Facebook Is The New Skype

Caveat emptor. Word is that Microsoft (MSFT) may buy 5% of social network Facebook for as much as $500 million. And, rumor is that Google may outbid it.

Ebay (EBAY) just wrote off about $1.4 billion of the $2.6 billion that it paid for VoIP company Skype. At the time of the purchase, Skype had about 50 million registered users. By some measurements, that number is now over 220 million.

Skype never became a big business from a financial standpoint because users were not willing to pay money for add-ons to their free VoIP service. Having tens of millions of users meant very little to the ultimate value of the company.

Facebook may face a similar future. While search engine advertising can be targeted by the nature of the search and many display ads are matched with the content of the web pages on which they run, no one has solved the Rubik’s Cube of how to get the huge audiences at sites like Facebook and MySpace to be an efficient place to put online advertising. MySpace is still not a meaningful revenue business for News Corp, but, it only paid a little over $500 million for the property. The odds that it will earn out its investment are at least reasonable.

Facebook, at a value of $10 billion, would be an entirely different proposition. Unless or until online social networks become a fertile place for internet advertising, their promise is only a promise, and a thin one at that.

Microsoft or Google may buy all or part of Facebook. But, like Ebay, they will look back and rue the decision.

Douglas A. McIntyre