Eight Billion Reasons Yahoo Didn’t Buy Facebook

For much of the year, Facebook had been in negotiation to sell itself to Yahoo. The market value of the “instant behemoth” social service sites has fluctuated, as services both large and small have changed hands this year. The first big acquisition was Newscorp’s purchase of MySpace for $580 million in 2005. That set a benchmark, which was driven upward somewhat by the NBC Universal purchase of women’s online network iVillage for $600 million earlier this year.

Social networking sites typically allow users to create and share blogs, pictures and videos with friends and the wider public. What makes Facebook different from MySpace? Its founder(s) set out to create a social networking site that is designed for post-high school users. It connects people by region, college, company and high school.

Build a personal profile and connect with others that are sharing your life experience as opposed to your social, entertainment and artistic interests, which are the focal points in MySpace. Facebook attempted to blend a little maturity into the energized chaos found on MySpace, and they have been successful. Their current membership is somewhere north of ten million – compared to the 145 million that MySpace claims.

The MySpace inclusion of ‘artist pages’ allows artists working in audio and video mediums to freely distribute media from within a social network. It has become a central feature of the network. Artist pages exist alongside individual profiles, and in addition to the regular profile features they allow the artists to upload media and distribute it in the network. Individuals can link to artist pages, endorse media, and participate as fans. This feature resulted in bands using the site to promote their music, one of the dynamics of the site that has made it so successful.

Facebook’s orientation around actual communities makes it much more efficient as a connectivity tool. You can connect to anyone within your group and you can search for people across the entire Facebook spectrum. Specific interest areas are much more easily brought into focus and it is easier to build a group around them. The big question for Facebook is its relevance past the college years. The question for MySpace will be its ability to undergo a little maturation in the form of advertising and control of commercial video and music posting.

In the marketplace Facebook has had several suitors on its dance card, having held negotiations with both Microsoft and Viacom over the past year. Microsoft has in fact signed a deal with Facebook whereby Microsoft will sell and provide banner ads and sponsored links for Facebook using its adCenter online advertising software. Some medial analysts dismiss this deal as minor, citing banner adds as passé and sponsored posts as an advertising method that is showing some age as well.

In the Google corner, the company has announced a deal with MySpace to pay at least $900 million in shared advertising revenue and become the site’s sole search provider. As part of the deal, Fox Interactive Media will add Google search boxes to MySpace and its other web sites. Google has first crack at selling any display ads Fox doesn’t sell directly. Google has shown an ability to work partnership agreements and a willingness to settle for a piece of the action that has served them well in the feinting and blocking that occurs in the Internet consolidation ring.

Google’s purchase of YouTube ratcheted up the pressure on Yahoo to close the deal. It’s worth noting that Google bought YouTube with Google stock – a choice that was not open to Yahoo in their Facebook negotiations. Earlier this summer Yahoo decided that Facebook was too expensive at $1 billion and in July, came close to closing an agreement at the $800 million figure. The reported high offer of just over 1.6 billion was rejected, and now Facebook claims it isn’t for sale, but if it was, it’s worth at least 8 billion.

From a financial/cultural perspective, Yahoo had a lot on the line with this acquisition because it would have significantly reshaped the portal’s efforts to establish and hold a Yahoo “community.” In one Yahoo corner or another, many of the features contained in both MySpace and FaceBook can be found already as Yahoo proprietary components. What is missing is the packaging and the social cachet that both social networking services hold for young people.

Yahoo has built a strategy of drawing Internet users and advertising through building community-based services on the Web, but acquisitions so far have been on a small scale. Recently Yahoo has acquired Bix, MyBlogLog and Kenet Works. Bix and MyBlogLog are built along social networking lines, and will work (hopefully) as a complement to Yahoo’s current properties: Flickr, Delicious, Upcoming and WebJay. All of these have slightly different orientations: FLickr is photo-centric, Delicious is a blog tagging and sharing service and Bix is a digital karaoke and entertainment site that takes amateur uploads.

While the Yahoo / Facebook deal appears to be dead, the evolution of social networking sites is bringing several characteristics to light. There is some indication that user loyalty is a slippery issue. MySpace users are migrating to Facebook, YouTube and other sites as their primary “hookup.” Average visitation time on the site has dropped by over half.

On the other hand, Media metrics firm Hitwise has released its Media Report which found that MySpace is still atop the social networking mountain, with 82 percent of visits to the top 20 social networking sites landing on their site. Whatever the figure, Yahoo’s attempted purchase of Facebook would have been an expensive bet on a hot product that could cool as quickly as Friendster and others that have preceded it. Finding an advertising model that works for the Facebook is also going to be a challenge, particularly given the existing Microsoft deal to handle some ad placement for the service. Given the turbulence in the social network marketplace, the inability to close the deal may end up being a positive for Yahoo.