Microsoft Still Lags Google Despite Facebook Deal
Scott Reeves and Rachel Rosmarin 08.24.06, 2:58 PM ET

Microsoft has won an important victory in its battle for Internet eyeballs by linking up with Facebook, but even though it scored a technological coup, it is still miles behind Google in the world of online advertising and searches.

In a deal announced late on Tuesday, Microsoft will provide advertising services for Facebook, a social-networking site that competes with News Corp.'s MySpace.com. Microsoft will sell and provide banner ads and sponsored links for Facebook using its adCenter online advertising software and other in-house technology and services.

"We believe Microsoft edged out Google due in part to its ability to serve banner ads," the Cowen brokerage house said in a research note. "Google is still testing image ad-serving. We expect Google to remain the industry search partner of choice due to its ability to provide higher monetization of keyword ads, which allows the company to promise higher minimum payments to big partner deals."

Initially, Microsoft's deal with Facebook didn't include search-based keyword advertising, the type of ad inventory that makes up the majority of Google’s revenues.

The lack of text ads could diminish Microsoft’s ability to tout its Facebook deal as a technological showcase, said Joe Wilcox, an analyst at JupiterKagan.

"Banner ads are so 1999, and sponsored links are so 2002," said Wilcox. “What Microsoft needs to show is its contextual advertising and the back-end power behind AdCenter.”

AdCenter’s business unit at Microsoft, MSN, lost $77 million during the company’s third quarter, and probably won’t be profitable until the end of fiscal 2007, the company said.

“The division is hurting, ad sales aren’t growing, and Google continues to eat more ad share,” Wilcox said.

While Google and Microsoft are eager to sell ad inventory to popular social-networking sites, Yahoo! has thus far abstained from striking exclusive ad deals with such sites. As a tech portal with lots of its own content, Yahoo! could view user-generated content sites as competitors, or, it could simply be waiting for the complete launch of its new ad-selling platform, delayed until the first quarter of 2007.

Either way, the two biggest independent social sites, MySpace and Facebook, have already paired off with ad providers, leaving only video-sharing site YouTube without an exclusive ad-seller.

Mark Zuckerberg founded Facebook in 2004. The Palo Alto, Calif., company is privately held. ComScore's MediaMetrix report said the site has about 9 million registered users, making it the seventh-most-popular Internet site in the United States. The site includes geographic, work-related, collegiate and high school networks.

"We chose Microsoft because it, like Facebook, is a technology company at its core and is committed to taking a fresh approach to targeting advertising to social media," Owen Van Natta, Facebook's chief operating officer, said in a prepared statement.

Steve Berkowitz, Microsoft's senior vice president for online services, said the companies will work together on future technology and advertising efforts.

"We believe that the combination of Microsoft and Facebook strengths will be incredibly attractive to advertisers as they forge more meaningful connections with one of the largest, most engaged audiences on the Internet," Berkowitz said.

Discussions between Microsoft and Facebook got serious last week. The companies hope the first ads will appear early this fall. Facebook now sells its own advertising, but in the past it has relied on others to handle the service.

Microsoft launched adCenter last spring in an effort to compete with Google and Yahoo!, which derive a torrent of bucks from their online advertising networks.

Earlier this month, Google announced a deal with News Corp.'s MySpace.com, the leading social-networking Web site, to pay at least $900 million in shared advertising revenue and become the site's sole search provider. As part of the deal, Fox Interactive Media will add Google search boxes to MySpace and other Web sites. Google has first crack at selling any display ads Fox doesn't sell directly. Microsoft and Yahoo! were vying to win the MySpace deal.

Meanwhile, Friendster, a pioneering Web site in the social networking sector, received $10 million in funding in a deal led by DAG Ventures in an effort to catch rivals Facebook and MySpace. Kleiner Perkins Caufield & Byers and Benchmark Capital, two prior investors, have joined the current round of funding.

Friendster created a buzz in 2002 and 2003, but then lost users to its newer rivals after a series of technical flubs and management missteps. Founder Jonathan Abrams would booted as chief executive officer in 2004.