Bill Gates and Mark Zuckerberg Are Now Friends!

What Microsoft's $240 million investment in Facebook means for the Web.

After much wrangling, hand-wringing, and second-guessing, Facebook and Microsoft announced an expansion of their strategic advertising alliance yesterday: Microsoft will pay $240 million for 1.6 percent of the social-networking site.

It's a great deal, theoretically, for all concerned. Facebook gets a sky-high valuation and cash to expand its rapidly growing and sometimes unwieldy site. And the deal does little to dilute the power of the company's original investors. Founder Mark Zuckerberg, with his reported 20 percent stake, is now a twentysomething paper billionaire several times over. Meanwhile, Microsoft gets, for what is basically chump change, access to one, the most promising platform for delivering advertising on the Web since the popup and two, a whole new set of eyeballs as Facebook expands internationally. The software behemoth also gets to call a do-over for having not "gotten the Internet" the first time around. Again, theoretically.

The degree to which Facebook can deliver on its promise of an enhanced advertising environment — where the magic of the social graph provides a more robust way to put compelling advertising messages in front of targeted users — will determine whether the companies will be able to say they made a killer deal. Microsoft's investment is a relatively low cost, low-risk way in, and Facebook took very little skin out of the game. So, until the advertising results are in, it remains an elegant handshake for both companies.

Executives at Google, who had competed with Microsoft for the better part of a year for a business mashup with Facebook, didn't have much to say about the announcement, which came during Google's annual analysts briefing. (Oh, snap!) But clearly, it was a disappointment. Google has been unable to duplicate the social-networking heft of Facebook, and what the search giant will know about its users will ultimately pale in comparison to what Facebook will be able to glean about its audience, as more and more people choose to live their lives out loud - throwing sheep, sharing tunes, or evangelizing major brands on the site. Newer, richer applications, which have yet to be born, will only deepen the user experience on Facebook. By opening up the site to outside developers (you can read more about Facebook's development team in my recent feature), Zuckerberg boldly open-sourced innovation on the young site in the hopes that an industry would spring up around the platform, and that even more delighted users would result. Again, it's early, but the results have been very promising.

All of which means the pressure is on at Facebook. At the end of what are always very long days there (executive meetings typically begin around 8 p.m. and last for hours), Facebook is a technology company, and seeks to be a disruptive one at that. (MySpace, by contrast, is a media company, and it has behaved more as a platform for distributing content than as a Petri dish for relationship facilitation.) And this is why, I'm certain, the wizards who stay up late at Facebook are looking at targeted advertising as yet another heady math problem to solve — namely, what can be discovered about consumer behavior and how can it all be measured. They're all about proof, not puff. And because they have a long history of keeping their heads down and their eyes on some simple things that are tough to do — user engagement, rapid innovation, and fixing things that are broken — I think they have a good shot at figuring it out. And while they're at it, they'll be establishing themselves as legitimate technologists in a field that's teetering dangerously close to bubbledom.

We're not going to have to wait long. On November 6, Facebook will make a major announcement regarding its newest target advertising initiative. Microsoft, no doubt, has seen the full monty; in a little over a week, the rest of the world can decide if it was all worth the price of admission.

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