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Microsoft signs two-part Facebook deal

An equity investment and an expanded ad deal bring software's giant and the Net's darling even closer together.

By David Kirkpatrick, Fortune senior editor

NEW YORK (Fortune) -- With its $240 million equity investment announced Wednesday, along with a commitment to expand its pre-existing relationship as exclusive third-party representative for advertising on Facebook, Microsoft has cemented its connection to the company Silicon Valley is obsessed with.

In a way nobody has seen since the early days of Google (Charts, Fortune 500), the collective attention of Silicon Valley is focused on one company. Facebook has everyone riveted for two reasons.

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First, it seems to represent the future of the Web because it is such an elegantly-designed way for individuals to connect with each other. The socially-networked Internet is what techies see as the next thing and Facebook is the standard-bearer.

Second, what causes Facebook to stand out from the scores of other social networking companies is its amazing pace of growth.

In today's conference call Facebook Chief Operating Officer Owen Van Natta said that the company is doubling its base of active users every six months. Today the figure is around 50 million. In a separate conversation with me he said that the company's growth internationally has been so stunning that users outside the U.S. now represent 60 percent of the total.

The biggest single change in Microsoft's expanded ad deal, many details of which remain secret, is that the Redmond software company will sell Facebook ads globally, not just in the U.S.

Van Natta also made clear that the ad deal is not financially a part of the equity investment.

"These are two completely separate transactions," he told me.

So in addition to an immediate payment of $240 million, which will enable Facebook to grow considerably larger with no concerns about financial strain, there will be additional payments of unspecified amounts as Microsoft (Charts, Fortune 500) sells those ads.

Facebook expects to employ about 700 people by the end of 2008, roughly double today's total, Van Natta said on the conference call. While Facebook was reportedly already getting around $150 million in revenue, mostly from the pre-existing U.S.-only Microsoft ad deal, the equity investment must feel like a comforting cushion to Facebook CEO Mark Zuckerberg.

Zuckerberg wants the company to focus mostly on improving its user experience, to figure out more ways to help people efficiently connect with their friends, and to help software companies build better applications inside the Facebook "social graph," which is his term for company's people network. Facebook's opening of its social graph to applications from outside companies in May supercharged the company's growth and cemented its status as Silicon Valley's obsession of the year. (Here is the exclusive detailed story about that move I published at the time.)

So Microsoft's $240 million, which amounts to a mere 1.6 percent of Facebook, wins Facebook a years-long insurance policy without it having to give up very much.

From Microsoft's perspective, it's a big win and worth every penny, even though it had to accept a Facebook company valuation of a stunning $15 billion. It was as much about keeping Google from buying a piece of Facebook as it was about buying one for itself.

Says analyst Roger Kay, President of Endpoint Technologies Associates: "For everything positive it does for Microsoft, it does something negative for Google, and in some ways that's the benefit. It's the return bout for having lost on YouTube, essentially."

One can only assume that in the deal's language are clear obstacles for Facebook to take money from Google anytime soon.

Microsoft with this pair of deals blocks Google's entrée to Facebook, and keeps Google from building an even bigger block of advertising partners to extend its own dominance of Internet advertising. Google has already partnered with MySpace and AOL, among others, at great expense.

Just to make it all the more satisfying for Microsoft, the deal was announced just as Google was conducting its own analyst day on its Mountain View, California campus. This is likely to be the talk of the day there, despite whatever impressive information Google itself is dispensing. Top of page