EightBlack.

It was a deal Microsoft virtually had to win. (And I think they got off cheap).

Does it make sense? Not sure yet. Too early to tell. Apparently, negotiations were going on as late as Thursday/Friday last week when both Steve Ballmer and Mark Zuckerberg were in San Francisco attending the Web 2.0 Summit.

There is no doubt Ballmer would have gone “ballistic” if this deal had fallen into Google’s hands. It was probably the reason why he allegedly handled the final negotiations himself. They always had the upper hand in one sense, because of the existing ad relationship that was in place. That was always going to be a hurdle for Google to jump over.

And last week at Web 2.0, Mark Zuckerberg struck me as the sort of young man that wasn’t easily as influenced with the standard job spiel enticement from the Google HR folks (ie “Mark, dude, come to Google, free food, great facilities and technology and you get to work on the coolest shit in the world”). Zuckerberg’s response would most probably have been “but I already am…”

The cash injection of US$240 million for a 1.6% stake values the social networking at US$15 billion.

Apparently, the funds will be used for infrastructure, hire more super geeks, make acquisitions (of more super geeks) and help with international expansion, which is where the growth lies for the barely 3 year old company.

From today’s Facebook-Microsoft conference call with reporters: Microsoft needs the international ad agreement because Facebook says nearly 60 percent of its 50 million active users are based outside of the US. Facebook also claims to be gaining 200,000 new users per day, worldwide.

The deeper issue here is not that Microsoft won and Google didn’t - although its psychologically important. The bigger issue is that Facebook may have cracked the “AdCode” and found a very viable alternative to the absolute market dominance of Adwords and Adsense.

If, as is reported at VentureBeat -

Yesterday, reports also surfaced a new Facebook ad product, apparently trademarked “SocialAds,” will be previewed November 6 to some of Facebook’s closest advertisers. Conde Nast, Nike, Apple, Sony, General Motors, Coke, CBS, Chase and Verizon have paid $300,000 each to be “Landmark Partners,” meaning they are the first advertisers to try SocialAds, according to these reports, none confirmed by Facebook. When asked for comment, a Facebook spokeswoman responded: “Facebook does not comment on speculation or rumor.”

The idea of the deal is to focus on “demand fulfillment” by taking advantage of Facebook users’ high engagement with each other, Facebook VP of product marketing and operations Chamath Palihapitiya was quoted telling FastCompany.

Facebook has a unique set of data about users that may be able to provide more relevant targeting, more often, possibly putting Facebook in competition with Google’s Adwords and AdSense programs.

You can be sure that the “courting” has only just begun. Microsoft’s deal simply gets them a seat at the table. Sort of like a rich uncle coming to dinner.

Google will scramble to push MySpace as quickly as they can now and the sooner MySpace opens up its API so the world’s development community can get to work, the better. Momentum has shifted to Facebook of late, but I for one, wouldn’t write off Murdoch and DeWolfe over at MySpace just yet.

According to this chart (courtesy Commscore and WSJ), MySpace still have more than double the unique visitors, but the percentage change with Facebook’s numbers is what should be worrying Murdoch.

One things for sure, the social networking “fad” as many people were referring to is no longer one of fiction. It’s here to stay.

And Microsoft, to their credit, are now a serious player.

Round One to Microsoft.

I gotta say first up that I actually really enjoyed this session. I’ll also say straight up that I’m not a huge fan of Microsoft nor Steve Ballmer, only because I think that after 30 years of making software - they still can’t get it right. With 80,000 employees and $23 billion in the bank, it just shouldn’t take 5 years to release a new version of software. And it certainly shouldn’t be hard to use. Think about it logically - to shut Windows down, you have to go the “start” icon.

And maybe, unfairly, through several parts of the media - Steve is portrayed as an arrogant prick. Which he can be.

Not all billionaries are though. John Doerr is a perfect example of a guy who is so passionate and endearing, that he redefines charm and charisma (more on him later).

If the majority of us, whether we be corporate or personal users, only use 10% of what a Windows application is capable of (like Outlook, Word, Excel, Powerpoint), then why can’t Microsoft make a “Windows Light” version. A version which doesn’t crash, which doesn’t require one whole gig of RAM to operate well and one that’s as intuitive as any Apple application.

Anyway.

