Best Deal of 2007: Microsoft-Facebook?

Much has been written on the terms of the deal between Microsoft and Facebook. The gist of it is this: Microsoft paid Facebook $240M for 1.6% of the company, and the exclusive rights to sell online advertising for the site.

This being the year-end, all pundit types have got their best and worst lists coming out, and this deal seems omnipresent on worst deals of the year lists.

Its not hard to see why this argument is made: "worst" is really a proxy for "stupidly lopsided value creation", and is Facebook remotely worth that much (remember that MySpace went for $500M and YouTube for $1.6B)? It creates an implied valuation on their user base (figure 50M users or so) of, like, $300 a head... that's some big math... hard to see how Microsoft ever really recoups its investment.

But of course, that's to focus on the value with regard to public markets and value cap - the *wrong* metric here. That implied valuation of $15B, is pretty much (forgive my language) bull$#!t because this deal was, in reality, a barter deal.

Let's look at the deal another way, very simply, in terms of cash:

1) Facebook gets a $240M cash infusion while giving up very little control or equity,
2) Microsoft gets a significant destination outside its network in which to build the value of its recent, very large acquistion of aQuantive (4% of the $6B that's already "sunk"),
3) Microsoft has to generate incremental ARPU of only $5 a user *in total* to break even,
4) Facebook is valued at $15B, which means...
5) Facebook is either (depending on where you think this ends): (a) off the market for some time at that price (so no Google, Yahoo, et al spoilers), or (b) tied to Microsoft and hardening/creating value in their online ad platform

Win, win, win, win, win - at least for Microsoft and Facebook: you know, the parties actually doing the deal?

Isn't that the definition of "best"? Lopsided value creation for *both* sides?

Any "investment" dollar$ back from the deal is pure upside for Microsoft. That means that they, more or less, let Facebook fill in the denominator: $240M of $XX - Microsoft doesn''t/didn't *really* care what that number was...

I don't know about you, but it leaves me with a funny taste in my mouth... is this the "revenue exchange" program of the new bubble - a variation of the old: "I'll buy from you if you buy from me and both our revenues go up, but we're not spending any money trick?"

Dunno - but it also smells suspiciously similar to another "equity for exclusivity" deal...

Epilogue: AOL Layoffs, 2006 Edition

So... I didn't think I'd be posting about AOL anymore (buh-bye). But today was my last official act (I think): laying off more than a few people as the Company restructures around the Web (and advertising). It was a fairly crappy way to spend a day, but I was asked to help; and I guess I'd rather folks that work(ed) for me hear it from me as opposed to some person they don't know - even if I am done there.

Its a tough thing, but it is a [media] business... and costs have to trail revenues :/ - though knowing that doesn't make the human component any more palatable, and I do feel AOL tried to make it as right as possible, all things considered.

I was also sent this today (I don't know who the original source was - I got it from someone no longer at AOL) ... It's in clearly poor taste (but still funny) - some employee's reaction (that last one had me in stitches) - in the category of gallows humour, I suppose.

So long, and thanks for all the fish...

Went to my good-bye party at AOL on Friday. It was fun :)
(Armughan has a picture).

Everyone keeps asking me what I'm up to next. I have some definite plans... but none concrete at this time, and I hope to keep it that way for a little while yet. At a minimum, not even close to ready to discuss it yet :)

Meantime, you can find me here.

Closing thoughts:
1) They say all truths go through 3 phases - first ridicule, then violent opposition, and then self evidence. AOL's getting through its truths, and that's a healthy thing. Good luck and good wishes. I think the company has the assets to be successful. I hope that it will.

2) Always good to remember: At software companies, the intellectual capital is in the people, not the code, and not the products. At software companies.

Reflecting back

This seems like the appropriate time of year for this..... :)

As I look back on my time at AOL, here's how I view the technology "periods" we, as a once-but-no-longer technology-team, rode through:

- Year 1: Stablize the base (and prepare for the future)
Basically, we cleaned up some significant technology architecture and cleared the ground for AOL on the web. Among many other things, the process slowed (too briefly) from feature competition to clean-up and we improved core business and product metrics (for example, what we call "Abnormal Disconnects" or "AD"s significantly; 25% to 60%) across the board. This is particularly significant when you imagine that in previous years the company struggled for every single percentage point gain (every percent of AD mapped to [EDITED FOR PUBLIC CONSUMPTION] difference in membership churn). Particularly, important in this was disconnecting Identity and Connectivity (capitalization intentional) throughout our application and content stack - one of the key things to prepare for the future.

