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My gut reaction to the news that AOL’s Platform A would offer a guaranteed CPM (cost per thousand) for applications developers building widgets for Facebook and Bebo was that it’s a subsidy and subsidies are an unnatural and bad thing for business. Then I found out the guaranteed payment was only 40 cents, which made me wonder how in the heck anyone could make real money off such a low CPM.

That translates into $400 for every 1 million visitors. Even with multiple ads and millions of page views, such a rate is unlikely to generate a venture-level return. Obviously there are plenty of people building apps (such as Scrabulous) who aren’t looking for venture returns, but it still seems awfully low. However, making money for apps developers is only a side benefit of the program.

The real goal is to encourage apps developers to use the Platform A ad network to sell their ad space, in turn boosting the entire category of online social network advertising. Obviously the bigger that category grows the better it is for the struggling Platform A (and Facebook’s attempt to defend a $15 billion valuation.) Undoubtedly Platform A will net more developers, especially for ad space that provides a CPM of less than 40 cents, but I’m not sure if this will help grow the industry as a whole over the long term.

I’ve asked Platform A how much they anticipate spending on this effort, but a spokesman declined to tell me. That, however, is the central question here, because what Platform A is doing is selling the ad space at a loss (or covering that loss). If we recall the subsidized shipping of the dot-com days, it’s remarkably easy to predict how this adventure could end if Platform A doesn’t either raising the CPM rate or limit the guarantee. For those riding the Platform A gravy train it would be nice to know when it stops.

 The big news tonight is business social network LinkedIn raised $53 million in Series D funding at a valuation of $1 billion. The new round is led by Bain Capital (the same genius investors who also funded Vonage) brings the total money raised by the company to about $80 million. I wasn’t going to write about this, given everyone had already jumped on the story.

Anyway the valuation of $1 billion -not as insane as the valuation placed by Microsoft on Facebook - was jaw dropping. Sure, LinkedIn has more value than plain vanilla me-too social networks but is it really worth a billion dollars? I ended up doing some back-of-the-envelope calculations while watching Boston Celtics celebrate their 17th NBA Championships.

The question of over-valuation had first popped up when I read about this round in May 2008 on Venturebeat . Techcrunch then reported that Allen & Co, the New York bank was helping Reid Hoffman’s company raise fresh capital at the $1 billion valuation.

So I decided to do a back-of-the-envelope comparison with XING with some of the publicly available data on XING, a European Social Network that is publicly traded in Frankfurt. It is a pretty good proxy for a business-focused social network, such as LinkedIn.

It has a market capitalization of about $300 million. It has has 5.71 million subscribers. XING had revenues of around $11.6 million at the end of first quarter 2008; about 70 cents per month per subscriber. That works out to about $52.30 per subscriber. For sake of comparison, Facebook’s reported $15 billion valuation works out to $125 per subscriber.

If you use those numbers, then LinkedIn’s rumored 20 million users are worth $1.04 billion. The company is adding about 1.3 million new subscribers a month, so by those estimates it should end the year at around 29 million subscribers. USA Today reported that LinkedIn was on target to do between $75-to-$100 million in revenues this year. Lets be generous and assume that they indeed do $100 million that works out to about 29 cents per month per subscriber (assuming that the number of subscribers at the end of the year is about 29 million.)

My back-of-the-envelope calculations show that if your user the value per subscriber of then LinkedIn’s $1 billion got a market valuation. On per-subscriber revenue basis, LinkedIn seems a tad overvalued, especially considering that their traffic is range bound, and the number of active uniques is showing a slight slump.

What do you guys think?

Update: Connie Loizos of PE Hub is spot on in saying that this video of LinkedIn VCs self-congratulating themselves made her cringe. Me to Connie.

Neither Om nor I are shy about talking infrastructure, but the High Scalability blog has gone totally geek and parsed the details of how Facebook plans to scale its new Jabber chat service to 70 million members using a hella lot of servers and Erlang. As Sandy Jen over at Meebo can tell you, chat is a challenge to scale because it requires a constantly open connection to the servers and low latency. That’s a recipe for a lot of hardware and some flexible architecture. Good thing Facebook has $100 million to spend, but bad news for the firm if the money spigot closes.

If this story interests you then you should definitely check out our upcoming conference, Structure 08.

