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A deal giving Microsoft Corp. (MSFT) a prominent role in powering Web searches on social networking site Facebook is part of a tapestry of smaller alliances, investments and tactics the software giant is pursuing to expand its online advertising businesses.
Since it's highly unlikely Microsoft will acquire Sunnyvale, Calif.-based Yahoo Inc. (YHOO) in order to reach significant scale in its Internet search activities, Microsoft is taking a piecemeal approach to improving its loss- making Online Services Business. It is focusing on improving its technology and boosting its audience share in myriad ways.
Few think there's any short-term prospect the company will vault past Mountain View, Calif.-based Google Inc. (GOOG) in the search market race any time soon. But the Facebook deal will boost Microsoft's audience and showcase its improving advertising search credentials, and both parties should generate additional revenue.
"This is a great deal for Microsoft," said Shar VanBoskirk, principal analyst with tech research firm Forrester Research. "They have some really smart search technologies, but there just aren't a lot of people using them."
Redmond, Wash.-based Microsoft said last week that it would soon provide Web search services on U.S. Facebook sites through its Live Search engine. Facebook is one of the world's most popular social networking Web sites. Microsoft last year invested $240 million in a 5% ownership stake in Palo Alto, Calif.-based Facebook, whose site works by offering users free accounts where they can keep in touch with their friends through email, pictures, music and games.
Microsoft declined to provide specific information about how the search deal will work, but most analysts think that it's likely Microsoft will place a search "toolbar" on Facebook, allowing users to search the wider Web from within their Facebook accounts.
Like most of the other smaller initiatives taking place to bolster Microsoft's online business, the Facebook deal isn't expected to shift the market-share landscape. Google in May took more than 68% of U.S. Internet searches, according to Hitwise. Searches, which account for roughly 40% of total Internet advertising, are the most profitable segment of the Internet economy. ComScore said that in June, Google took 63.7% of global searches, with Microsoft taking just 3.1%.
But Microsoft's current approach seems designed to highlight the specialized and innovative nature of its search properties, which some analysts think are under-appreciated. Recently, Microsoft bought San Francisco-based Powerset Inc., a so-called semantic search specialist; acquired Seattle-based Farecast Inc., a travel search specialist; and announced such promotions as Cashback Search, which allows consumers to get money back on selected searches.
Forrester's VanBoskirk points, for example, to Microsoft's AdCenter planning technology, which she says has some demographic targeting properties that are more sophisticated than those provided by either Google or Yahoo.
Microsoft's Chief Executive Steve Ballmer last week told industry analysts at a jamboree at Microsoft's Redmond headquarters that search is "ripe for innovation."
"We will work to reinvent the user model and the business model" of search, Ballmer said. "It's often harder for the guy who is in the strongest position."
All About The Eyeballs
Two key things the Facebook deal brings are audience and demographics. Facebook has approximately 90 million active users worldwide, according to its Web site ("active" refers to a user who has returned to the site more than once in the past 30 days). Of those, around 30 million are in the U.S.
"This will help (Microsoft) aggregate a bigger audience," says Emily Riley, an analyst with Jupiter Research. "For most of its history, Microsoft has been known as a tech-oriented portal, while Google and Yahoo are regarded more as media aggregators."
By increasing its audience, Riley says, Microsoft has a better chance of improving the rate at which it monetizes that audience, although Riley thinks the increase isn't immediately likely to be very significant. Most users of social networking Web sites tend to use their default search engine, rather than a search engine within their social networking site, Riley says, citing Jupiter statistics. These figures show that around 8% of total online users use social networking as a search engine, but that 18% of social networking users use social networking sites as a search engine.
Justin Long, who edits the InsideFacebook blog, thinks that both Microsoft and Facebook should be able to drive additional revenue through the deal. He notes that a similar deal, struck between Google and social networking site MySpace, boosted the search revenues of both parties. MySpace is owned by News Corp. ( NWS), which owns Dow Jones & Co., publisher of this newswire.
Microsoft also gains access to the demographically attractive slice of users that Facebook brings, generally young and affluent. VanBoskirk says that if Microsoft tailors its search strategy well, it can make use of some of the features in AdCenter to more effectively target customers by profile, which will help monetization.
Ultimately, the deal is probably more beneficial to Microsoft than Facebook, says Danny Sullivan, editor of Search Engine Land, who has followed the Internet search business for many years. "Microsoft desperately needs more search queries" on its networks, he says.
Facebook declined to comment further on the deal.
-By Jessica Hodgson, Dow Jones Newswires; 415-439-6455; jessica.hodgson@ dowjones.com
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