I would also think about the way IE turned into an awfully modularized insecure POS after winning. I disagree. IE just didn't improve much after winning. It always was a POS. Just as netscape was. Neither product was very standards-compliant, mostly because the standards were also POSs (PsOS?) at the time. The decision to rewrite Netscape wasn't taken because it was a perfect product.
Luckily we now have better, more standards-compliant alternatives.
The high valuation also represents a belief that Facebook is creating an important new operating system -- one that exists on the Web instead of on personal computers.
I'm not sure how a valuation is capable of representing a belief All valuations are by definition a representation of a belief; the value of a company is the present value of the combined future cashflows. Thus a valuation is nothing but an expectation of the future profitability of a company.
This doesn't mean that Microsoft expects Facebook to be this profitable, MS has other interests than the typical investor as 'User 956' noted earlier (http://slashdot.org/comments.pl?sid=338933&cid=21105741). But if Facebook, as some expect, will be the #1 source of commercially interesting consumer data (what they like, what their friends like, where they live, etc.), they will take big advertisement $$$. Microsoft definitely wants a piece of this.
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After all, how hard is it to build a special case for one specific website?
This doesn't mean that Microsoft expects Facebook to be this profitable, MS has other interests than the typical investor as 'User 956' noted earlier (http://slashdot.org/comments.pl?sid=338933&cid=21105741). But if Facebook, as some expect, will be the #1 source of commercially interesting consumer data (what they like, what their friends like, where they live, etc.), they will take big advertisement $$$. Microsoft definitely wants a piece of this.