Facebook users can already access the site on their mobile phones through the Facebook mobile page, but apparently the combination of the social network and 3G networks is what prompted Hong Kong tycoon, Li Ka-shing, to up his stake in the company to more than $100 million from $60 million.

Li talked about his Facebook investment on an earnings call for Hong Kong conglomerate Hutchison Whampoa this morning, where he is chairman. MarketWatch reported that Li is willing to invest even more because “we could have some synergy between the 3G services of Hutchison and Facebook, so the customers could use Facebook on mobile phones.”

Hutchison, which provides 3G service in Asia, Europe and the Middle East under the 3 brand, has lost more than $16 billion since 2002 building out 3G networks. In fact Hutchison today reported that its 3G services turned cash-flow positive for the first time in 2007, with 17.6 million subscribers worldwide and total sales of HK$ 59.91 billion ($7.7 billion). However, it still reported a net loss of $2.31 billion on 3G services.

An alliance with Facebook might be a way to pump up the brand a bit more. Actually, this looks remarkably similar to Microsoft’s reason for investing in Facebook. And who wouldn’t put a $15 billion valuation on sex appeal?

This morning after AOL said it would spend $850 million to buy social networking site Bebo, I had a chance to chat with Ron Grant, AOL’s chief operating officer. What follows is an edited version of our conversation.

OM: Why Bebo?

GRANT: Bebo is one of the best social media companies out there. They are more than a one-dimensional company, and they have embraced their social media space. Three things attracted us — it is utilitarian and has a high level of engagement, its rich media aspect, and their ability to understand marketing and engagement marketing.

OM: What are the plans? Why can AOL make it work where MySpace and Facebook have challenges?

GRANT: Bebo is going to be a cornerstone of our global expansion. It is difficult to monetize with search, but a good platform to monetize with display advertising. Platform A has a better opportunity to monetize this. Bebo provides a unique relationship with advertising. It is different from search and search keywords.

OM: How will Bebo fit in with AOL?

GRANT: This is one of our core focuses, and this is going to add assets to the mix. It will stand alone from the unit and we will talk more about it when the deal closes.

OM: What’s going on with this deal and Time Warner’s plans for AOL? It’s like Time Warner is schizophrenic.

GRANT: The whole focus has been the turnaround of AOL, making this a viable company and creating long-term value. Regarding speculation around Time Warner, we in AOL are getting support. Time Warner spent a billion on acquisitions for Platform A and now another $850 million. We have been getting tremendous support from Time Warner to build long-term value for this company.

OM: Are there online video synergies with Bebo and Time Warner?

GRANT: There are synergies across all the media, Time Warner and throughout all of the entertainment industry. Bebo is open, and we can work with everyone.

OM: Will we see AOL making more deals soon?

GRANT: I can’t really speculate on additional acquisitions, but we will be aggressive.

Today’s Wall Street Journal devotes 2,400 words to Mark Zuckerberg’s hiring of former Google exec Sheryl Sandberg as Facebook’s COO, and his attempts to mature into the CEO role at a large company. After reading the article I decided to sum it up in haiku form for our readers.

Growing up is hard
Doing it in public sucks
Facebook needs money

All levity aside, as a young founder Zuckerberg is treading on the worn footsteps of entrepreneurs everywhere. College is one of the best times to start a company because you don’t need to be mature. You have the ability to spend all hours obsessing over your creation, not paying rent and generally avoiding other responsibilities. Bill Gates, Michael Dell, Marc Andreessen, Sergey Brin and Larry Page all began their efforts in or immediately after college.

Zuckerberg is lucky, his collegiate startup has soared. And he now has the unenviable task of growing from a self-absorbed adolescent into a gracious adult in public. Not everyone makes this transition and no one does it without a few awkward moments. He’s also hampered by a point of view that’s unique to entrepreneurs.

Like many entrepreneurs, he’s recognized his flubs and is seeking to address them. Also like a true entrepreneur, he doesn’t spend a lot of time apologizing for his mistakes, but opts to go out and act differently. Those of us in the real world can fault him for that, but that mindset isn’t as much a function of age as it is a hallmark of an entrepreneur. As Zuckerberg matures, he’ll still have that mindset, but he’ll likely hide it a bit better.

