Microsoft acquires a 1.6% stake in Facebook. Not a FaceSoft.

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Microsoft beat out Google for a stake in the growing social networking company. The investment represents a $15 billion valuation which Greenspan would certainly think exemplifies "irrational exuberance."  With more advertising spend moving to the web, this opportunity represents a way to specifically target users based on their hobbies, favorite music, location, age and gender - just to name a few. According to eMarketing, the U.S. advertising market for social networking sites is forecasted to exceed $900 million this year. The deal for Microsoft is access to international expansion by Facebook where they will be able to influence more of how the model develops. According to ComScore Media Metrix, Facebook experienced over 129% growth in unique visitors year over year compared with only 23% on MySpace. Microsoft has struggled with their online investments over the last four years and this represents a way to energize that group. Here's where the social networking sites have changed the traditional (if we can call it traditional now) online advertising model. Typically, users are presented banner and rich media ads depending on what they are doing on a web page or results from a search query.

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Google adwords have led the charge and this is a very profitable business model today. Customers search for things, ads are presented, click-through happens and the online cash register rings. On social networking sites the user's purchase decision has nothing to do with search. It has to do with what their affinity group is doing, what their friends are recommending and other online discussion about the goods and services being consumed by their social network. Both Google and Microsoft are at a strategic disadvantage here. I will analyze this more thoroughly later. This investment is also overshadowed by a competitive war between Google and Microsoft. Google has stepped up its investment and expansion in office productivity applications offered as a service and Microsoft has stepped up their online advertising business. Ballmer was asked about this at the Gartner conference. They are going after each other's core business. The companies in the middle, like Facebook, will not be collateral damage - they will change the way marketers think about online advertising.