Microsoft and Facebook?

A few days ago, The Wall Street Journal reported that Microsoft is in talks with Facebook:

Microsoft is in talks to buy a minority stake in the popular social-networking Web site Facebook Inc., a sign of a new urgency by the software giant to jump-start its online business at a time when Google is widening its lead in the fast-growing Internet-advertising business. As part of its catch-up program, Microsoft also has quietly granted broad powers to an executive recently hired from outside the company, who is expected to help shake up the software giant’s online business.

Microsoft in recent weeks approached Facebook with proposals to invest in the startup that could value the fast-growing site at $10 billion or higher, said people familiar with the matter. If those talks bear fruit, Microsoft could purchase a stake of up to 5% in the closely held startup, at a cost in the range of $300 million to $500 million, the people said.

CNNMoney.com discusses the financial implications:

But could Facebook possibly be worth $10 billion? That’s the value implied if Microsoft (Charts, Fortune 500) invests $500 million for a 5 percent stake, as several reports have suggested it might. Meanwhile, the Wall Street Journal and others report Zuckerberg is holding out for a valuation of $15 billion, either from Microsoft or other potential investors possibly including Google (Charts, Fortune 500).

How can you put a price tag on the future? That’s what any investor in Facebook would be doing.

There’s no way the company is worth that kind of money today, despite the 43 million active users it claims. (The Journal reports that private Facebook this year expects to make $30 million profit on $150 million in revenues.) But that is not the same thing as saying that somebody would be insane to buy a small chunk at such a valuation. (For a glib and contrasting view from Kara Swisher, see AllThingsD.)

And analyzes the marketing implications:

The company has, in a crude way, solved the critical problem of Internet identity. Each member’s profile is tantamount to their personal Web site, which defines who you are, who you know, what you are interested in, and what you are doing now.

This matters in business terms because the Internet is rapidly moving toward a world in which advertisers are able to target their messages to those most likely to be responsive.

While this is often painted as an invasion of privacy, in fact it is a service. If these future systems work the way the ad industry expects them to, the ads we see will quite often be ads that convey information we want. If software algorithms can help marketers identify what sorts of goods and services we are most likely to buy, it is a benefit, not an intrusion.

Facebook may be the best place yet for marketers to experiment with these new techniques. Unlike its bigger rival MySpace, Facebook’s individual profile information is intended to represent a real person precisely and accurately. So by investing in Facebook, Microsoft - or Google or another intrepid company -may be buying access to a tremendously valuable testbed for the future of web advertising.

While this may benefit advertisers, we at Privacy Maven are not as quick to dismiss privacy concerns. Foremost, these social networking sites and the technology which make them possible are new. Short-term and long-term implications continue to unfold. Public service announcements abound in all media warning parents to monitor their children’s Internet activity, for concerns of privacy and safety. Accordingly, adults must also govern themselves cautiously and appropriately.

Here is an informative report, reminding us of the implications of surrendering privacy on Facebook and elsewhere on the Internet.