• by Gavin O'Malley  @mp_gavin, October 26, 2007

Above all else, Microsoft is hoping that its stronger ties with Facebook through a $240 million investment for 1.6% of the company will provide sufficient inventory to fuel ad revenue growth. "This deal represents a major advertising syndication win," Kevin Johnson, president of Microsoft's platforms and services division, said on a Wednesday conference call.

It's that focus on advertising that is clearly driving every move Microsoft makes these days. Earlier this month, its chief executive Steve Ballmer said advertising would make up 25% of the company's total revenue within a few years. Ballmer's pronouncement came a few months after Microsoft paid $6 billion for advertising technology powerhouse aQuantive.

aQuantive founder Brian McAndrews--now Microsoft's senior vice president for advertiser and publisher services--is planning the broad execution of the companies' combined digital marketing services network to take on Google and DoubleClick (whether the Federal Trade Commission agrees to that merger or not.)

In its fiscal year ending in June, Microsoft's online ad revenue rose 21% to $1.84 billion--still far short of Google's $13.3 billion in ad revenue during the same period.

In quarterly earnings released on Thursday, Microsoft said its online services unit grew 25% to $671 million, but its revenues amounted to less than 6% of Microsoft's quarterly sales. The quarterly loss from online services more than doubled to $264 million, compared with a loss of $102 million in the year-earlier quarter.

Through aQuantive's Atlas division, McAndrews and Microsoft plan to soon provide advertisers with logs of all the sites where consumers encounter their ads online, so they can more effectively plan their media spend.

Since launching its adCenter hub last year, Microsoft has signed on roughly 100,000 advertisers, and plans to offer advertising throughout its entire product line. Firmly rooted in its history as a technology company--rather than an entertainment company--Microsoft this summer also opened a research center dedicated to online advertising.

Going after Google's monopoly on search dollars, Microsoft last month expanded the scope of pages spidered by its search engine by 400%, revamped its query response technology, and deepened the breadth of its core verticals--including health, local, shopping, and entertainment.

When it fully launches, Microsoft's Live Search service should also better interpret search queries--accommodating misspelled words, for instance, and recognizing variations on words like "read" and "reading."

Unfortunately, analysts didn't expect that Microsoft's most recent innovations in search will have much impact on its share of search. In August, its share of search queries actually dropped 3% year-over-year to 7.98% of all U.S. search queries. Google, meanwhile, continued to lead with a 63.98% share of all U.S. searches.

Also in the realm of social networking, Microsoft plans to launch an instant-messaging service on Bebo.com before the end of the year.

In addition, Bebo and Microsoft's Windows Live will be synchronized to allow users of other services to exchange contact information and communicate.

While the San Francisco-based Bebo lags significantly behind social-network leaders like MySpace and Facebook in the States, it is now the most visited social site in the U.K.