Facebook, Skype, and Microsoft's savvy investment

Microsoft has made a mint on its 4-year-old Facebook investment. But the real payoff comes from its ability to use Facebook's social network to compete with Google.

Facebook's Mark Zuckerberg, left, and Skype's Tony Bates announce a deal to include Skype's video conferencing into Facebook's social network. James Martin/CNET

Just after Microsoft Chief Executive Officer Steve Ballmer announced plans in May to buy Skype , he and Skype Chief Executive Officer Tony Bates had one more order of business.

"The day we announced, we definitely came to see Mark," Bates said, talking of Facebook Chief Executive Mark Zuckerberg, at a press conference today announcing Facebook's plans to bake Skype's video conferencing technology into its social network. "It was for both of us, Steve and I, the most important strategic relationship."

As Google grows ever more powerful in techdom, and Microsoft's influence slips, the Redmond software giant is building closer and closer ties to Facebook. The Facebook-Skype deal today is more evidence that Microsoft and Facebook are in lockstep as they fight their mutual foe, Google. And it comes even while Microsoft awaits regulatory approval to conclude its Skype acquisition.

"We have a really good relationship with Microsoft, where we work with them on a lot of different stuff," Zuckerberg said at the press conference announcing the new video-conferencing feature. That stuff includes advertising, where Microsoft provides all the search advertising to Facebook. It used to provide display advertising, too, but Facebook took over that task last year.

Microsoft has been criticized for its many missteps on the Internet, ranging from leisurely upgrades of Internet Explorer to being slow to understand the importance of search. But its relationship with Facebook is something Ballmer & Co. got right. Microsoft cemented its bond with Facebook in 2007, when it bought a 1.6 percent stake in the company for $240 million. Today, if reported valuations of Facebook are to be believed--online privately held stock marketplace SharesPost currently has an implied value for the company at $82.4 billion--that 1.6 percent is worth $1.3 billion.

But the Microsoft-Facebook relationship isn't really about savvy investment, of course. It's about fighting off Google. Microsoft's Facebook deals, and you can include the new video chat feature from Skype, are all aimed squarely at the search king. And just as the Web search giant has changed the market dynamics to undermine Microsoft's power--helping establish the Web, not the PC desktop, as the heart of computing--so too is Facebook challenging Google. Its service, with 750 million users worldwide, is becoming something of an alternative Internet, a place where computer users spend huge chunks of time and never touch a Google service.

In May, Microsoft began including recommendations from Facebook friends into its Bing search engine, elevating results that receive a "like" from someone in the searcher's network. That way, when people search for a coffee shop in Los Angeles, for example, a java stop that won Facebook praise from their friends will rate higher in their search results, as long as they are logged in, than other nearby locations.

The Microsoft-Facebook deals are creating services that Google has yet to match. Google has tried to add social networking to search, creating its +1 button to shower favor on a news article, a company, or even a search result. But its network isn't the equal of Facebook. So clicking the +1 button doesn't have the same impact as clicking a Facebook "like."

The new video chat feature unveiled today offers the potential to extend Skype to an ever wider audience. Facebook users can connect their accounts with Skype. If they chose to, it opens another outlet for the video-conferencing service. Microsoft has already talked about baking Skype into a host of products, everything from its Outlook e-mail software to its Xbox video game console. The new deal could conceivably allow video chats from a Skype customer through a Facebook account on a PC to a TV set where an Xbox user, also connected by Skype, is online.

That's why Google continues to innovate too. Its Google+ social network , launched to a limited number of users last week, is a direct threat to Facebook, offering features unavailable from its established rival. Google+ Circles is a far more convenient way to sort friends and acquaintances and send updates to specific groups than Facebook's friend set-up. And Google+ Hangouts was first to video chat, and allows users to connect with up to nine of their contacts. The new Facebook video chat service only allows one-to-one calling.

There's little doubt the battle will continue with both sides ratcheting up the pressure with new services and features. Standing next to Bates at the press conference today, Zuckerberg made that perfectly clear.

"We're in the process of figuring out what we want to do next," Zuckerberg said.

 

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