In what could be a major shift in the social networking landscape, Yahoo (Nasdaq: YHOO) 
reportedly has held talks to purchase Facebook, which trails rival MySpace.com in terms of total users, but has found traction among the college-age demographic with a more restrictive membership approach.
Yahoo could pay as much as US$1 billion for Facebook, according to a Wall Street Journal report Thursday. The social networking site has also discussed a sale with both Microsoft (Nasdaq: MSFT) and Viacom (NYSE: VIAb) , the parent of MTV Networks and other media properties, the report said.
Facebook limits membership, requiring that its members belong to existing networks such as a high school, college or a hand-picked group of companies. That requirement has kept it relatively small, with around 10 million registered users compared to 100 million for MySpace, which has no such restriction.
Even with limited membership, Facebook is one of the most heavily trafficked sites on the Internet, with users displaying a high degree of loyalty, using the site heavily to check up on friends, find new friends or connections and maintain their own pages of photos, Web logs and other information.
Rival MySpace was sold last year to Rupert Murdoch's News Corp. for around $600 million.
Strange Bedfellows
If the deal does go through, one of the first orders of business for Yahoo would likely be to undo the recent agreement that made Microsoft the search provider for the site. Neither Yahoo nor Facebook would comment on the reports Thursday.
That $150 million agreement was a major win for Microsoft, especially since it came after Google (Nasdaq: GOOG) outbid it for the right to serve up ads for MySpace. Google paid $900 million for that privilege.
Yahoo could likely use the boost that a bold move like buying Facebook would give it. The company suffered another blow to its stock price this week when executives said the portal's ad sales growth had started to slow in key areas such as automotive and financial services advertising.
A sale may also be timely for Facebook, with recent signs indicating the company's rapid growth may be contributing to some stumbles along the way.
Earlier this month, Facebook's 22-year-old founder and CEO Mark Zuckerberg acknowledged making a mistake when it implemented changes to a news feed program that let people know precisely when profiles had been updated -- without telling members in advance or giving them the ability to change those features.
"We really messed this one up," Zuckerberg said in statement posted on the site after members became outraged over the changes. "We did a bad job of explaining what the new features were and an even worse job of giving you control of them."
Matter of Time
Facebook has been the subject of takeover rumors since Murdoch's purchase of MySpace, which sent shockwaves across the Web industry by suggesting that social networking could become not just part of a larger Internet strategy, but a key foundation for one, said Outsell analyst Chuck Richard.
"Murdoch's move put the entire sector in the spotlight," he noted.
The recent deal with Google goes a long way toward answering the question about profitability, but whether sites that become popular stay that way remains to be seen. "We've only had a relatively short time to see how these sites perform and already we know that sites rise and fall in terms of their popularity pretty quickly," Richard told the E-Commerce Times.
Indeed, social networking has also proven to be notoriously hard to predict. For instance, Friendster went from cutting-edge to old-hat in a matter of months and efforts by Google -- with its oddly named Orkut -- and other major Web players to establish their own social networks have largely fallen short of targets.
Yahoo has also tried to use the photo- and video-sharing site Flickr as the basis for its own social networking juggernaut.
An even bigger question remaining is whether the sites can ever become significantly and consistently profitable. The bet waged by Murdoch on MySpace certainly suggests he believes the sites can make money, and the fundamentals of the sector are favorable as well, noted Nielsen//NetRatings analyst Jon Gibs.
Gibs called such networks the "reality television of the Internet," because the content is generated by users and costs sites themselves little to create and manage.
"Social networking is not a fad that will disappear," Gibs declared. "If anything, it will become more ingrained in mainstream sites." Having social networking as part of a larger Web realm is the best recipe for success, he said.
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