The battle for facebook

What to do if you are unhappy about the prospect of Microsoft getting its clutches on the social networking phenomenon, Facebook? Why, start a discussion group on Facebook, of course.

The backlash has begun, and it is barely 24 hours since news leaked that the mighty Microsoft is in talks to acquire a stake in Facebook, the website that has accumulated most of its 40 million members in just the past few months. The growth of the company is so explosive that Microsoft would get only a 5 per cent stake for an investment of $300m-$500m, valuing the whole business at around $10bn. That stake, though, would be enough to thwart the ambitions of Microsoft's rivals such as Google and Yahoo to develop lucrative new business relationships with Facebook, and it would put Bill Gates' software titan in pole position if and when there is a full-blown takeover battle.

One battlecry from a user of the site yesterday: "We want to keep Facebook free of the nefarious and ubiquitous clutches of Microsoft. Join the crusade." Another: "I will close my account if Microsoft buys Facebook." And another: "Less privacy, more advertisements, and everything that Microsoft runs typically sucks. Don't sell Facebook to Microsoft!"

It's not certain yet that the protestors need to fully mobilise, since Facebook may still demur at aligning itself with Microsoft or any of the big players. It is early days, not just for the talks – which everyone involved was staying mum about yesterday – but also for Facebook itself, which estimates suggest will turn a profit of just $30m (£15m) this year. Mark Zuckerberg, the 23-year-old, who founded the company at Harvard University less than four years ago, has often said he wants to float the company, not flog it.

What is certain already, however, is that Facebook is taking up an increasingly large amount of users' time on the internet and that advertisers are clamouring for ways to reach potential customers online. One way or another, dollars will follow eyeballs, which is why Microsoft is so keen to deepen its relationship with Facebook, why Yahoo made a near-$1bn bid for the company a year ago, and why Google is rumoured to be interested in bidding against Microsoft for the 5 per cent stake that might be up for grabs now. Some people close to the fundraising effort reckon that the valuation on Facebook could go as high as $15bn if an auction develops.

What Google, Yahoo and Microsoft all have in common is that they run sophisticated technology for selling advertising space on websites, not just their own but also on third party sites with which they have agreements. The ads are targeted to reflect the specific internet user's interests by using clues such as search queries and other information on the web pages being viewed.

Google's technology is the most sophisticated of the trio, because it is based on the expertise that created the world's most successful search engine, and as a result the company dominates the internet advertising industry. No wonder its shares are trading at record levels, up some 570 per cent since its initial public offering. It is expected to rake in revenues of $16.3bn this year, almost all of it from advertising, more than five times as much as Microsoft is making from its similar business.

Andrew Frank, analyst at Gartner, the market research firm, explained why Microsoft may be willing to pay such a seemingly large valuation for a piece of Facebook. "It's fair to say that they are trying to catch up with Google, and it is fair to say that social networking is one of the key frontiers for advertising beyond search."

Both Google and Microsoft have purchased specialist ad agencies this year – respectively, DoubleClick and aQuantive – with the aim of expanding and improving the types of adverts they can serve up for web users.

Yahoo, meanwhile, has been rolling out Panama, its long-delayed new system for targeting ads based on search queries. The trio fight ferociously for the right to serve ads to third party sites (Google guaranteed to pay $900m (£450m) over three years in return for the right to serve ads on Facebook's rival, MySpace), and are fighting equally ferociously to attract users to their own web content, search engines and networking tools. Microsoft already has a deal to sell adverts that appear on Facebook pages, which it signed last year when the social networking site was much smaller and mainly focused on the US, to which the deal is limited.

The purchase of a 5 per cent stake would likely freeze out rivals and allow it to extend that partnership. It would also allow Microsoft to profit from Facebook's own targeted advertising technology, which is being launched soon and threatens to reduce the opportunities for Microsoft to serve ads on the site's pages.