John Battelle jumps straight into the interview and asks Ballmer how’s the financing going for Facebook. He deflects the question like a seasoned pro, obviously knowing a whole lot more than he’s prepared to let on in front of 1200 rabid industry folk. Apparently, according to multiple blogs, there’s an all hands meeting at Facebook tomorrow (Tues US time) where it’s rumoured that an announcement will be made re the next step at Facebook as far as funding is concerned.

Something just tells me that Google has to be involved somehow - and it’s got nothing to do with the fact that I was at Google late Friday afternoon last week and heard a few whispers. Sadly, the whispers were about something else.

Back to Steve. He was relaxed, even as Battelle started to probe about search. And this is when, while he erupted, he erupted in excitement and flair, which is classic Ballmer. It’s also where respected news agencies such as the Associated Press got it all wrong and had to retract a story, whereby they indicated Ballmer referred to Google as a “precocious tot”.

In fact, he was referring to his own set of kids at Microsoft. Not Google.

It was a little funny, as Battelle started to talk about search and Steve’s “one trick pony” comment, Ballmer still refused to actually refer to Google as Google. He’d rather just say “the leader in search”.

Battelle went on, “Let’s talk about search. Is it one of those kids who you privately take out the back and smack on the back of the head and say “Do better in school, Jimmy…”"

Ballmer’s response caused the audience to cheer wholeheartedly. Even the harshest of critics would have had a smile on their face. The footage is here - at the 21 minute mark of the Battelle/Ballmer interview. It’s worth watching.

Click To Play

I will say this about the whole interview. Ballmer is good. He’s insightful, he’s determined beyond what’s normal, he’s got a solid grasp of what’s going on in his own company (even at 80,000 strong employees) and he wants to win at all costs.

Because of the interview, my perception of him and of the company has changed. And that’s a good thing. Not that anyone should care. But this interview has gained a lot of exposure. And if you previously vowed that Microsoft would be the last place on earth you would want to work, given all the options open today in the tech sector, maybe, just maybe after watching this, you might change your mind.

It strikes me that Ballmer would have you convinced after 20 minutes in a one on one interview.

So let me ask you this, after watching the interview from Web 2.0, would YOU work for Microsoft?

Christ there’s a lot happening in the online ad space. Where do you start? And I’m not talking about the ever growing Adwords and its sibling, AdSense.

This year has seen a blistering pace in total ad revenues, with the first half producing in excess of US$10 billion. Not surprisingly, Google has 40% share. And no doubt wants a heap more. It was only a matter of time before they worked out how to fill YouTube videos with AdSense (and they have and did).

Most people, when it is shown to them, understand fully the relevance of an Adwords ad (that little headline and 2 lines of text plus a display URL that the stupid ACCC here in Australia has a hard time distinguishing) - and then recognise it’s sister as an Adsense ad. I dont think I need to explain this any further. Okay, here - look at this.

However, what I can’t seem to fathom is the growing amount of businesses who are hammering away blindly with banner ads across the online horizon, without any thought (or care apparently) as to the return on investment.

I dont think you should ever bundle targeted Pay Per Click advertising in with mainstream banner ads. This is where the new breed of start ups are coming into their own.

There are a lot of smart folks in the industry who have recognised that banner ads via shotgun wasn’t going to last long. Targeted, relevant ads delivered according to user profile, intent, previous history is where savvy marketers would pay a massive premium.

First up, there are start-ups in this space who are getting lucky with hiring some very smart and innovative folks out of Google.

Microsoft wants to play ball in this field and The Chair Thrower (aka Steve Ballmer) wants 25% of Microsofts future revenue’s pinned on advertising, meaning that the USS Microsoft will become a full bore media player.

At least he went on record this past week and stated publicly that Google has set the bar. From the recent ANA ad conference;

“In world search and advertising, Google is the leader; we’re an aspirant,” Ballmer said. “We have a lot of work to do in search and advertising.”

His must have taken twice as much ritalin when he gave this speech. Either that, or he swallowed a vallium tablet that wasn’t supposed to be taken orally.

Anyway.

New companies such as Admob, (Kevin Scott from Google just defected there), and AdReady are both making a play in either mobile or fixed ad offerings and established sites such as Nielsen Net Ratings (now Nielsen Online) have been working on advanced display advertising solutions for a while now.
Google buying DoubleClick, Yahoo! making a play with its own launch of “Yahoo Smart Ads”, Microsoft acquiring AQuantive for a cool $6 billion. It goes on, but the numbers get smaller. You get the point.