Slow and steady wins the race. Given the VC industry’s penchant for hockey-stick growth charts, it’s far from their slogan, but when it comes to a slow annual growth in funding data, it’s a welcome sign. The PricewaterhouseCoopers/National Venture Capital Association MoneyTree data is out for 2007, and the $29.41 billion invested in companies is the highest level since 2001, when VCs plowed $40.62 billion into businesses.

What they don’t say in the release is that before this, 2006 was the highest level since 2001 — and before that, 2005. Venture investing has risen almost steadily since the incredible drop seen between 2000 and 2001, when the $105.11 billion that went into startups fell by 60 percent.

This is pretty good news for people worried about the next technology bubble. It’s not to say that technology companies big and small won’t be affected by the current weakness in the economy, but venture investment doesn’t have as far to fall. Sure, there are what seems to be a hundred new startups popping up, but most of these haven’t raised $25 million in Series A like some of the telecom copycat deals of the late 90s.

Some quick math with dollars invested and the number of deals shows that the average deal size today is about $7.7 million compared with $13.3 million in 2000. That points to more reasonable amounts getting put into deals and given the smaller amounts put on the line, investors are likely anticipating a more reasonable M&A exit while still hoping for the home run IPO.

Those exits should become clear in the next year or two. Last year 1,168 firms received later stage funding, or 31 percent of the total number of deals. The year before, 1,006, or 28 percent of total deals, scored late-stage funding. Typically those firms are about a year or two away from an exit, and since many are becoming pessimistic about technology IPOs in 2008, it will be worth watching to see how many of those companies get picked up in M&A deals.

Update: Frankly, I am myself getting sick and tired of repeating myself about the all-important “information transmission from partner sites” aspect of Beacon. That question remains unanswered in Zuckerberg’s blog post, which upon second read is rather scant on actual privacy information. Here is what he writes:

If you select that you don’t want to share some Beacon actions or if you turn off Beacon, then Facebook won’t store those actions even when partners send them to Facebook.”

So essentially he’s saying the information transmitted won’t be stored but will perhaps be interpreted. Will this happen in real time? If that is the case, then the advertising “optimization” that results from “transmissions” is going to continue. Right!

If they were making massive changes, one would have seen options like “Don’t allow any web sites to send stories to Facebook” or “Don’t track my actions outside of Facebook” in this image below.

I think Facebook needs to clarify this point further, because currently, despite this mea culpa, I don’t think it’s easy to trust Facebook to do the right thing with the information they continue to collect. You can also share your thoughts on our Facebook Question of the Day Application. (Original post below the fold.)

Facebook founder and CEO Mark Zuckerberg, after taking it on the chin for nearly two weeks, is apologizing about the company’s Beacon advertising platform fiasco. In his blog post, in which he explains his side of the story and rationalizes his reasoning, there is one paragraph which says it all:

We’ve made a lot of mistakes building this feature, but we’ve made even more with how we’ve handled them. We simply did a bad job with this release, and I apologize for it. While I am disappointed with our mistakes, we appreciate all the feedback we have received from our users.

He goes onto say that while he thought Beacon was a great idea, the company might have gone overboard.

The problem with our initial approach of making it an opt-out system instead of opt-in was that if someone forgot to decline to share something, Beacon still went ahead and shared it with their friends.

No shit! I think they tried to push the limits, and got some push back, and that’s that. Regardless, had people not contacted them, as Zuckerberg puts it, they would have gotten away with it.

Instead of acting quickly, we took too long to decide on the right solution. I’m not proud of the way we’ve handled this situation and I know we can do better.

I think this is a good move by Zuckerberg and I hope his team learns from it. This is the second time they have tried to test the limits of their community and gotten some flack for it. It would be better if they asked — they are a social community — and being social means listening and talking with each other first, not after the fact.

Our entire coverage of the Beacon Gate

Microsoft (MSFT) has invested $240 million in Facebook at a valuation of $15 billion and gets the rights to sell third-party ads on the Facebook network. That’s about 2 percent stake. Not as crazy as the $900 million that MySpace (NWS) pried out of Google (GOOG), but still pretty steep. I thought the deal was for $500 million, so I am guessing there is another shoe to drop here. (Looks like Microsoft is going to be to Facebook what Yahoo was for Google…transition strategy!)

