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Facebook CEO visits Seattle, Microsoft schemes

An investment by the software giant seems likely - Facebook is the ideal testbed for the future of advertising.

By David Kirkpatrick, Fortune senior editor

(Fortune) -- Facebook CEO Mark Zuckerberg was spotted Tuesday in Seattle, headed for meetings with executives at Microsoft. That lends credence to the unattributed reports in various papers this week that Microsoft was contemplating a major investment in the fast-growing social network.

But could Facebook possibly be worth $10 billion? That's the value implied if Microsoft (Charts, Fortune 500) invests $500 million for a 5 percent stake, as several reports have suggested it might. Meanwhile, the Wall Street Journal and others report Zuckerberg is holding out for a valuation of $15 billion, either from Microsoft or other potential investors possibly including Google (Charts, Fortune 500).

Facebook CEO Mark Zuckerberg

How can you put a price tag on the future? That's what any investor in Facebook would be doing.

There's no way the company is worth that kind of money today, despite the 43 million active users it claims. (The Journal reports that private Facebook this year expects to make $30 million profit on $150 million in revenues.) But that is not the same thing as saying that somebody would be insane to buy a small chunk at such a valuation. (For a glib and contrasting view from Kara Swisher, see AllThingsD.)

Facebook is the closest thing the world has to a next-generation Internet, one structured not around Web sites but around people. In the Facebook topology, every data source or service is defined by who else is using it.

The company has, in a crude way, solved the critical problem of Internet identity. Each member's profile is tantamount to their personal Web site, which defines who you are, who you know, what you are interested in, and what you are doing now.

This matters in business terms because the Internet is rapidly moving toward a world in which advertisers are able to target their messages to those most likely to be responsive.

While this is often painted as an invasion of privacy, in fact it is a service. If these future systems work the way the ad industry expects them to, the ads we see will quite often be ads that convey information we want. If software algorithms can help marketers identify what sorts of goods and services we are most likely to buy, it is a benefit, not an intrusion.

Facebook may be the best place yet for marketers to experiment with these new techniques. Unlike its bigger rival MySpace, Facebook's individual profile information is intended to represent a real person precisely and accurately. So by investing in Facebook, Microsoft - or Google or another intrepid company -may be buying access to a tremendously valuable testbed for the future of web advertising.

In weighing the probability of such a move, don't forget Microsoft recently spent an astonishing $6 billion to acquire the advertising technology of aQuantive. (Information Week suggests that closer Facebook ties could help Microsoft leverage the tools it acquired with aQuantive.)

It may also be worth quite a few hundred million for any company to get into bed with Mark Zuckerberg.

I have gotten to know him a bit in recent months. He is the closest thing to Bill Gates I've seen since the original. Not only does he have natural gifts for programming, leadership, and marketing - traits that served Gates well in Microsoft's first couple decades. He also, like his industry predecessor, seems mostly driven by a conviction that what he is doing will make the world a better place.

The money will come to him, as it did to Gates, not because he seeks it but as a byproduct of finding effective ways to help society move forward using software.

His focus is extraordinary. What's more, he is a nicer person than is Gates.

It would behoove any company to keep him close. His thinking about the importance and role of what he calls the "social graph" - the network of relationships that underlies a social network - is subtle and unselfish.

I doubt if Zuckerberg sees it as essential for his company to align with Microsoft or any strategic investor. But he is enough of a pragmatist to realize that Facebook would be immeasurably strengthened by the kinds of sums now being bandied about. He won't refuse them. Top of page