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Microsoft Searches for Revenue With Facebook

The message from Microsoft's annual meeting with financial analysts couldn't have been clearer: We're serious about competing with Google in search.

Part of Microsoft's (NASDAQ: MSFT) commitment to draw more ad dollars from search, what CEO Steve Ballmer called a trillion-dollar opportunity, the software giant is expanding its partnership with Facebook to power its Web search and serve up the related ads.

Microsoft said that Facebook, which by some measures has overtaken MySpace to become the most popular social network in the world, will make its search API available in the fall. At Facebook's own developer conference this week, the company acknowledged that it needed to improve search on its site, which it recently treated to a substantial redesign.

A deeper partnership with Facebook revisits one of the great questions kicking around the tech industry these days: Is there actually money in social networks?

Microsoft did not announce terms of the deal, but it appears similar to the partnership between Google (NASDAQ: GOOG) and MySpace. Under that arrangement, reached in 2006, Google agreed to provide search and advertising to the site in exchange for a minimum revenue assurance of $900 million over three years.

Google and MySpace parent News Corp. (NYSE: NWS) have both since noted that advertising on MySpace has not produced the revenue they had hoped, a difficulty they described as symptomatic of social networks in general.

Microsoft has already been handling a portion of Facebook's advertising, under an agreement reached last October, in which the software giant shelled out $240 million for a 1.6 percent stake in Facebook. That investment valued the social network at $15 billion, a figure that was more than even the most generous estimates of the company's worth.

Through that deal, Microsoft took over Facebook's global display advertising business, building on an existing agreement for domestic ads.

Facebook CEO Mark Zuckerberg said earlier this week that he remains focused on improving the site's ability to build social relationships than he is with figuring out the revenue problem.

Facebook, of course, will only be one piece of the puzzle for Microsoft's search strategy. The pursuit of Yahoo had been another, though Ballmer insisted the acquisition was not a competitive imperative, but rather a "tactic" aimed at furthering Microsoft's chase of Google in the online arena, where search is the centerpiece.

According to the latest figures from comScore (NASDAQ: SCOR), Microsoft handled just 8.5 percent of all U.S. Web searches, compared with Yahoo's 20.6 percent and Google's 61.8 percent.

At yesterday's meeting, Ballmer gave a lengthy rehashing of the soap opera that the Yahoo acquisition talks became, and unequivocally assured his audience that Microsoft had moved on.

Abandoning the bid for Yahoo, Ballmer argued, will afford Microsoft greater flexibility in innovating in search, without the costly overhead that would have come integrating Yahoo's operations or the fight for regulatory approval.

Besides, Ballmer suggested that Yahoo, which is planning to outsource some of its search advertising to Google, isn't a relevant player in the search-driven Internet business that Microsoft is trying to build.

"This is a two-horse race: Microsoft against Google," he declared.