Microsoft and Facebook: Holy alliance or hard-up hookup?

A close partnership between Microsoft and Facebook may just be the unholy alliance required to thwart Google and their plans for world domination.

Back in October 2007, Microsoft invested $240 million in what was then the up-and-coming social network, Facebook, and the two companies announced that Microsoft would be an exclusive third-party advertising partner. At that time, the site was estimated to have around 50 million active users, and the net worth of Facebook founder Mark Zuckerberg was valued at $3 billion. Facebook's main rival was MySpace, which was said to have more than 110 million users.

The past four years have shown that Microsoft placed its bet on the winning horse in that race. Today Facebook boasts over 750 million active users, and according to a profile in Forbes magazine, as of March of this year Zuckerberg's wealth had increased to $13.5 billion. Rumor has it that the company plans to go public with its stock next year, on a valuation of $100 billion, which would make it worth more than Cisco, HP, and many other long-established tech companies.

There's no denying that what started out as a Harvard-only website run from Zuckerberg's dorm room has grown into a behemoth. It seems as if everybody and his dog (literally - including Zuckerberg's own puppy, Beast) has a Facebook account. I know a number of people, especially young ones, who no longer bother to check their email accounts; they do all their online communications through Facebook.

The upsurge in the popularity of social networking has occurred in conjunction with the rise of Internet-connected mobile devices; millions of users are perusing their friend feeds and updating their statuses from their smartphones and tablets. Last March, Facebook announced that they had 250 million mobile users.

The war's not won

George Orwell said, "The war is not meant to be won, it is meant to be continuous." Although he was referring to something completely different, the same quote can be applied to the battle for supremacy of the technology giants. Microsoft was long thought to be the undisputed king of the tech world, but (based on market capitalization) Apple is now on top. And Facebook can't rest on its 750 million laurels, either. Just as it toppled MySpace, the Next Big Thing could come along and snatch its user base right out from under it.

As recently as June of this year, Twitter was seen by some as Facebook's biggest competitor, even though the two really serve different purposes and many people regularly use both and even link them together to make cross-posting easier. Still, the announcement at this summer's World Wide Developers Conference of complete Twitter integration for iPhone, iPad and iPod Touch inevitably stirred up visions of an Apple/Twitter vs. Microsoft/Facebook smackdown.

A couple of weeks ago, though, a new and possibly more dangerous opponent has emerged. Late last month, Google launched an invitation-only beta of its most recent attempt at a breakthrough in the social media space, Google+, and the tech world has been buzzing over the newest social networking kid on the block. After less than overwhelmingly enthusiastic response to previous SN services Orkut, Wave, and Buzz, the G-men are hoping they have a hit on their hands with Google+. Some of the early adopters think they do. Our own Jason Hiner believes Google+ is about to change the world as we know it. And he's not the only one who thinks it's awesome.

I've been testing it myself, and I've found a number of things to like (and some to not like) about it. Google has basically copied Facebook in many ways. Some things are identical (right down to the "it's complicated" option for relationship status), whereas some are the same features with a new name ("+1" is the equivalent of "Like"). But Google+ has definitely upped the ante, bringing some new and, yes, improved functionality to the table, such as circles, instant uploads from your smartphone (with G+ app installed), and more control over things you've already posted (ability to edit them, disable comments, or block resharing).

Another hot new feature included at launch was video chat within Google+, which they call "Hangouts."

Facebook fires back

Here's where Facebook's cozy relationship with Microsoft came in handy. After all, it was just two months ago that Microsoft announced their $8.5-billion acquisition of Skype, something I wrote about in this column in May. And Skype just happens to be one of the most popular applications used for video calling.

Thus it didn't come as a huge surprise to those in the know when Zuckerberg held an "event" last week to announce that Facebook was rolling out its own video-chatting capability, powered by Skype.

But here's the problem: The Facebook video chat functionality allows you to interact with only one person at a time, and you must be friends with that person. With Google+, you can "hang out" with up to 20 other members in a virtual video-enabled chat room, and you can chat with people who aren't necessarily in your circles. Facebook's new video chat feature also isn't very high profile, so many users don't yet realize it's there. You have to install a Java file and then a not-particularly-noticeable camera icon appears on the chat interface.

There's speculation that Facebook will catch up with group chat, too, but currently that's something that you have to pay extra for in Skype, so making it free within Facebook would eat into that revenue stream.

The enemy of my enemy ...

Google+ is obviously seen as the biggest threat to Facebook now, with eWeek reporting that it had garnered more than 5 million (and possibly as many as 9 million) users in its first two weeks of operation, despite being in "limited field testing." At the same time, Google is considered by many to be the biggest threat to Microsoft -- more so than Apple -- because the two compete directly in so many different markets: search engine, web browser, webmail, calendaring, photo editing software, maps, translation services, instant messaging, cloud-based productivity apps, phone OS, netbook OS, and more.

In fact, according to an engineer who left Microsoft to go to work for its rival, Steve Ballmer declared war on Google way back in 2004, vowing to "kill" the company. Two years later, the New York Times called the battle of the two tech companies a "titanic corporate clash for the ages."

The two are reportedly now in competition over Hulu, the online TV/video service. And it's not just about luring home users into the respective folds, either. The two have been fighting it out over the lucrative government market for email and office tools, as well. And Google is even trying to home in on the enterprise market that's dominated by Microsoft, last year creating a marketplace for developers to sell software applications to businesses.

