With its purchase today of privately held Firefly Network of Cambridge, Massachusetts, Microsoft made a high-profile move to establish itself as a monolith that cares about your personal privacy.
No price was disclosed, but estimates have pegged the purchase as a US$40 million deal, which Forrester Research analyst Kate Delhagen refers to as a "rounding error" for the buyer in Redmond. Microsoft's press release indicated that it was buying Firefly primarily for the company's profiling technology, which enables users to control the information they disclose to Web sites using Firefly's "Passport" product.
"Microsoft has had a very checkered past on the privacy front," Delhagen says. "Their sites have been very erratic about disclosing what they're doing. But with this purchase, I think they're showing that they recognize that they can't do business on the Web -- with sites like Investor, CarPoint, and Expedia -- unless they establish good privacy policies now."
The purchase made little mention of Firefly's "collaborative filtering" technology, which Firefly was founded in 1995 to commercialize. That technology, used on sites like BarnesandNoble.com lets a Web site make intelligent recommendations about books, music, or movies that a user might like, based on their stated tastes.
For that reason, Firefly's competitors in the collaborative filtering market say they don't feel threatened by the purchase. In fact, some are downright jubilant.
"This is the best thing that ever happened. This is wonderful," chirps Steve Snyder, an ex-Microsoftie who now runs Net Perceptions in Minneapolis.
Why the cheeriness? Microsoft's purchase of Firefly effectively removes one competitor from the marketplace when companies are shopping around for the collaborative filtering technology to add to their sites. And that leaves Snyder's company as the de facto leader. "This clarifies the market for collaborative filtering," says Snyder, going on to praise Microsoft for supporting consumers' privacy rights.
Also praising Microsoft are those on the receiving end of the reported $40 million.
Nick Grouf, Firefly's CEO, said that "everyone here is absolutely thrilled" by the deal, which was the end product of an "incredibly fast" negotiation.
Private investors and venture capital funds had poured slightly more than $20 million into Firefly in its short lifespan, and the company's original business plan projected that it would have gone public by 1997. At one point, Firefly's market value was estimated at $100 million.
But the Firefly gang doesn’t seem to think Microsoft got off cheap. Christopher Sprey, general partner at Atlas Venture in Boston -- the firm that led Firefly's first round of financing, sounded pleased.
"Obviously, we think the price is a good one or else we wouldn't have agreed to it," says Sprey. He praises Microsoft for its savvy integration of companies it acquires: "They really understand how to do that right and do that well." (Atlas also handled the sale of Vermeer Technologies, which developed FrontPage, to Microsoft.)
With the sale of Firefly, all 70 of Firefly's employees are expected to relocate to Redmond.
But some observers think that Firefly went cheap. David Card, an analyst at Jupiter Communications, offers one reason why: "This is rev three of their business plan. First it was agents, then collaborative filtering, then profiling and privacy," Card says. "That may be one reason for the valuation. And they're buying Firefly for profiling and privacy, which is something they don't really have many clients for. People like Barnes & Noble bought the collaborative filtering, not the profiling technology."
Firefly changed its focus, according to Grouf and Sprey, because before users would submit detailed information about themselves and their likes and dislikes to any collaborative filtering software, they wanted to ensure that they could control the use of that information. For that reason, Firefly was one of the first companies to post a "privacy policy" on its Web site, and the first to have its policies on handling personal information audited by Coopers & Lybrand.
And also for that reason, Firefly over the last year began to focus more and more on profiling, and to dedicate less effort to its collaborative filtering software, according to sources.
Sprey at Atlas explains it like this: "The establishment of a system for profile management is a precursor to collaborative filtering or any other kind of personalization.... As the company developed, it realized that it needed to work at that piece first." Grouf, too, describes profiling as the "foundation" to any kind of personalization services on the Web.
And that, apparently, is what attracted Microsoft. "Profiling is going to be a very valuable piece of commerce going forward," says Forrester's Delhagen, who adds that collaborative filtering technology has stalled in the market. "Now, it's up to Microsoft to execute on this promise, and to do the right thing on privacy."
