Facebook taking contextual ads one step beyond Google's game

Don't you love this brewing battle between Google and Facebook?

Given that Google just launched its own social networking platform, you have to wonder about the reports that Google was competing hard with Microsoft for the right to sell overseas ads on Facebook and take a stake in the company.

If those talks ever were serious, they certainly became something else once Facebook learned about OpenSocial, Google's new platform which developers can use to create applications that will work across multiple social-networking sites, including named partners MySpace, LinkedIn, Plaxo and Friendster. 

If Google can convince enough developers to create applications for its platform, it stands a chance of cleaving the social networking world into two camps: Facebook, with its proprietary development platform, and everyone else using an open platform.

It's a very calculated move on the part of Google executives, who know that most tech markets haven't been kind to proprietary solutions when there is an open alternative.

Yet in launching its own ad platform, Facebook showed what a powerful hand it holds if it can get to the final table, sit across from Google, and slug it out for dominance of the online ad market.

As Yahoo now so painfully understands, online ads that are served up in front of Web users without any knowledge of those users' tastes or habits or preferences are a dead-man's game. They are quickly becoming a commodity. The future of Web advertising is in contextual ads, meaning those that are based on some knowledge of the viewer. 

This has been Google's secret sauce -- it knows what people are searching for, and what Web sites they visit, and can thus serve up ads that are highly relevant. Advertisers on the Google network don't mind paying a premium for those ads, which -- in a virtuous circle -- prompts online publishers to also be part of that network.

But Facebook knows even more about its users than Google know about those who type queries into its search page. It knows who their friends are, what kind of music they like and where they like to travel. It not only knows who your significant other is, it knows whether you prefer to poke or hug them. 

What's more, Facebook is going to let advertisers take advantage of the fact that the endorsement of a friend, acquaintance or relative has much greater weight in swaying a purchasing decision than does the quality or ubiquity of an advertisement. The company introduced the world to a new term today, "social ads," which will be placed onto the pages and into the feeds of Facebook users who have identified themselves with a product. 

All of this is enough to make Google's relevance algorithm seem so, well, Web 1.0.

Make no mistake, Facebook faces a significant challenge in scaling its business if Google is successful in walling it off, and it may never earn the $15 billion valuation Microsoft's investment just bestowed upon it. But given its close partnership with Google's most powerful enemy, and the value of its user data, it stands a chance of getting there someday.