Facebook, and other social networking sites like MySpace (owned by News Corp. – NWS), have gained a certain status as post-dot-com bubble hangover sites due to their insistence that their business models are game changers, but are presently accompanied by little in the way of current earnings or revenues.

Microsoft (MSFT) was largely mocked for their $240 million deal with Facebook, but in the grand scheme of things the money isn’t that significant for Microsoft, and you can’t ignore the fact that sum represents more than an investment, but also counts for an ad deal that extends through 2011. The real breakdown in payments there between equity and ad rights might never be well delineated, but I’m going to forego myopically focusing on valuation because I feel there is a more important macro shift going on…

As I indicated in my previous article, there are tens of billions in advertising dollars that are looking to be moved from traditional television and print media and on to the internet. How are the big players in online advertising – namely Google (GOOG), Yahoo (YHOO), and Microsoft - responding?

In Google’s case, the company is building out a slew of useful products that provide value for consumers – think the highly intuitive Google Maps – that also allows Google to serve additional targeted ads. Their bread-and-butter search engine is also the category leader, and allows Google plenty of opportunities to monetize users. What Google doesn’t have much in the way of is content – so while Google again has plenty of chances to use its contextually-served AdSense program on affiliate sites, they don’t have much (if anything) in the way of unique content.

Contrast that with Microsoft and Yahoo, both of whom offer sprawling portal sites that cover a huge range of interests – and with it, the chance to reach tens of millions of visitors with ads. I’m not particularly impressed with anything Yahoo has done outside its investments in sites like Yahoo Japan and Alibaba (and am disappointed with Yahoo Finance, which Yahoo seems to be actively trying to ruin) – and perhaps the stock being at a 52-week low means I’m not alone in those sentiments. Yahoo Publisher Network, supposedly a competitor to Google’s AdSense, has little to no visibility, their search engine traffic is getting cannibalized, and while Jerry Yang took the CEO title with much fanfare, I’ve yet to see him deliver anything noteworthy.

Chart: MSFT (Blue), GOOG (Green), and YHOO (Red) over the last year.
[You may need to scroll down to see the chart below]

Now consider Microsoft, which has long relied on its MSN Network as a mainstay of its online presence (one friend with a Mac commented that Microsoft’s online help guide should count too…). With the addition of Facebook for advertising, Microsoft is actually becoming more like Google in that it is decentralizing its content structure to focus more on user-created experiences. Whether this current hybridization approach continues to shift Microsoft to a more user-centric bias in the coming years is still open to debate, but they certainly have the cash to make acquisitions should that be their desire.

The more interesting extrapolation to make from the diverging paths of Google, Microsoft, and Yahoo is how it relates to the content centers of tomorrow. Television advertising has long been a mainstay of marketing campaigns, but will the internet serve that purpose in the future? If so, how do you build an ad network to serve that purpose in the most effective way possible? The model used by Google (and adopted by Microsoft with Facebook) intuitively has the potential to deliver the highest ROI, because you are essentially outsourcing the creative production process to outsiders at zero cost – thus, the inherent appeal of huge margins translating to huge profits.

Will this new online advertising initiative be enough to drive new growth at Microsoft and diversify the company away from its under-siege operating system cash cow? A look at Microsoft’s financial health, business prospects, and investment merits will be my next topic of discussion tomorrow.

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