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Every year, the celebrities and power brokers of big business converge on Sun Valley, Idaho for the pinnacle of exclusive schmooze and booze deal making conferences. Investment banker Herb Allen’s five day event is legendary.  This year, it began officially on Wednesday, under the scenic skies of the mountain resort town.

Guests with the privilege of attending include such heavyweights of media and technology as Rupert Murdoch (News Corp), Robert Iger of Disney, Jerry Yang and Terry Semel from Yahoo, Warren Buffet, Steve Ballmer, Bill Gates and others.  Also on the guest list are the folks from a number of high profile, high-buzz startups including representatives from IPTV player Joost, from news aggregator Digg, from Facebook, even newly funded Ning.

Between golf, meetings and private events,  among the crowd, ideas are circulated by the pine trees or the pools. In the boardroom or lounges, strategies and business cards are exchanged. Partnerships are contemplated. 

One day in out of five and rumors are already swirling about deals in the works. Thursday, leading the pack was a story about Facebook and Microsoft.  Apparently first reported by former analyst Henry Blodget and inspired in some part by the proximity of Microsoft executives and media-darling of the moment, Mark Zuckerberg (of social network Facebook) – talk reverberated about an acquisition in the neighborhood of $6b. 

The speculation makes for interesting discussion though there is nothing credible to suggest Microsoft buying Facebook is any more likely than the alien abductions reported on the front page of supermarket tabloids. 

Still,  though the deal is extremely unlikely, there is a plausible foundation for people to suggest it (beyond just the presence of the two company’s executives at the same hotel) and that makes for some talking points;  two on why its not impossible to consider and one on why it won’t happen:

FIRST, THE MONETIZATION CHALLENGE:
Most social networks have struggled to monetize their audiences beyond pure-play internet advertising.  Facebook, though its audience metrics are huge (recent comScore numbers peg 28million users and growth in all demographics), is so far another glaring example of that.  They depend extensively on advertising partnerships for income.

Marketers salivate at the prospect of selling to this audience, and the staggering usage metrics make for a climate of “irrational exuberance.” But in cold, raw view?  Few sites have been successful at converting audience from passive viewers to active buyers on a consistent basis.  Further, monetizing the user-base without harming the user experience in a way that ends up alienating the customers is a challenge and obstacle that remains a constant concern with the volume of competing networks growing exponentially.    Ads are one thing but direct monetization by sales are another.

Big media and product oriented conglomerates with diversified offerings are among the best equipped to handle these issues.  Microsoft is among the pool of ideal buyers. They are fighting to catch Google in search, pushing for more audience at MSN, and simultaneously moving video games and product.  All of those initiatives could benefit from greater audience reach; even Microsoft advertising solutions, which have been newly bolstered with the purchase of aQuantive, would benefit from more direct control over an audience the size of Facebook’s.

FAMILIARITY CAN LEAD TO STRONGER PACT
Microsoft and Facebook aren’t strangers, they’re already partners. Late August, 2006, Microsoft and Facebook sealed a strategic alliance that made Microsoft the exclusive provider of both banner and sponsored link advertising on the Facebook platform.  Through that deal Microsoft is already very familiar with the Facebook audience and their behavior patterns.     

POINT 3: WHY THE DEAL ISN’T LIKELY
— The Math doesn’t Make Sense –
Facebook recently started looking to hire a stock administrator, a role only needed by a public company.  They also recently opened their platform to outside developers and a wider audience.  It’s crystal clear they’re looking to grow bigger and bigger and file for an initial public offering sooner than later.  If buzz were the sole judge, they’d be prom king for life.

To stop the train, change their course,  Microsoft would have to pay a large premium. (And Facebook has reportedly already turned down a two billion dollar buyout in the past year).  At $6b, as reported, the price might be enough to temp the Facebook decision makers but per the speculation from former Internet industry analyst turned blogger Henry Blodget, that would be an amount equivalent to 1/25 the valuation of Google.  Thing is, by most accounts Facebook’s revenue is not even close to 1/25 that of Google, nor growing at a rate to justify that kind of multiplier against earnings.   (As a private company, actual revenues are not disclosed)

Microsoft is intimately familiar with Facebook’s advertising revenues; and by many reports, the numbers aren’t attractive.  News site GigaOm, for example,  reported a general dissatisfaction from Madison Avenue several months ago.  In another report Click-Thru rates were earmarked as being about .04%….that’s 400 clicks per million page views.  At $1/click that would yield just about $40k in revenue on a billion page views a month or $480k in revenue over a year.

For perspective, Microsoft paid $6b to buy advertising firm aQuantive in May.  aQuantive had 2006 revenues of $442m. One hundred billion page views a month would only bring in ten percent of that.   Even factoring in display ads, if the click-thru numbers are correct, the traffic volume would have to be (and remain) phenomenally high for revenue to approach the same number as that paid for aQuantive.  (And that neglects the fact that the aQuantive deal was considered over priced by many.)

So the question is: Would Microsoft pay that much? Would they take on two $6b deals within a few months of each other?  Not likely and less likely!   It’s true Facebook has a huge user base.  It’s true that if a dollar figure was attached to each user for the  point of monetization it would only take $200 per subscriber to value the company at $5.6billion.  It’s even true Microsoft has motive and incentive to want to buy.  But the price?  Even for Microsoft, $6b is a lot of cash.

As a prospective buyer, it comes down to how you look at things – on the one hand, do you bet on what you’ve seen done (click thru rates, effective monetization, existing revenue etc)?  Or on the other hand, do you look to the future and focus on potential….like $200 per customer?

I don’t see the folks in Redmond being so excited about the future that they’d be blinded by the present.  I definitely don’t see Steve Ballmer as Blodget wrote in his post:  being “desperate and furious, sick of sucking wind in the Internet game”…I don’t see him “raiding the bank account and snapping up the hottest company on earth.” 

Buying out of desperation and simply because something is hot?  That’s about as logical as Microsoft announcing tomorrow they’re scrapping the Xbox, and Search and instead going to focus on consumer space travel.

For Microsoft to buy Facebook at the figure floated they have to have a model that gives a logical justification of the price.  There’ got to be rationality.   If such a model exists, it’s sure hard to see from the outside looking in and reports speculating this deal is possible have done zero for providing illuminating evidence that makes their case.