Facebook and Microsoft

Microsoft is not used to being held ransom by a 23-year-old. But Mark Zuckerberg, founder of social networking phenomenon Facebook, could put the software giant in a serious quandary. If he really does try to sell a stake in Facebook, Microsoft will feel huge pressure to buy it, even at the heady $10bn valuation being mooted in the Wall Street Journal.

Why? Microsoft’s efforts to take on Google and Yahoo in their respective dominance of online search and display advertising have fallen flat.

Even when it comes to relationships with high traffic sites, where Microsoft’s deep pockets should have come in handy, most potential partners have opted for a deal with Google or Yahoo instead. Those include AOL, Ebay and MySpace.

One of the few big relationships that Microsoft has secured for its online advertising system is with Facebook – for display advertising in the US. So the software group will be desperate to avoid having it wrenched from its grasp by Google.

The trouble is that 5 per cent of Facebook gets Microsoft nothing in terms of influence. It is a tiny foot in the door. And the mooted valuation is huge, even for a company expanding as rapidly as Facebook. It feels like no time ago that Yahoo and others were in talks to buy it for less than $1bn.

The only way Microsoft could justify such a transaction is if it comes with some right of first refusal on a bigger stake or it is tied in with a deeper advertising relationship.

That could be an extension of its display advertising agreement internationally or a deal with Microsoft around online search. Then it might feasibly make sense. But with Microsoft desperate and Google flush with confidence and cash, Facebook would no doubt ensure the software giant pays through the nose.