Facebook Replaces Microsoft Banner Ads with Its Own Performance Ads in Some Countries

By Eric Eldon Comment

As part of Microsoft’s $240 million strategic investment in Facebook back in 2007, the two companies agreed to expand their existing advertising agreement: Microsoft would run banner ads on Facebook both in the US and in other countries around the world. While that agreement was set to extend to 2011, it has already ended as of January 1 of this year in at least some countries, including the United Kingdom.

Now, Facebook is running its own performance ad inventory  in certain countries outside of the US, as we’ve heard and as the company has confirmed to us. These self-serve ads let most any advertiser provide their own ad copy and target ads to a wide range of very specific demographics. The format also includes call-to-action items such as the ability for a user to like an ad and see who among their friends have already liked it. Advertisers pay for these ads either based on the number of impressions (CPM) or by the number of clicks (CPC) that the ad is projected to receive

Facebook has more than doubled its revenues in 2009 to well over $550 million, in a large part due to the increasing popularity of these ads.

The additional inventory — especially in big advertising markets like the UK — mean these ads are going to be even more attractive to people trying to reach Facebook users. The change is also good news for companies who use Facebook’s Ads application programming interface to sell ads in bulk to social game developers and other large advertisers.

More supply equals lower prices, at least for now. “Lower CPCs mean a 25% improvement in performance,” Simon Mansell, the managing director TBG London tells us. “More supply means a 25% improvement in volume available.” His company uses the Ads API in a bulk-ad sale tool called the ONE Media Manager; it provided the graph, above, of Facebook CPC rates before and after the Microsoft switch. TBG and other advertisers were given advance notice about the switch, and had prepared additional inventory to be ready for the first day of the new year.

But as with all market prices, a good deal will not last forever. “I suspect CPC levels to rise again over the next few months as demand increases due to better performance,” as Mansell relates, “but for the next 3 months I expect large clients/app developers etc will be very happy.”

While third parties might be enjoying the changes, Facebook surely is, too. “People at Facebook hated running the MSN banners,” a source who asked not to be named tells us. “They thought they were bad for user experience and didn’t make as much money for them as their normal ads, which are starting to do very well.”

Microsoft likely has mixed feelings about the changes. While it is losing some inventory, the fact that the company owns significant stock in Facebook means that it will eventually benefit from Facebook improving its user experience and bottom line.

Microsoft’s ads also stopped showing up in the US as of January 1, but that was due to a glitch, Facebook has previously said. Those banners should be returning shortly — although for how long?

Thanks Sam Goldfarb of Tradimax for the tip.