declined.
But now, Microsoft has effectively given the site a market value of more than $15-billion.
That may make Facebook's controlling interests - not to mention the venture capitalists who financed the service in return for shares in the company - pretty happy, but does it bear any relationship to reality? It's difficult to see how, and yet an argument can be made that Microsoft was wise to pay as much as it did for a stake.
There's no question that Facebook has some pretty amazing numbers attached to it: It has about 50 million registered users, a number that is growing rapidly; a substantial number of those users (more than 50 per cent, according to some estimates) spend an hour a day on the site; and traffic grows by double digits every month.
At the same time, however, attracting millions of users is not a difficult hurdle for a popular Web service to clear. And when it comes to the bottom line, Facebook's revenue this year is estimated to be in the $150-million range, and its profits are relatively small (as a private company, it doesn't disclose its financial data).
Even if you assume that Facebook's growth rate will continue the way it has in the past year or so - which involves a leap of faith, given the way previous social networks such as Friendster soared and then flamed out - you have to make a lot of assumptions about the value of those users to get to $15-billion in market value.
It's even more eye-opening when you realize that Microsoft accounts for about 30 per cent of that $150-million in revenue that the social network is expected to generate this year, as a result of the advertising deal it signed with the software company earlier this year.
Under that deal, Microsoft got to serve up banner ads and other display advertising to Facebook users outside of the United States, while Facebook maintained control of the U.S. market.
As part of the arrangement that saw Microsoft take the $240-million stake, it will now be able to serve banner ads to the entire Facebook service.
That's part of the reason Microsoft's investment isn't as unreasonable as the $15-billion valuation might make it seem. After all, the software giant isn't buying the entire company (or at least not yet, anyway), so the implied valuation is effectively moot.
There's another elephant in the room in this deal as well: one named Google.
It is widely believed that the Web-search behemoth was also considering an investment in Facebook as a way of extending its presence in the search-related advertising market into new areas. That would have given Google a chance to lock up a potentially lucrative new portion of the online ad business.
In the long run, in other words, it may actually have been worth it to Microsoft - which has been doing its best to bulk up in the Web-advertising game - to pay $240-million just to keep Facebook's advertising space out of Google's clutches.
Microsoft still has to generate a substantial amount of value out of its Facebook investment to justify the $240-million price, of course. One of the ways it might be able to do that is by targeting ads at individual users of the site, about whom Mr. Zuckerberg and his team no doubt maintain a surprisingly detailed database about personal interests, demographics and even their online behaviour.
And even if the deal with Facebook does not turn out to be worth almost a quarter of a billion dollars, Microsoft - and its shareholders can still rest comfortably, knowing that the giant software maker generates roughly that much profit in less than a week.
