Facebook Unfriending Microsoft

Microsoft Corp., an investor in Facebook Inc., has lost part of the social-networking site’s advertising business and is renegotiating an agreement as it faces the possibility that more ads will be pulled, Dina Bass and Brian Womack report in BusinessWeek. Facebook stopped using Microsoft this month to sell graphical banner ads in some international markets. It may also drop those ads in the U.S., Robin Domeniconi, vice president of U.S. ad sales at Microsoft, said. Facebook, the biggest social-networking site, sells its own ads on home pages and profiles. Those ads are more interactive, allowing users to become “fans” of a business. Microsoft deals with ads for pages such as groups and photos. Palo Alto, California-based Facebook is interested in handling more of that work itself, said Keith Lorizio, a Microsoft vice president who works for Domeniconi. “We are in discussions with them on adjusting it or changing it as we go forward,” Lorizio said of the companies’ agreement. “They have a desire to sell their own advertising.” The changes come more than two years after Microsoft invested $240 million in the site. At the time, Microsoft touted the related ad deal as a major win for its Internet business, which has struggled to catch up with Google Inc. Google had more than 13 times as much ad revenue as Microsoft in the quarter ended in September and is expanding into the graphical display ad area, where Microsoft is stronger. “It’s a little bit of a black eye,” said Brendan Barnicle, an analyst at Pacific Crest Securities in Portland, Oregon, who rates Microsoft “outperform.” “Microsoft hasn’t had such a great record in the ad part of their business.” The moves represent quite a big turnaround since the ad relationship between the two companies has only been growing in recent years. Then, what would explain the about-face? For one, as Facebook has grown, so has the social network's desire to do things on its own. Perhaps this is a sign that Facebook's social ads are performing well and its business is maturing -- so much so that the company needs to grab back some of the inventory that has previously been filled by Microsoft ... At this point, that looks more likely than any sort of riff between the two companies, whose deal also includes Bing powering web search results on Facebook. Microsoft still has an agreement to show its search-linked ads on Facebook sites. The banner ad changes won’t affect Microsoft’s revenue because the company will replace the ad space it sold to clients on Facebook with other social- networking ad slots, Domeniconi said. Only a handful of clients, such as major retailers, care specifically about placement on Facebook rather than on other social sites where Microsoft sells ads, she said. Brandon McCormick, a spokesman for closely held Facebook, confirmed the company had stopped using Microsoft in some international markets. “Ad formats that feature social actions perform better and provide a better user experience since they are more consistent with the look and feel of Facebook,” McCormick said. “Facebook ads can also be targeted to people based on the information they provide.” He declined to comment on whether more ads sold by Microsoft will be pulled.