In 2007, Microsoft purchased a $240 million stake in Facebook and agreed to a partnership where Microsoft would manage Facebook's display ad sales outside of the U.S. At the time, the deal looked like a desperate attempt by Microsoft to associate with something cool.
But Redmond had bigger plans. Once Microsoft had shown Facebook that it could execute quickly, it later negotiated for access to Facebook's social graph data. That gave Microsoft the ability to incorporate Facebook data into Bing search results -- and thus to deliver relevant, customized results based on the social graph. The results of this partnership are rolling out now, and they have the potential to start a new era of search. At the same time, the partnership could drastically change the way ads are targeted on Facebook, the biggest player in online display.
To understand what this partnership means for search, let's quickly review the history of search engines. They began with directories that helped people find sites (the original Yahoo model) and then evolved to an on-site optimization model (think of Alta Vista). Today, Google's algorithms and theories of Link Authority and Site Authority are the driving force behind search. Social graph optimization -- using the influence of friends and Facebook likes to tailor search results -- is the next evolution of search, and it represents the biggest innovation since Google arrived.
As it stands right now, the opinions of your friends on Facebook influence your search results on Bing. Call it "Like Authority." If I search for coffee in Atlanta on Bing, the top result is a shop that nine of my Facebook friends indicate that they like, in the social network's definition.
Social graph optimization yields far more relevant results to the user, especially on the local level. Bing takes into account everything a user likes on Facebook, as well as what their friends like. The medium where this is going to have the largest effect is on mobile search, where it's still difficult to get truly relevant localized results. Bing has yet to roll out its socialized mobile search, but it's going to kick open the door for local results.
The Facebook and Microsoft partnership essentially forms the biggest threat to Google that we've ever seen in the search space. Ironic that it's coming together just as the Federal Trade Commission plans to investigate the search giant for alleged anti-competitive practices. Google has held roughly two thirds of the search market for the past few years, but it can't compete with Facebook when it comes to social media. The search giant recently rolled out +1, a feature that promotes items in the search results according to how many consumers click the "+1" icon.
Google's problem is that it doesn't know who's behind these choices. Microsoft does, because users stay logged in through Facebook when they visit Bing. Google consumers can stay logged in when they access search, but most don't. Bing has exclusive access to Facebook's social graph and data, and Google isn't gaining that access anytime soon. Once Facebook fans begin adopting Bing, it's going to signal a significant shift in revenue. Every Bing convert means more revenue for Microsoft and less for Google, and Bing has just begun rolling out the social search.
The other major piece of this deal is the potential targeting windfall for Facebook. The social network is a gold mine of user-interest data, but it doesn't have access to Internet data -- the link and page authority that power search engine rankings. If the deal between Microsoft and Facebook turns into a two-way street where Facebook gets access to Bing's Internet data, it opens the door to more relevant ads on Facebook.
Search intent is the best way to target advertising online. That's why paid search brings in more revenue than any other online ad channel. Were Facebook to gain access to Microsoft's data, they'd have a backdoor to intent-level data, giving them access to what consumers like and are looking for online. With that , Facebook would instantly compete with Google at the top and the bottom of the sales funnel online. That positioning would come in handy, especially when you consider that Facebook is already on pace to bring in more display revenue than Google this year.
One of the most popular discussions in social media is the value of a Facebook "Like." When Likes power search results, the value is obvious. Google recognizes this, which is why it developed +1. Google has dominated search for a long time without any real threat, but the growing relationship between Facebook and Microsoft is making the search king sweat.