So if Google is the nemesis of both Facebook and Microsoft, it makes perfect sense for the two to team up against the "Big G." The question is how far will they go in banding together against their common enemy.

Should Microsoft go "all in"?

We know Microsoft has made a big commitment to the cloud. Social networking services are probably the number one cloud-based consumer application. If Microsoft wants to beat Google and Apple in the consumer cloud, Facebook probably represents their best bet for doing it. Rumors have been bandied about for years that Microsoft would or should buy Facebook outright. Of course, most of that speculation came when the company was valued at "only" $15-20 billion. At this point, it seems unlikely that will happen, but an intensified partnership might benefit both Microsoft and Facebook.

It would be easy enough for Facebook to copy most of the new features introduced in Google+ (and why not, when Google copied so many of theirs?), but it's what Google can do to combine social networking with its other services that may give G+ a competitive advantage. I'm thinking here about integration with Gmail, Google Apps, search, YouTube, and so forth. Facebook does only one thing and doesn't have products in those other spaces (well, OK, they did introduce Facebook email accounts last year, but I don't know anyone who actually uses one). But guess who does have all those things?

If Microsoft incorporated Bing search, Office Web Apps, Windows Live Hotmail, Xbox Live video, and other services it already has into Facebook, Zuckerberg's social network would have a much better chance of countering Google's moves. Microsoft also has some things that Google doesn't have, such as Xbox games.

Some analysts see the next big battlefield as the telecommunications front, what with Google Talk, Facebook's unified messaging, and now the Microsoft acquisition of Skype. In this context, the Microsoft-Facebook alliance is seen as a form of "co-opetition" (cooperating and competing at the same time), with the two combining forces against Google in the struggle to wrest that market away from the telco giants and make the phone networks irrelevant -- at least for anything besides providing an Internet connection. That's a tall order, and when you're taking on the likes of AT&T and Verizon, you need all the friends (or even "frenemies") you can get.

My take

For Microsoft to team up more closely with Facebook at this point is a logical business decision, and I'm sure plenty of research and deliberation went into it. It also feels right at the gut level. Microsoft has a lot to offer Facebook, and Facebook has something Microsoft needs: a huge user base. In order to compete with Google+ and all the features that Google is capable of putting into it by integrating with their other services, Facebook needs Microsoft.

And Microsoft needs an infusion of the kind of "young and fresh" image that Zuckerberg, at 27, brings with him. It's no coincidence that some have compared him to a young Bill Gates. And they have a lot in common. Both dropped out of Harvard to start what became multibillion dollar businesses. Both were accused of stealing the ideas that made them wealthy. Both have been said to be mildly autistic by armchair diagnosticians. Some have even suggested that Zuckerberg might be a good replacement when/if Steve Ballmer leaves Microsoft.

Microsoft could certainly do worse. Justified or not, the company has gotten stuck with the image projected by those annoying anti-Vista Apple commercials: that of a stodgy old organization that doesn't have its finger on the pulse of what's happening today. They've tried to counter that with the advertising campaigns for Windows 7 and Windows Phone, but the perception persists.

Apple's popularity with young people is based not just on their products but also on Steve Jobs' public persona of cool, hip, on-the-cutting-edge. It's not about chronological age -- Jobs was born the same year as Gates, making him a year older than Ballmer -- but rather, attitude.

Ballmer is a businessman, which is actually a great qualification for running a multinational corporation. But unlike Gates, Jobs, and Zuckerberg, he's not really an entrepreneur. He didn't build the business from nothing (although he certainly did get in on the ground floor, joining in 1980 when there were only 30 employees). By the time he became CEO in 2000 and was truly in charge, though, Microsoft had over 39,000 employees and almost $23 billion in revenues.

Would a closer relationship between Microsoft and Facebook help Microsoft win over a younger demographic? Zuckerberg is still in his 20s, and Facebook started as a service exclusively for college students. On the other hand, young folks are awfully fickle and often the first to abandon what was yesterday's hottest spot -- especially when the old folks discover it. And last year's Pew Research study showed that older adults (65 and up) are flocking to Facebook.

If you believe what you read on some tech sites, there's been a wholesale exodus from Facebook already. Over on Google+, beta testers proclaim that they're leaving Facebook and from now on will spend their social networking time going around in Circles and Hanging Out. Is this the wrong time, then, for Microsoft to jump wholeheartedly onto the Facebook bandwagon? Or is it exactly the right time?

I think the reports of Facebook's death have been greatly exaggerated. The people using Google+ now are, by definition, early adopters who eagerly embrace the latest and greatest. But that's not the description of the typical Facebook user, who has invested a lot of time and effort into building a social network. Most people don't like change, even if it's for the better. And a lot of people don't trust Google. And as long as mom and dad and the cousins and all those nontechie friends are still over on Facebook, even we "cutting edgers" are going to maintain accounts there, even if we go to Google+ to hang out with our tech industry friends.

On the other hand, if Microsoft and Facebook partner to bring additional features and integration into Facebook first -- and implement them better -- Google+ might go the way of Wave and those who left might come running back to Facebook. If the Nokia partnership and the Skype acquisition also turn out to be big successes, Microsoft could hit the trifecta. The next couple of years should be interesting ones for Microsoft watchers.

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