Tech giants poke around Facebook

Silicon Valley has asked a question about Facebook: Who will invest in — if not own — the wildly popular social-networking site?

Microsoft msft, Google goog and Yahoo yhoo are among the well-heeled suitors generating headlines about their interest in Facebook, a white-hot commodity that has quickly become a major force in social networking.

Millions of Americans joined Facebook Nation this summer to "poke" each other, share book favorites and pose questions to their online circle of friends about the latest Britney meltdown. Between Facebook and its rival, MySpace, it seemed the entire country was part of a social network.

And others noticed. Last week, there were reports that Microsoft is in preliminary talks with Facebook about a 5% stake — worth anywhere from $300 million to $500 million. Google is also reportedly interested in an investment. (Facebook, Microsoft and Google had no comment.) Last year, Yahoo and Viacom made bids to buy Facebook.

What's not to like?

Facebook's expanding user base of 43 million members includes the young, old and everyone in-between in the USA, industry analysts say. And it's poised to launch an advertising push that many tech analysts say could be as game-changing as the text-based ads that fueled Google's meteoric rise.

It's so hot that Facebook's cherubic CEO and co-founder, Mark Zuckerberg, 23, is in no hurry to sell any or all of his 3-year-old company. Many analysts speculate Facebook is girding for a blockbuster initial public offering in late 2008. The company is also mulling raising more than $100 million in cash for acquisitions and expanding its 300-person workforce, say financial analysts.

"If (Facebook) is not the Big Man on the Internet Campus yet, it's the handsome frat guy everyone wants to know," says Debra Aho Williamson, an online-advertising analyst at researcher eMarketer. "There is a feeling that Facebook may be onto something big: It takes Google's concept of targeted search advertising and goes multiple steps further" by delivering highly tailored ads to individuals and their network of friends.

By all measures, it's the Internet company of the moment, prompting some analysts to liken it to being the next Google. (To be fair, it has a ways to go to match Google's $10.6 billion in revenue last year.)

Facebook could be worth as much as $6 billion today, Bear Stearns bsc analyst Robert Peck says. He expects privately held Facebook to post a profit of about $30 million on revenue of $140 million this year, and register a $70 million profit on revenue of $358 million in 2008. He predicts $6 billion in revenue by 2016.

PayPal co-founder Peter Thiel, a Facebook board member and its first investor ($500,000), recently suggested the company is worth as much as $10 billion.

"Mark is not focused on selling quickly," Thiel has said. "Some people get nervous about the boom and the bust and maybe the boom again. Not him."

A prized possession

Even by the Valley's outsize expectations, Facebook is generating a loud buzz.

It has become the poster child for the power of social networks, personalized websites where individuals share their profiles and interests with friends and business associates. Social networks are used by two-thirds of the estimated 220 million online users in the USA, says Karsten Weide, an analyst at IDC. idc An estimated 200,000 new folks sign up for Facebook each day.

On Facebook, you can easily set up your own Web pages to communicate with friends and business associates; share photos and videos; exchange e-mail; join groups that mirror your personal interests; and add more than 4,000 applications to play with, such as writing superlatives about your buddies or giving them a virtual poke.

In the immediate future, Weide sees Facebook integrating Web-based services and productivity applications such as word processing. "They could become the much-talked-about Web-based operating system of the future — not Google," he says.

"It is the one-stop shop for all my social needs, and it's where all my friends are," says Kiyoshi Martinez, 23, of Orland Park, Ill., a Facebook member for more than three years. "There's no reason to leave."

Martinez and millions of others have embraced Facebook and more than dozens of other social-networking sites because of the breadth of offerings and the possibilities of what it can do for them, analysts say. "We think Facebook represents a fundamental, next-generation opportunity on the Internet," says Jim Breyer, another Facebook board member and Silicon Valley venture capitalist. His firm, Accel Partners, invested $12.5 million in Facebook in April 2005.

Facebook's influence runs deep because the Internet is at the same stage that the computer operating system was in the mid-1980s, says analyst Peck. The tech company that controls the mechanism for buying and selling ads online will hold remarkable sway over the Internet industry for years to come — just as Microsoft did through its Windows operating system.