- Year 2: Unwall the garden
In 2005, we went from one major product ship (with one slipstream update) to shipping a signficant number of new products, both on the desktop and on the web, including AOL.com itself. Though it still required deep cross-coordination, AOL built out significant new infrastructure, transforming as well as just force-fitting a lot just to gain the opportunity to learn, and have our products be available for the first time on the web-at-large. A lot wasn't right, but was necessary to learn what the company didn't yet know it didn't know.

- Year 3: Embrace the web
There is/was a lot that this idea implies, both technically and... karmically (for lack of a better word). Its why I had accepted the added responsibilities over the last year - to renew the soil of our core services (i.e., mail and IM), publishing and search infrastructure, and business technologies platform. This year has been about really embracing and evangelizing what the Web means from a development, deployment, and infrastructure perpspective. Its been not just about technology change (even the old in-client AOL "Welcome Screen" is - finally! - in HTML), but embracing the change in role implied by embracing the the web eco-system.

Overall, slower than I would like (and loooong overdue: as I tell my folks all the time - "not Rocket Science, barely Computer Science"), but ultimately valuable - growing pains and all.

From the product side of things, I'd say things were more muddled than I would like. Not that it wasn't enjoyable, but I had influence more than authority, and I've learned a few things in my time at AOL about that.

I'm leaving AOL

Some confusion over my last post - so allow me to clarify (this should be of no surprise to folks inside AOL).

Yes, I'm leaving AOL, and, no, its not connected to Jon Miller's departure, except in the zeitgeist-of-the-Company-atmosphere/sign-of-the-times kind of way.

I had first resigned some time ago, but was asked to help stabilize through a significant company transition and "keep an open mind through the process". I think I did that (really, I tried) - even running the Open Services Developer's conference, creating participation opportunities with external developer communities and helping accelerate the Company's (metaphorically and literally) thinking around what embracing the Web means.

That said, it became clear some time ago that where I'd want to invest and direct our technology and efforts just didn't align quite enough. I was offered some very generous senior opportunities inside the transforming organization - for which I'm very grateful - but after 7 bosses in three years, and having participated in and initiated quite a bit of transormation at the Company - I think its just time to move on, professionally and personally.

Officially, I'll be wrapping up next month - so don't be surprised to see me still wandering the halls. I had also been asked to ease the change - to make the transition smooth, and that's been going on for the last few months.

I'll still be blogging here, so don't expect any particular change in that arena - you'll see here what develops as I'm ready to talk about things.

Important footnote: My choice isn't a reflection of AOL's opportunity. I genuinely do believe that AOL can be signficant, relevant, and successful again as a leader on the Internet - I hope that it will. People like Jim Bankoff, Kevin Conroy, Mike Kelly, Joe Redling - these guys aren't dummies.

Anyhoo - it was a good time: met some great people (many of whom are also gone :P), took away some things, contributed some things, and hopefully left a positive wake.

Time for the next thing :)

AOL CEO Switch: Miller replaced by Falco

Jon Miller was a deeply thoughtful leader. There is no question he'll be missed.

I had resigned from AOL, back in June of this year (no surprise for AOL insiders), for professional as well as personal reasons (which still stand - I'll elucidate in the near future). But I had stayed on in my role because the (then) CEO and the (then) CTO personally asked me to help through the significant transition immediately ahead - and to keep an open mind about the future through that process. I am/was senior enough, and had been entrusted with enough responsibility, that that seemed more than reasonable.

He certainly taught me, personally, a lot about what it takes to run an organization at scale, through significant transformation - I think people forget how differently the Company operated 3 years ago. For example, when I started we had 300+ developers still working on the upkeep of an aging AOL client and hitting quality targets for our Dial network. Now its a dozen or so, from our Bangalore development center, no less - and all core development is about embracing the Web.

And more than that, Jon's a professional, in every positive sense of the word - and in culture of personalities and politics, that's refreshing. I appreciate the time I got with him - as well as the growth opportunities he offered me during his tenure.

Although it became clear by the fall that I was not long for AOL, and though I feel I've been able to positively impact the Company's fortunes, this kind of leadership change is a big deal. I hope they know what they're doing... and more importantly, what they're trying to accomplish. This level of turmoil without clear direction seems a little... I dunno, desperate - and, in my view, furthers AOL from the battle field in which in needs to compete. I hope that's intentional, and that they have a plan (Good luck Randy :))

If I had one complaint of Jon, it would be that he was not able to be involved enough in the day-to-day execution and operations of the Company - AOL would've been better for it. I imagine his responsibilities with Time Warner made that difficult.

You can read more here. Jason sums up the somber surprise well...

Updated: Some clarification on my status at AOL.