Both internet companies had allegedly been courting the social networking behemoth with the hope of cashing in on its massive user base.
Microsoft already supplies banner advertising to Facebook in the US following a deal signed in 2006, but this extended alliance takes its remit into international markets (including the UK). Microsoft also agreed to take a 1.6 per cent stake in Facebook worth $240 million (£117 million) in its next round of financing.
The deal is significant - not just because it gave an indication of how much the market values Facebook at ($15 billion), but also because it could be the catalyst for Microsoft to become a much stronger player in the online advertising space.
Despite Microsoft's investment in its search platform, adCenter, and its Digital Advertising Solutions division, its performance in online search and display advertising has so far failed to seriously challenge Google or Yahoo!. For a company with a market cap of £340 billion, this is embarrassing, not to mention potentially damaging to its long-term growth prospects.
Partnering with Facebook - with its estimated 50 million active users - gives Microsoft some much-needed reach and a vital shot in the arm for its syndication business. "We need a way to generate more inventory for sale, because frankly we're pretty much sold out of what we have to offer," admits Chris Ward, commercial director for Microsoft Digital Advertising Solutions.
"We want to sign up lots of syndication partners, because we believe we can help them monetise their advertising inventory more effectively."
The deal's not entirely one sided; one can assume that a company with 30 years' experience and an annual turnover of $51 billion offers a newcomer such as Facebook considerable knowledge, resources and sales support.
"I suspect the economics seemed to work and they felt comfortable with the management team," agrees Brendan Condon, managing director at Advertising.com International, citing Facebook's existing relationship with Microsoft in the United States.
Upper hand
That said, Warren Cowan, chief executive at search agency Greenlight, is convinced Facebook is still the one pulling the strings in this relationship.
"Microsoft seems to have paid over the odds, which suggests to me the company was really desperate to get out there," he says. There's also been speculation that Microsoft will be taking the smaller share of revenue, estimated at around 20 to 30 per cent.
A clue as to why Microsoft might be interested in the social networking advertising opportunity lies in eMarketer's prediction that spending on online social networking advertising will top $3.6 billion globally by 2011. Little wonder Facebook has also launched its own ad system, Facebook Ads, in order to siphon off some of the profits as well.
One of the big attractions of social networking sites to advertisers is the wealth of information users give when they sign up, so there's the opportunity for richer targeting.
"Certainly the advantage of partnering with Facebook is not just the advertising from a socio-demographic perspective but also a contextual perspective," says Cowan.
"So if I'm in the 'Jack Bauer for president' Facebook group, I might be presented with ads for the DVD box set of 24 season five from HMV."
Bear in mind though that users on social networking sites are in entertainment rather than 'buy now' mode, warns Phil Macauley, head of planning and strategy for Yahoo! Europe. "So you want to add value to what they do, as opposed to giving the hard sell," he says. "If you're after an immediate sale, you'd probably be better advertising a travel product on a travel site or using behavioural targeting tools." This could explain anecdotal reports that conversion rates on social network sites are low.
Waiting to book
Not that this has deterred Microsoft. Ward says the company still has "a lot more work to do before we start booking advertising", although he promises they'll start selling ads "imminently".
Not that Microsoft's competitors are standing still waiting for the software giant to catch up. In November, Google launched its OpenSocial platform, which lets developers build standards-based applications across sites, and has already signed up MySpace, Bebo and others. "One of the reasons developers would want to move applications around the web is that you can build advertising into applications," says a Google spokesperson. It's a win for advertisers, but also for Google if they decide to use its Google's AdSense platform.
Meanwhile, Yahoo! has its own advertising deal with Bebo, and in November launched a 'Facebookesque' networking site called Kickstart for college leavers.
There's also nothing to stop Google or Yahoo! from working with Facebook in the future. Should Facebook one day want to add a web search engine to its site, for example, its search advertising business could be up for grabs. While Microsoft would no doubt jump at the opportunity to increase uptake of Live Search, one could assume the market is wide open to Google, Yahoo! or even a white label provider too, because Facebook's existing relationship with Microsoft makes no reference to search advertising.
So while the software giant might have scored a victory in this instance over its competitors, the future of the online advertising industry is far from sewn up yet.
AN ADVERTISER'S DREAM: FACEBOOK'S VITAL STATS
- Second most trafficked social networking site (ComScore Media Metrix, January 2006)
- 55 per cent female, 45 per cent male (ComScore Media Metrix, January 2006)
- 35 per cent aged 18-24 (ComScore Media Metrix, January 2006)
- 80 per cent have purchased online in the past six months (ComScore Media Metrix, January 2006)
Source: Microsoft.