Facebook's fake revenues


Everyone's still talking about Henry Blodget's facile guess on his Internet Outsider blog that Microsoft might offer $6 billion for Facebook, the social network of the moment. And Facebook investor Jim Breyer, the Accel Partners venture capitalist who's on Facebook's board, tried to stoke hopes for such an outsized valuation by casually mentioning at Fortune's iMeme conference that Facebook was on track to do $100 million in revenues and turn an operating profit, by some financial measures, this year. But you shouldn't buy Blodget's musings, or Breyer's shilling, for a moment. Here's why.

Most people in the know believe that Facebook's revenues, such as they are, come not from actual ad sales but from a revenue guarantee Microsoft offered in a desperate bid to win the right to sell ads on its site. If such a guarantee exists, then Mark Zuckerberg doesn't have to lift a finger: Whether or not Microsoft actually sells ads, it still owes Facebook money. A sweet deal, as long as it lasts — which is 2009. But Breyer knows that, were Facebook to go public, it would have to disclose just how much of its revenues come from Microsoft. So he's just bluffing by talking up Facebook's Microsoft-inflated numbers.

Microsoft, which is in a better position than anyone to see how poorly Facebook's ads perform, should hardly be happy about paying Blodget's bubbly price for Facebook. After all, the revenues Breyer brags about are coming out of Microsoft's own pocket. Blodget's right about one thing: If Microsoft buys Facebook, it would be out of sheer desperation, not any kind of financial logic.