Rivals Microsoft and Google, among others, recognize social networking could be that next crucial mechanism, and Facebook is the ideal vehicle. Google far outpaces Microsoft in online ad revenue. Microsoft believes a closer partnership with Facebook could help shift the balance of power, Peck says. About half of Facebook's estimated $140 million in revenue comes from an advertising deal with Microsoft, he says.

Charles King, principal analyst at market researcher Pund-IT, says Microsoft could tie Facebook members into its advertising business, giving its online services a badly needed shot in the arm. However, it's unclear how much influence Microsoft would have with just a 5% stake. Facebook conceivably could still do deals with Google, he says.

Google may try to trump Microsoft with an investment in Facebook, Peck and others say. Google has shown in the past that it will pay dearly for Internet traffic — as witnessed by its $1.7 billion purchase of YouTube last year. And Google will happily outbid others — such as Microsoft and Yahoo — when faced with competing bids, as it did for YouTube. Or consider Google's $1 billion stake for 5% of AOL in 2005, when it also outbid Yahoo and Microsoft.

"Facebook could sell minor stakes to both Microsoft and Google, but that would require a relationship-juggling act worthy of Cirque du Soleil, " says King.

Facebook is being wooed by the tech titans because it enjoys a clear advantage over them in the fledgling social-networking industry, Weide and others say. MSN Spaces is a little-used social network, and Microsoft is interested in either acquiring one or making an investment. Google's YouTube is a social network designed around video sharing, and Orkut, its 3-year-old social-networking service, seems to be popular only in Brazil. Yahoo has had limited success with Yahoo 360. Facebook rival LinkedIn only last week gave its 14 million members the ability to add photos to their profiles.

"Facebook is special," says Josh Bernoff of Forrester Research. forr "Taken together, its 40 million-plus active members, the explosion of Facebook-specific applications and its rich detail about customers lend it an unprecedented dynamic."

Facing some obstacles

Despite its heady prospects, Facebook faces inevitable challenges as it expands aggressively and benefits from being Silicon Valley's "it" company.

Some analysts wonder if it already is vastly overvalued. "It may be the benefactor — and victim — of hype," says Trip Chowdhry, an analyst at Global Equities Research.

Chowdhry has doubts about the staying power of broad social networks such as Facebook. He points out that Facebook is made up largely of former MySpace patrons, and he predicts the Next Big Thing could be micro social-networking sites that cater to folks that share specific interests such as hip-hop music or surfing. "Social networks are fads," Chowdhry says. "People are moving targets."

Chamath Palihapitiya, vice president of product marketing and operations at Facebook, envisions Facebook as the underlying technology platform that serves as a communications hub among specialized social networks.

"Our potential is to create a utility so essential that we connect everyone in the world," he says. "With nearly 6 billion in the world, that's very humbling. We've taken the first few steps in a very long path."

Still, there are obstacles on that path. Employers are blocking access to Facebook to keep workers from spending too much time on the site. Facebook's new ad platform has stirred privacy anxieties among some customers. And it confronts similar criticisms to MySpace that it attracts sexual predators.

New York Attorney General Andrew Cuomo is pressing forward with a month-long investigation into the availability of pornographic material on Facebook and how the company responds to user complaints about pedophiles who solicit minors. Last week, Cuomo's office subpoenaed Facebook for information.

Connecticut Attorney General Richard Blumenthal is overseeing a similar, unrelated investigation. Facebook says it is cooperating with both attorneys general.

What is more, Facebook is preparing a major new advertising plan for later this year that would let marketers tailor ads. The new format may display more prominent ads on the news feed — a list of updates on the activities of a user's Facebook friends. Facebook ads also currently appear as banners on the left and bottom borders of Facebook pages. (MySpace has started testing targeted ads in the past few months.)

"It's a delicate act of accepting more personalized ads without (angering) users," analyst Bernoff says.

Meanwhile, others question whether Facebook will be able to translate its popularity into Google-size profits. "How much do Facebook users pay attention to ads?" asks analyst Williamson says. "They may not be as attentive as those who conduct Web searches."

Zuckerberg also faces a lawsuit that charges him with stealing the idea for the company.

But such challenges could be mere potholes for Zuckerberg, one of Facebook's largest shareholders and chairman of its three-member board.

With mega offers rolling in every few months, he is at the center of high-tech's Next Big Thing.

Contributing: Byron Acohido in Seattle, Jefferson Graham in Los Angeles