How Microsoft-Yahoo could shape social networking

Social networking is one of the biggest and fastest-evolving phenomena on the Web, and Microsoft's proposed takeover of Yahoo will undoubtedly send it in new directions. More than anything, a MSFT-YHOO acquisition will shake up the debate over just how you can make money off a Facebook or MySpace.com--because they're running out of time to figure that out.

Should the Microsoft-Yahoo acquisition go through, expect them to try to corner the social-network advertising market.

The common wisdom is that neither Microsoft nor Yahoo is a real force in social networking. Both companies own multiple social media properties, and the only resounding success among them is Yahoo's Flickr. (Sorry, Microsoft, I'm not counting the Zune's "song-squirting.") "They're very interested in the space," Forrester Research analyst Charlene Li said in an interview with CNET News.com. "They haven't been able to get traction in it. They look at it very longingly."

Social networking, in addition, will be a tasty slice of the Web for a hypothetical Microsoft-Yahoo because it's also one of the few niches of the Web on which Google doesn't already have a stranglehold. Its OpenSocial developer initiative isn't ready yet, its Orkut social network has only gained traction in a few regions of the globe, and the company admitted in its recent quarterly earnings call that social advertising (specifically on News Corp.'s MySpace) isn't bringing home the bacon.

Taking the reins on the advertising market is probably the best way for Microsoft-Yahoo to make waves in social networking without actually launching a big social-media initiative--and I certainly hope they don't try to, because there are way too many networks out there already. Microsoft already has a foot in the door with its $240 million stake in Facebook. (Yahoo tried to acquire it outright in 2006 and was promptly spurned.) And Facebook's own Social Ads were met with high-profile opposition and plenty of bad press.

With Microsoft's and Yahoo's resources pooled, the two companies could devise a more effective social advertising strategy (if such a thing is even possible). Even if it's dubious in its effectiveness, expect it to be very high profile. Think about it: Microsoft-Yahoo could claim they're doing what Google couldn't do. How's that for instilling confidence?

"A potential acquisition, if it actually goes through, could be a much, much more interesting player for Facebook to want to do business with," Li said, noting that Facebook's current deal with Microsoft only covers display advertisements, not search ads. "If Microsoft and Yahoo can actually make a play in search, that makes Facebook a lot more comfortable going with an all-Microsoft deal and maybe even be acquired by it. Who knows?"

But beyond advertising, a combined Microsoft-Yahoo has a massive social-networking tool at its fingertips, Li continued. "Yahoo and Microsoft both have this wonderful asset called e-mail address books and instant-messaging buddy lists, which are essentially a social graph," she said. "A lot of people are using those services, much more so than Gmail, for example, and so that's an instant social graph."