Today Facebook also launched an application for BlackBerry, and got RIM and T-Mobile USA on stage with Facebook co-founder Dustin Moskowitz to announce it today. Facebook already has an iPhone app that early adopters everywhere love to brag about. Moskowitz also announced the Facebook platform was expanding to all web-enabled phones, with apps appearing on mobile Facebook profiles and getting access to SMS to communicate with users.

Press call live blogging below the fold:

• The call was supposed to start at 2 pm, its already 2.04. Bad muzak playing!
• Mark Zuckerberg , if you want to play Steve Jobs, learn to be punctual like Steve.
• Maybe they are getting their stories right, and haven’t figured out how to put the obscene finger gesture to Google in polite/politically correct language.
• 2.10 pm, and still terrible music and no sign of anyone.
• 2.12 pm: It’s on. Vivek Verma and Kevin Johnson, president of the Platforms & Services Division at Microsoft, are on the call. Brandee Barker (spokesperson) and Owen Van Natta, vice president of operations and chief revenue officer at Facebook. are on the call.
• Mark is beyond all these PR things He got peeps it seems who are handling this!
• There is an error in the press release, and will be reissued.
• Owen is speaking. He is saying stuff which could be spoken by any executive on any conference call.
• Kevin - major win for Microsoft in advertising and strong signal from our biggest partner. Facebook is a strategic win for us. We are very pleased with the depth and the scope of this deal. Seems like Facebook is going to work on newer ads for social environment.
• Kevin says the equity stake is a strong statement of confidence in this partnership. Blah blah! 200 million users is in realm of possibility and combine that with monetization opportunity.
• Kevin - there are certain elements we won’t disclose about this deal. We have strong alignment around technology. Lot more we will do together.
• Owen says: lot of folks wanted to partner with us over advertising, and relationship has been great for us. We are now expanding our relationship beyond U.S. borders.
• Owen says: no restriction on 3rd party developers. I think they can tap into Microsoft ad center and other technologies.
• (Arrington asks) Any other investors in this round? Not announcing any other investors in this round for now. Just Microsoft.
• Kevin says - we are expanding our advertising relationship internationally and that is what we are announcing right now.
• In response to Josh Quittner’s question about who else were they talking to, Owen says not commenting on who were others they were talking to.
• Owen says lot of rumors about financing but this is the best set of terms we came up with this deal.
• Not talking about Facebook IPO.
• Is this deal just for banner ads? Will it be expanding to Internet Search deal and will it be separate deal? We are not announcing anything related to Web Search. This is only about advertising.
• Question Mine: Kevin Johnson (what we are seeing so far) we continue to see monetization which continues to improve. We will drive hire. Continues to improve… both parties are not disclosing the metrics. Part two - in terms of what we are using the capital for, our innovation and growth we are seeing today. Expanding our employee base. 700 employees in 2008 (wow). International growth and there is a lot of technical infrastructure we can build around the. Allow people to experience better Facebook. (I will expand on this point later)
• Building your own (FB) salesforce? Microsoft is an exclusive advertising platform partner. The two companies work together today and going forward - there are different needs advertisers have. Socialization of the Internet needs innovation.
• Does Microsoft have access to Facebook user data? User trust is core to what we focus on and we both are going to provide highly relevant advertising and focus on that. We don’t want to violate user trust…There are certain parts of the partnership we are not announcing. I think they are dodging a very relevant question.

Hitwise just sent me over some data that helps put the deal in perspective. According to the Internet monitoring firm, for the week ended 10/20/07:

*Facebook.com was the 9th most visited web site in the U.S., with .96 percent of all Internet visits.

*U.S traffic to Facebook.com has risen 102 percent year-over-year when compared with the week ended 10/21/06.

*Among a custom category of leading social networking web sites, Facebook.com received 15 percent of U.S. visits, putting it at No. 2 behind MySpace.com, which received 76 percent. Windows Live Spaces received 0.4 percent.

*Facebook.com received 9.9 percent of its U.S. traffic from search engines. Of that traffic, MSN Search and Live Search combined for .46 percent to Facebook.com. Google sent 6.82 percent of U.S. traffic while Yahoo! Search sent 1.34 percent of traffic.

*U.S. visits for Facebook.com among users ages 35 and over have increased 19 percent when compared with the week ended 10/21/06.