It’s likely to be one of the most talked-about ad deals of the year. The company they are jockeying to sign up with is attracting 200,000 new users a day. Last week it was valued at $15 billion (£7.3 billion), though it has yet to make a profit.
Facebook is a three-and-a-half year old “social network” site that offers people a way of communicating with their friends online. So far, some 50m people have signed up to it. The company says it expects to break even this year.
Last week, Microsoft beat Google to buy a small stake in the firm, valuing it at $15 billion — more than twice as much as British Airways, a company that made a profit of $602m last year.
For some, the deal indicates a return of the “irrational exuberance” that former Federal Reserve chairman Alan Greenspan identified in the mid-1990s — an exuberance that ended when the dotcom bubble burst in 2000.
Facebook is the latest in a series of ever-bigger deals for a new generation of so-called web 2.0 companies.
Once again, internet start-ups with lots of buzz — but next-to-no profits — are being snapped up for huge sums by the world’s big media and technology firms.
For others, including Microsoft, the prices are not irrational but a concrete sign of the value of online advertising.
In recent years, internet advertising has soared as advertisers have shifted more and more of their spending from television, newspapers and other traditional media to a host of websites.
Online advertising is now a $16.5 billion business in America, according to Jupiter Research. Shoppers spend 10% of their money online. Compared with mature advertising markets such as TV (worth $74 billion in America), online advertising spending remains small, but it is growing by about 14% a year, and by 2011 it will be worth $32.1 billion.
Only a small slice of this goes to “social network” sites like Facebook and its larger rival MySpace (owned by Sunday Times parent News Corporation).
This year, according to eMarketer, $900m will be spent advertising on social-networking sites in America and $335m elsewhere. The growth of these sites is phenomenal. Facebook believes with Microsoft’s help it can reach 300m users worldwide in the next few years.
“It’s anybody’s guess how big Facebook will get,” said John Delaney, an analyst with the Ovum consultancy. “But 300m doesn’t sound completely ridiculous.”
Other sites with similar features to Facebook and MySpace have failed to take off — the British site Friendsreunited and America’s Friendster have both been left behind. But the success of Facebook and MySpace shows “there is a market for people to interact on the net in a similar way to the way they interact in real life”, said Delaney.
Advertisers, too, are increasingly enamored of the sites.
Carlton Cribb, the digital buying director at Zed Media, a London ad agency, said clients now see online sites as an intrinsic part of their advertising strategy.
“In the past couple of years there has been a major change from the clients’ perspective,” he said. “Online was kept very separate from the rest of the budget. Now online is another viable medium for reaching their audience — it’s part of the media mix.” A part of the mix that is growing swiftly.
Social networks collect a lot of personal data about their users. People share their taste in music, books, films, their political views as well as their location. All this information can potentially be turned into well-targeted ads. The danger is that users may turn against the “commercialization” of the sites.
When Google bought YouTube, the video-sharing website, Delaney said there was a lot of complaining from users, many of whom warned the company to stay away from Facebook.
“We heard the same sort of stuff when News Corp bought MySpace. People moan but they still use MySpace. It’s not the first site to put ads on its website. People understand that they get a lot of cool stuff for free on the internet because it carries ads,” he said.
But the internet is a two-way street, and advertisers now have to figure out how to reach an audience that has the power to talk back in a way that was denied them with more traditional forms of ads.
“That’s the promise and also the danger of social networks,” said Delaney. He points to the success of Arctic Monkeys, the indie rockers who built a following on MySpace.
“They were selling their brand. People will engage with you on a very deep level. The problem is that you are not in control of what is out there.”
Some advertisers have stopped using social-network sites, concerned that their ads will come up alongside unsuitable material put up by the sites’ users.
Cribb said these were problems to which the sites and advertisers were now finding solutions in what are still early days for a rapidly changing medium.
When Facebook boss Mark Zuckerberg started the site it offered simple web pages for college students to list information about themselves and send messages to friends. Increasingly the site and its rivals offer an array of services, from e-mail to online photo galleries that have historically existed independently.
The aim is to make Facebook the first port of call for internet users in the way that many people now have Google as their home page.
It’s not a new strategy — AOL tried something similar and failed and Yahoo, which also courted Facebook, has a similar approach. But Facebook has the buzz and the momentum to more than rattle its rivals. As it adds new services, advertisers will be watching developments as closely as Facebook’s users, Google, MySpace and Yahoo.
Unlike the first internet boom, “big media” has in the main fought shy of paying huge prices for online firms. News Corp bought MySpace in 2005 for $649m and more than recouped its investment with an ad deal with Google worth $900m over three years.
For Microsoft the $240m investment is chump change. But it marks a significant evolution for the software giant as it increasingly moves its muscle online. Whether or not Facebook lives up to its $15 billion promise remains to be seen.
Dominic Rushe is a writer for the Times Online
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