Microsoft Extends Facebook Deal in Quest for Search Ad Dollars

Microsoft execs told financial analysts yesterday the company has expanded its ad deal with Facebook. Currently the exclusive seller and manager of all Facebook’s display ads, Microsoft will soon provide search and paid listings to the social networking site.

“We will be providing an API to Facebook where they will create a rich search experience, including a Web search for the Facebook users. And that’s something that they will launch in the fall, working with us, and it’ll carry both our Web results as well as our paid search advertising,” Satya Nadella Microsoft SVP Search, Portal & Advertising Platform Group, told the audience at the company’s financial analyst meeting. The agreement extends one signed two years ago between the firms.

Today, Facebook allows users to seek out profiles and find friends through its search function, but offers no Web-wide searching.

“We think that it’s something that made a lot of sense as an extension of what we can offer users and advertisers on the site,” a Facebook spokesperson told ClickZ News regarding the deal extension. The company has yet to determine how Microsoft’s search will be implemented, and would not estimate the amount of search ad inventory Facebook might represent to Microsoft.

Describing search as “mission critical” to Microsoft’s business during his keynote talk, CEO Steve Ballmer noted, “Search is interesting. It’s the only business where clearly people value advertising as part of the result. It’s not clear people value ads everywhere, but they sure value it as part of a search-type experience.”

Presumably, the Facebook extension will bolster search query volume for Microsoft, something Ballmer indicated was “up about 40 percent year on year.” What isn’t doing so well is the company’s revenue per thousand, or RPM.

“Google does about 500 billion queries a year, something like that. Worldwide — non-U.S. but worldwide — about $25 RPM,” said Ballmer. Not only is Microsoft “a small fraction of Google’s overall query [volume],” he added, “We are substantially below Google’s RPM rates in the U.S.”

Ballmer continued, “We’d like to increase our revenue per search, and the way to do that is to get more query [volume]. The more queries we get, the more advertisers we get, the more keywords they bid on, the higher they bid. You get the virtuous cycle flowing.”

Whether the new Facebook deal will actually help boost Microsoft’s search query volume or RPM is questionable. When Google reported its own earnings for the fourth quarter of 2007, CFO George Reyes said advertising efforts on social networking sites were “not monetizing as well as expected.” Google runs Web search for the clear U.S. traffic leader in social networking sites, MySpace, among others.

Certainly, Microsoft hoped some sort of deal with Yahoo — be it a full acquisition or purchase of its search business alone — would make it more competitive in search. Referencing Microsoft’s original $44.6 billion offer for Yahoo, Ballmer put that potential to bed during his talk:

“Six-plus months ago we were talking about $40-whatever, blah, blah, blah, billion for Yahoo, and then we weren’t, and then we were talking about a search deal, and then we weren’t, and then we were talking about another search deal, and now we aren’t. And that’s where things are, just as a small summary,” he said. “There’s nothing under discussion between the two of us.”

An earlier version of this story attributed Nadella’s Facebook comments to Steve Ballmer.