Loaded with cash, Facebook may take on Google

Analysts warn CEO Mark Zuckerberg not to lose focus

With Facebook now flush with cash, the social networking phenom has the muscle to better duke it out with tech industry heavy-weight Google.

But while the investment of $500 million from Goldman Sachs and a Russian investor could do a lot to validate the business behind social networking, the question remains as to what Facebook CEO Mark Zuckerberg should do with this new financial muscle and industry clout.

While opinions vary as to what Zuckerberg's next step will be, most agree that the 26-year-old entrepreneur and billionaire shouldn't lose focus.

"Facebook needs to avoid the dangers that come from being big and having a lot of cash," said Augie Ray, an analyst with Forrester. "There can be the temptation to throw a lot of money around exploring different ideas, but Facebook needs to continue to focus on the unique core value drivers it has around personal sharing, relationships and communications."

Reports surfaced Monday that Goldman Sachs, a major investment bank, has taken a stake in Facebook, valuing the social network at $50 billion and investing $450 million in it. Another $50 million reportedly came from Digital Sky Technologies, a Russian investment group.

"The value of Facebook has been climbing," said Dan Olds, an analyst with The Gabriel Consulting Group. "With this transaction, the total Facebook value hits $50 billion. And if estimates are right, this puts Facebook's overall value at more than 40 times revenue, which is a huge number in this type of economic climate."

Olds was quick to note that this is great news not just for social networking companies, but for the tech industry as a whole.

But the Goldman Sachs investment shines quite a strong spotlight on Facebook.

Rob Enderle, an analyst with the Enderle Group, said Zuckerberg would be smart to sock a chunk of this new cash away because he's going to need it to take on Google.

While there's been a lot of attention on the competition between Google and Microsoft, there's been a growing rivalry between Google and Facebook. It makes sense. Both companies are top in their field. Maybe most importantly, both want to dominate the social Web.

While Facebook -- the most visited site in 2010 -- is the early leader in the social Web, Google is rumored to be working on its own social network to go head-to-head with Facebook.

"Facebook needs to use this new money to get ready to go to war with Google, which is where they are likely to face their biggest competitive challenge," said Enderle. "Finding ways to better monetize their properties, deny Google any revenue from those properties, and make their offerings stickier would all be advised strategies in terms of investment."

While Olds said he expects Facebook to use some of this money to make some strategic acquisitions, Ray cautioned that Zuckerberg would be wise to not start throwing his money around.

"If Facebook continues to do what it did in 2010, which is to build off of and enhance its core value proposition, then it will avoid diluting its brand and offering," said Ray. "There are many areas in which it can invest and grow.... If I were to pick one company whose turf Facebook may encroach in 2011, it would be Yelp. Sharing local business recommendations, meeting friends, making plans and discovering new places are all core to users' personal lives and relationships, and Facebook is already moving in this direction."

Sharon Gaudin covers the Internet and Web 2.0, emerging technologies, and desktop and laptop chips for Computerworld. Follow Sharon on Twitter at @sgaudin or subscribe to Sharon's RSS feed . Her e-mail address is sgaudin@computerworld.com.

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