Facebook is taking full control of display ads on the world's No. 1 social networking website, cutting short an exclusive deal that had allowed Microsoft Corp to manage part of that business.
However, Microsoft -- the exclusive provider of Web search on Facebook -- will continue to sell text-based search ads on the website as the partners extended the arrangement beyond 2011, when it had been due to expire. A Facebook spokesman declined to say how long the deal has been extended.
Microsoft also said it will further integrate its Bing search engine into Facebook while expanding its reach beyond the United States.
Facebook, which counts nearly 400 million users, said its own display ads feature interactive aspects and can target viewers based on their personal information, making them better suited to its social networking service than Microsoft's standard Web banner ads.
Ad formats that feature social actions perform better and provide a better user experience since they are more consistent with the look and feel of Facebook, the company said in a statement. This combination of targeting and social relevance is the primary driver behind the shift in strategy.
Facebook said it stopped displaying Microsoft banner ads in some international markets recently, and following additional talks with Microsoft, has agreed to stop running the banner ads across all of Facebook. The change will take place over the next 30 days.
Facebook has long sold its own display ads on users' profile pages and other parts of the site, but the company allowed Microsoft to sell banner ads in certain sections of its website in 2006. The deal, which was extended in 2007, was supposed to run until 2011.
A Facebook spokesperson would not provide details on whether the advertising deal with Microsoft entailed any revenue sharing agreement, or whether Facebook would pay Microsoft a fee for altering the deal early.
The news comes as Facebook has increased its focus on its financial performance. In September, Facebook said it had become free cash flow positive -- meaning that the company makes enough money to cover the costs associated with running the service -- ahead of schedule.
Microsoft said on its corporate blog on Friday that Web searches within Facebook will bring up information from Bing beyond just links to websites. Microsoft's search technology will be available on Facebook worldwide, instead of just the United States, it added.
Facebook, which lets users connect and share information with friends online, has emerged as one of the Internet's most popular destinations and is increasingly challenging the Web's established powerhouses like Yahoo Inc and Google Inc.
Microsoft invested $240 million in Facebook for a 1.6 percent stake in the company in October 2007.
On Thursday, Facebook said it expected to reach 400 million active users of its site within the week, representing a gain of 50 million new users since December. The company also announced a new design to its homepage.
Microsoft shares finished Friday's regular trading session up 18 cents at $28.02.
(Reporting by Alexei Oreskovic; editing by Richard Chang and Andre Grenon)