There’s a lot at stake. Traditional media, like News Corp, want a piece of the action. Even rational folks as cool and calm as Warren Buffet have publicly claimed that the newspapers have a limited time left when it comes to protecting ad revenues. And thats coming from a man who has been a long term investor in The Washington Post.

My point is this. There’s a wave of smart, innovative, algorithm driven folks who are going to apply this search knowledge to deliver a technically superior ad platform and a whole host of intelligent ad solutions. One that is targeted down to a users profile. That means, if you are an 18-24 year old, on My Space or Facebook, the ad algorithm will scour your entire profile and if you respond to a banner ad for part time or casual work over the summer, it will be because the intelligence in the adserving application picked up every detail there was available to it and showed you a job ad rather than an ad for new tyres for your car. It would be able to deliver hospitality or retail job opportunities based on your experience, where you lived, your likes and dislikes and “intent”.

It will also mean that advertisers will be able to move away from the traditional CPM model (cost per thousand impressions) and know that if they can deliver highly targeted, highly contextual ads, then click thru rates will be higher, and more importantly, conversion will be higher. Ultimately, an advertiser can change the playing field and set his or her own ad rates, depending on how responsive his site is.

My guess is that a lot of time and energy will be spent discussing online advertising this week at Web 2.0.

Incidentally, we spent the past few weeks developing an add on to the popular “Open-Ads” adserving application for the benefit of a few of our clients. Called “Taguchi-Ads”, it’s been designed to deliver contextual based ads that fits a persons profile, likes, and preferences.

Standby. More to come…

(Image courtesy wizbit.net) 

This piece courtesy AdNews. It just shows how big the gap is for Yahoo! and Microsoft Live to close if they want to compete with Google at “vanilla” search. In some respects, it’s the very reason Mahalo, MyLiveSearch, ASK and others are pursuing completely different models.

Jerry Yang at Yahoo! has got to be doing some soul searching and you can bet Ballmer at Microsoft threw another chair at the wall when this latest Comscore report came out. I’m looking forward to seeing Steve next week speak live on Day 2 of Web 2.0 in the US. I personally think John Battelle is going to go easy on him for fear of him blowing a valve in public. Or something like that.

Anyway, back to search. Here’s some data that puts Googles’ massive share into perspective.

(Data courtesy Comscore)

My ignorance in looking at this chart is that I wasn’t even aware that Korea had its own search portal. Nor did I realise that the Chinese search platform, Baidu, had so much critical mass - given the censored content it provides.

Of the 61 billion searches conducted in August this year, Google had 37 billion of them (60%), 4 times that of Yahoo! and over 18 times more than Microsoft. Sixty per cent share of any market is massive, some would say too dominant. My take is that Google is just getting started.

When Battelle wrote “The Search” I remember a quote by the 2 founders of Google stating that they thought that the whole “area” of search was only 10% solved. Now, 2-3 years on, they might say that they are closer to 20%. But there’s still a long way to go.

There’s a lot of money being spent on local search - for good reason. It’s essentially the domain of the printed directories, like Yellow. And Google knows this, knows what money is at stake, and wants a piece of the action.

I don’t think the average person switches search engines easily. The advantage Google has is that its now a part of our DNA, our dictionary and vocabulary.

My question to you is this. What would make YOU switch?

Microsoft has just pulled back the curtain on a new release of its Live Search Platform. I took a quick look this morning.

I will say this - the interface is clean and it has some neat features - such as a nifty feature within the “images” tab which when you hover your mouse over the thumbnail, the image expands and you can see further details.

According to the Live Search team blog, here’s the essence of what’s been included in this update:

• • Relevance, relevance, relevance. We’ve quadrupled the size of our index, which means we can return the right results for your searches. Improvements like enhanced ranking algorithms, auto-spell correction and better stop word handling help us return the best results.
  • Speed. Pages load much faster than before.
  • Streamlined look and feel. We focused on the end-to-end experience from the homepage throughout the site. For example, search results are now easier to read thanks to work on typography, contrast, colors and spacing.
  • More high-interest content. You asked us for more in Entertainment, Shopping, Health, Local and Video search and we’re happy to deliver it.

I’m not sure if the average user gives a rats toss about “an enhanced ranking algorithm”. And they say that they have quadrupled the size of their index - but they don’t give us a baseline of how big the index was in the first place. And then “speed”. Allegedly the search app now runs on premium gasoline - whereas before it ran like an old dog. Or something like that.