Mr Zuckerberg's decision to turn Yahoo away last year looks smart now, but there were serious questions being raised yesterday about the company's hopes of attracting a $15bn (£7.5bn) valuation. That would be a stratospheric 100 times this year's rumoured revenues, and an out-and-out gamble that Facebook is going to turn into a Google-style gateway to the internet for the social networking generation. That is certainly what Mr Zuckerberg is planning – and why he talks of Facebook as a "social operating system" for the internet. It is analogous to the Windows operating system for the personal computer, within which users install a constellation of other applications. There are now around 4,000 so-called apps, also known as "widgets", available within Facebook and more are springing up daily.

Admittedly, many of them are still pretty juvenile; one can expect that interest will soon wane in pretending to be a zombie or a vampire and giving your friends a virtual bite.

However, video sharing applications and party organization tools are taking off, and Facebook recently created a $10m (£5m) fund to give grants to apps developers.

In an investment note yesterday entitled "How Much Are Your Friends Worth?", Lehman Brothers analyst Vijay Jayant wrote that this strategy is one potential advantage Facebook may have over its older and more profitable rival MySpace.

"Facebook's decision in May to open its platform to web developers (who can build unique mini-applications, or widgets, which users can populate their Facebook profiles with) demonstrated some of the same attributes which have helped Google become such a popular platform among both developers and users," said Mr Jayant. "As a result of this open approach, many companies are now investing in building customized Facebook applications, further fueling an already fast-growing ecosystem."

Andrew Frank at Gartner strikes a note of caution, though. Anecdotal evidence so far suggests that the targeting of ads on Facebook is still poor, many users effectively "screen out" the ads, and the numbers in which they click through to advertisers' websites is low. Mr Frank said: "It is a highly controversial subject, and people give answers that run the gamut from 'social networking is the most effective advertising medium ever invented' to 'nobody even sees the ads',"

Mr Frank added that the advertising industry is going to have to come up with more creative ways of attracting interest on Facebook and similar sites. "I think that the yield even on effective ads is still smaller than it needs to be for social networking sites, given the size of their user base."

A potential solution? Last week, Google launched "gadget ads" which allow advertisers to create much more interesting and interactive content, such as combinations of video and real-time data, in widgets that can be placed on websites. It is cutting edge stuff. As Microsoft dallies with Facebook in a bid to catch up with its arch-rival, Google may be sprinting off into the distance again.

The rise of the social network phenomenon

It is not what you know but who you know that is important in life. Facebook's founder, 23-year-old Mark Zuckerberg, has done extremely well out of this 21th-century truth. In August 2007, Facebook overtook MySpace as the most popular social network, receiving 6.5 million unique visitors compared with MySpace's 6.4 million. Facebook is now visited by 20 per cent of all online Britons.

What has been more impressive, however, is the rate of growth that Facebook has enjoyed. Since December 2006, the number of visitors has increased by 541 per cent. This dwarfs the growth rate of MySpace: 20 per cent over the same period. Bebo has also experienced staggering growth in popularity. Its visitor numbers have increased by 64 per cent since 2006, reaching 4.4 million last month.

Will Facebook still be king-pin in a year's time? The answer is that in the fickle world of social networking no one is quite sure, and least of all the Facebook team who have tried to enhance their product with fun walls, gifts and even graffiti. Indeed there is a new kid on the block. PerfSpot.com, another social network designed for people to share their interests on the web, had no recorded figures until April 2007. Since then, the number of people with so-called 'Perf' lives has risen by 756 per cent. This puts it ahead of Facebook as the fastest-growing social network in 2007. Not bad in just four months.

But these growth figures published by Nielsen/NetRatings reveal another possible threat to Facebook's pre-eminence. Three of the 10 fastest growing social network sites target specific interests such as travel, business and music. WAYN is a social network for travellers who want to share experiences, photos and keep track of all the friends they have met around the world. Since December 2006, its visitor numbers have soared by 80 per cent. And it is a similar story for LinkedIn, mainly used for professional networking, which has seen growth of 194 per cent; and for Imeem, enabling fans and artists to discover new music and videos, where growth has been 79 per cent.

Emma Carroll