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Microsoft on Wednesday said it has signed an agreement to sell advertisements on Facebook's international sites, beating rival Google for the potentially lucrative deal that includes a $240 million equity investment by the software maker in the growing social networking site.
As part of the deal, Microsoft agreed to take a minority stake in Facebook, based on a $15 billion valuation of the 3-year-old, privately held company. During a teleconference with reporters and analysts, Kevin Johnson, president of the platforms and services division at Microsoft, said the hefty valuation was a "strong statement of confidence in Facebook."
Microsoft, which has been selling display ads on Facebook's U.S. site for a year, believes Facebook is on a path to reach 200 million or even 300 million users in the near future, positioning it as a major ad destination on the Web. Facebook claims to have 50 million active users today and is adding new users at a rate of 200,000 a day. At the same time, the online advertising market is projected to reach $80 billion in two or three years from $40 billion today, Johnson said.
"From my perspective, this is really a win, win, win," Johnson said, meaning the deal would benefit advertisers, Facebook users, and the two companies.
While Facebook has not disclosed its revenues, The Wall Street Journal, quoting unidentified sources, reported that the company expects a profit of $30 million this year on revenue of $150 million.
Facebook has become the latest Internet darling because of its potential as an advertising bonanza. Besides being one of the fastest growing social networking sites, many of its users are under 30, a coveted age group for advertisers. During last week's Web 2.0 Summit in San Francisco, Mark Zuckerberg, the 23-year-old founder and chief executive of Facebook, said he expected the number of workers at the company to more than double next year to 700.
The deal could prove to be a big win for Microsoft, which has been playing catch-up against Google in the online advertising market, which is growing multiples faster than ad spending in newspapers, television, and other media. While Microsoft has scrambled over the last couple of years to build and launch an online platform and network to serve advertisers, Google has reaped billions of dollars in profits.
Google reportedly was also talking with Facebook about a possible ad deal and investment. Owen Van Natta, chief revenue officer at Facebook who joined Johnson in the teleconference, declined to discus any other negotiations that preceded the Microsoft deal.
As to why Microsoft was chosen, Van Natta said, "We've been working with Microsoft for over a year now in the U.S., and it's been a relationship that has worked really well for both of us."
Microsoft has been the exclusive broker for banner advertising on Facebook's U.S. site since August 2006. The deal runs through 2011. The latest agreement expands the partnership by adding Facebook's international sites, too. The companies on Wednesday declined to say whether the new deal could include search advertising in the future, but Johnson said the companies' partnership was expected to grow.
"You can sit back and watch how this partnership is going to develop," he said. "There a lot more that we'll be doing together."
One area of focus would be in delivering targeted advertising based on user data. Van Natta, however, insisted that Facebook would continue to respect user privacy.
Almost 60% of Facebook's users are outside the United States, where social networking has also grown rapidly. At the end of the year, Asia is projected to have the largest share of social networking users at 35%, according to research firm Datamonitor. The regions of Europe, the Middle East, and Africa are expected to account for 28% of users; North America 25%; and the Caribbean and Latin America 12%.
As to how Facebook plans to spend Microsoft's $240 million, Van Natta said it would be used to fund "innovation and growth," including the hiring of more developers.