But what I don’t get though is why make it a clone of Google. Yahoo!’s already the same. Now the big 3 all treat the “sponsored link” area exactly the same. If it’s all the same, then the average user is going to gravitate to what he knows best - Google. Always will.

I think if Microsoft want to stay in the race, they’re going to need to place a much bigger bet. Take more risk. I’ve said this before - along with a lot smarter people than me and it’s this. Microsoft need to spin off Live Search and make them a separate entity. Entirely. Steve Ballmer shouldn’t be allowed in the building. All he should see come across his desk are “Capital Request Authorisations”. For shitloads of money.

Because unless MS start to differ in the search space (like Jason Calacanis with Mahalo), then all they can hope for are tiny increments of growth in a space that Google continues to thrive in.

Oh, and one last thing. The folks at Redmond should quietly tap Jerry Yang on the shoulder and get a deal done. Before someone else does.

And if that’s too cryptic for you, let me translate. “Steve, get off your arse and pick up the phone and talk to Jerry Yang at Yahoo!” And bring your cheque book.

God I hope this doesn’t happen. News today running in the US edition of the Wall Street Journal talks about Microsoft taking a 5% stake in the social networking darling for anywhere between US$300-$500 million. The full article is here.

Mark Zuckerberg, the young CEO and founder is no fool. He’s already knocked back a billion (or just under) from Yahoo! a little while ago. And Google has made it abundantly clear that it wants to play.

Microsoft, for whatever reason, has the tactical advantage given that it already has an ad syndication deal with Facebook which has been running for just over a year now and continues through to 2009.

If Zuckerberg knocked back a cool billion from Yahoo!, I can’t understand why he jumped into bed with Microsoft and what is clearly an inferior search partner with their AdCenter platform. It can’t have been money alone - he’s got people throwing the stuff at him in the same way the US Department of Defense spends money on going to war.

It seems on the surface such an unlikely combination. I can’t imagine a guy who wears thongs to work, comes in when he wakes up, and running one of the hottest online gigs around sitting down for sushi with someone like Microsoft’s Steve Ballmer. It’s about a likely combination as Britney Spears and Barry Manilow.

Maybe Microsoft hired some private investigators and has photos of the Facebook team doing unflattering things with 2 camels and a goat.

Because I’m buggered if I know why the ad deal got done in the first place and equally buggered as to know why on earth Facebook would sell a stakeholding to a 30 year old dinosaur.

Maybe you’ve got the answer?

Here’s a recent video interview of Mark Zuckerberg at the recent Techcrunch4.0 gig held last week in the states. Maybe this has the answer I’m looking for.

Boy, this must be really grating on Steve Ballmer, the beleaguered benevolent dictator at Microsoft.

The industry titans have had a crack at this before.

But because the Google juggernaut over the past 12 months has shown no sign of slowing down, what choice did Ballmer and Semel have but to go back to the table with a different perspective.

Story broke via the New York Post and now this snapshot courtesy the Wall Street Journal.

The renewed talks are a sign of the continued growth in Google’s power and problems over the past year with in-house efforts at Yahoo and Microsoft to ride a boom in Internet advertising. Meanwhile, management changes at both companies could help pave the way for a pairing that a year ago couldn’t happen. The talks were first reported in the New York Post.

Microsoft and Yahoo couldn’t be reached for comment.

I love this saying from one of Tom Peter’s slide decks…

“When asked to name just one big merger that had lived up to expectations, Leon Cooperman, former co-chairman of Goldman Sachs’ Investment Policy Committee, answered: I’m sure there are success stories out there, but at this moment I draw a blank.”

I agree. You dont get economies of scale by being bigger. This deal, to be successful, will require abundant thinking by both sides and I’m just not convinced they’ll be able to get it over the line.

Microsoft traditionally dont like big acquisitions and this one will require them to trump up with a boat load of cash - enough to even give them indigestion and its public knowledge that one of Yahoos founders, Jerry Yang, thinks Microsoft is about as appealing as a prostrate exam. Or something like that. Apparently, he doesn’t even use any of their applications.

If a deal just so happens to eventually get over the line, then good. It will make the space a lot more interesting. And it will push Google harder.

If it doesn’t, then Yahoo! should concentrate on doing what it does best. And that’s serving its communities.