Facebook’s crafty theatre over that $15bn valuation

In the big Microsoft/Facebook debate on Techeme, one fundamental point seems to have been largely overlooked:

At the end of the day Microsoft paid $240m to beat Google for the exclusive advertising contract to supply to non-US advertising on Facebook. Microsoft doesn’t care how much of Facebook it got for it’s money – that wasn’t the fundamental point of the excercise (looks like Terrence Russell @ Wired agrees).

That contract is probably worth more to Microsoft than the $240m – I wager that Microsoft could have given Facebook the $240 simply as a ‘golden handshake’ and still would have been happy (this would be similar to the deal Google struck with MySpace). What’s $240m to Microsoft?

Facebook, not the market, decided the $15bn

Therefore, I think we have seen a very interesting piece of theater played out today by Facebook. Microsoft was more interested in getting that contract over Google than it was obtaining equity – and probably were happy to sign at any %age offered (or with minimal pushback). This meant Facebook was probably able to decide how much Microsoft would get for it’s money and thus Facebook were able to set their own valuation – rather than have it decided by market forces.

To me, that therefore makes the $15bn valuation very shaky indeed. We have a valuation set through an investor who’s primary motivation was a secondary goal – an advertising deal and not an anticipated return on investment.

To put it another way…

When I was a child, they wanted to build a shopping mall on a piece of land near to where I lived. But on one side of this land stood some small family houses. Those houses were probably worth £50k, but the land developers offered to buy those houses for £100k because of the additional tangible benefit they would get through owning them (the benefit being that they could pull them down and build a shopping center over them). They didn’t really care what they paid, because they just wanted the secondary benefit of the land.

The point is that for anyone else looking to buy those houses, they were really still only worth £50k – because most other potential owners wouldn’t get any secondary benefits.

That story is not much different to the Facebook/Microsoft deal. And perhaps most importantly of all, even when the land developer did buy those houses for £100k, it didn’t make the houses on the other side of the street also double in value. If everyone else starts pricing their houses at £100k then we risk inflating a bubble, and then it could be 1999 all over again…

(A point I just made on today’s dotBen Seesmicast)