Microsoft to acquire Social Media Sites?

Dave Naylor speculated late last week that Digg will be bought by Microsoft. This is based on a statement by Kevin Rose that Digg had “signed on Microsoft as our new partner to sell and serve the ads on Digg”. Dave admits that it’s pure speculation and also observes that Microsoft has a similar deal with Facebook, and then speculates that Microsoft might buy Facebook too.

Having spoken with Robert Scoble recently, Microsoft’s former technical evangelist, I am not sure that either of these are too likely. Don’t get me wrong, I think both would be fabulous moves for Microsoft, which needs to look past short term revenue potential when looking at acquisitions, and start looking at the bigger picture of getting a strong foothold on the web, which they currently sorely lack.

It was Robert who pointed out to me the problem. Microsoft management has trouble understanding how to deal with these types of companies that are highly under-commercialized. He tried to persuade Bill Gates to buy Flickr at a time it did not have a set value yet (Yahoo! later bought it for $30M), but was soundly rejected. Robert pointed out that businesses to Microsoft generate $4B in revenue, not a few million with lots of upside potential.

That aside, it would be a very smart move for Microsoft to acquire Facebook, and potentially Digg as well. It would give them a strong foothold in the social media space, which, as Dave points out, they just don’t have right now. You can see why it might make sense for Digg to sell, because it’s no longer climbing like a rocketship. It’s still a very important site, but it’s peaked.

Facebook is another matter. Facebook is one of the hottest things in the valley right now, and this is likely to make the Facebook management team very patient in terms of selling out. That adds up to even higher pricing expectations. That makes it even less likely that Microsoft will step up to the plate with the more than $5B that such an acquisition is likely to require to get such a deal done.

As for Digg, this could be a step in the right direction for Microsoft too. They just need to do a lot more than acquire one company right now to establish themselves as a serious long term player on the web.