Indian social networks stumped by Facebook deal

Microsoft buys 1.6 per cent stake in Facebook for $240 million and extends its advertising partnership with the social network. Is this good or bad news for Indian players?

Microsoft has planted the first flag in the battle to acquire Facebook. On Wednesday, Microsoft announced that it has acquired 1.6 per cent stake in Facebook for $240 million, thus valuing the four-year-old social media site at $15 billion. Microsoft has also expanded its advertising alliance with Facebook, and will now be handling sales for the site internationally.

comScore places Facebook as the sixth most visited property worldwide with 73.5 million unique visitors in September. As Facebook opens up advertising to Indian companies, some of which are already making their appearance there, local social networks are going to have a find a revenue model – and fast. And with Facebook’s valuation skyrocketing, they are in for some tough competition.

Indian social networks stumped by Facebook deal

Though the social media phenomenon has hit India as well, none of the local players such as Minglebox, BigAdda, Yaari or Indyarocks have followings of the kind that Facebook has, leave alone the valuation. Will the over-valued Facebook-Microsoft deal crush the opposition or will it help them get higher valuations?

Navin Mittal

Navin Mittal, business head at Fropper, certainly hopes for the better of the two. “When MySpace was bought by NewsCorp for $580 million in 2005, people thought it was over-valued. But I think MySpace has proven its worth. The Facebook deal sends out a message that large corporations are placing value on social networking.”

Sanchit Sanga, business director, Group M, Interaction, does not think the deal is over-valued, but is not so sure about the fate of Indian social networks. “Facebook is one of the best social networking sites and social networks will attract a lot of advertising in the next two-three years,” he says. Sanga does not think that local players are going to see great increases in their valuation as a result of this deal.

Mahesh Murthy

Mahesh Murthy, founder and CEO of Pinstorm, concurs, “This deal is Microsoft’s last ditch effort to get ahead of Google. The price they have paid is actually to keep Google out of Facebook. But if you look at Indian social networks, they are really not worth much right now and I don’t think this is going to affect their valuation.” Murthy adds that the only way for Indian social networks to survive is to cater to verticals, i.e., niche communities.

Almost 60 per cent of Facebook’s members are outside the US, according to the company. Microsoft is already selling banners on Facebook in the US in a deal that goes on till 2011, but the investment also comes as a precursor to the advertising platform Facebook is expected to unveil on November 6.

Kevin Johnson

Over the past few months, there were intermittent rumours of Facebook being wooed by Microsoft and Google. Apparently, Microsoft got through first, but for a fraction of the share. It had allegedly offered a price tag of $6 billion to buy out the site. Which leads to the question, is Facebook grossly overvalued?

Kevin Johnson, president of the platforms and services division at Microsoft, has tried to address this concern. “The fact that you look at just the run rate of users, and if you believe that they have the opportunity to get to 200 million users, 300 million users, which we believe is certainly in the realm of possibility and on the path that they’re on, you can figure out when you think that might occur; you combine that number of users with the monetisation opportunities, and you can figure out a fairly modest average revenue per user per year, and you can very quickly get to this level of valuation,” he says in the transcript of a conference call.

On the advertising alliance, the companies did not disclose terms of the agreement, but ruled out search advertising from the deal. However, Johnson added, “(The agreement) enables both parties to collaborate as Facebook looks at developing new ad types that are unique to the social experience.”

Owen Van Natta

Owen Van Natta, chief revenue officer at Facebook, did not deny that there would be other investors, but said that Microsoft is the only investor in this round. Natta added that member privacy would be considered while targeting ads on the site, and sharing that information with Microsoft. “(We) want to make sure that users feel we don’t violate their trust in any way, and we certainly think about that in terms of how it is that we use information that they provide to target advertisements...”

As far as the Indian sites go, it’s a long road ahead. Manish Vij, founder and business head at Quasar Media, agrees. “Facebook is writing the rules of social media. However, social networks, including Facebook, need to crack their ad model.” Quasar Media has recently added social media advertising to its portfolio of services.

Clearly, Facebook, with its new market value and its upcoming advertising platform, is going to be a force to reckon with. The path ahead for Indian social media sites is then going to be to either go niche or to offer an open platform for advertisers.

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