The immediate reaction from everyone who I spoke to last week after they heard that Microsoft had invested $240 million for only a 1.6 percent stake in Facebook was that the company, in a desperate effort to catch up with Google, may have made one of the most idiotic overpriced investments of all time.
And when you consider that Facebook is only bringing in an estimated $150 million in revenue, the investment does - on it's surface - seem completely irrational and does indeed appear to be another indication of a massive Web 2.0 bubble that is about to burst.
But personally, I think Microsoft's investment in Facebook is one of the smartest moves the company has ever made.
And my rationale for this may not be what you may think.
A $15 billion valuation is absolutely irrational if you view Facebook simply as an incredibly smart and successful web destination where revenues will come from monetizing advertising served up on pages on Facebook.com. Those that are saying the a $15 billion valuation for Facebook is overpriced, are those that are looking at Facebook as a website or a portal.
And this is where the mistake is made. Facebook is much more than just a web destination. Facebook has the ability to eat Google's lunch by beating it at its own game.
Google isn't worth billions because of search.
Search became a lost leader for Google to sell highly targeted contextual ads across the web through its brilliant AdSense advertising platform.
Now, using the same playbook, Facebook is planning on using Facebook.com as a lost leader to sell highly targeted and contextual ads across the web through its soon to be announced "SocialAds network" that is rumored to officially launch next week on November 6th at Adtech.
Just as AdSense completely transformed the online advertising world a few years ago, Facebook is poised to transform it once again. And in doing so, Facebook has the ability to be the one company that truly gives Google a run for it's money.
What does Facebook have that Google doesn't?
User data.
Unlike Google, Facebook knows a lot about you and me. They know this based on they types of information that we put into our profiles on Facebook. Facebook knows where you went to college. It knows weather you consider yourself a liberal or conservative. It knows what movies and tv shows are your all-time favorites. It knows who your friends are.
Google doesn't know any of this information.
Google knows nothing about us other than what country we're logging in from.
Facebook knows all about us.
So why is Facebook's valuation of $15 billion far from being overpriced?
From the mere fact that Facebook's SocialAd network will finally deliver what others (including Google) have tried to launch for years but have each and every time come up short - a psychographic based behavioral ad targeting system that follows you from site to site as you navigate across the web.
As of right now, Facebook has the ability to deliver psychographic based behavioral ad targeting to its current base of 45 million users. If Facebook continues to scale at its current rate, that user base may well grow to be over 200 million people.
The value of 200 million users for a psychographic based behavioral ad network?
In a word.
Massive.
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