Microsoft purchase a 1.6 per cent stake in the venture capital backed site for $240m, valuing the firm at $15bn.
Microsoft will also become the exclusive worldwide advertising provider for the site. The software giant has been Facebook's sole broker for US banner ads since August of 2006.
In a conference call announcing the partnership, Microsoft's president of the platforms and services division Kevin Johnson declared the deal a "win-win-win" situation that would benefit both companies as well as advertisers and users.
"The equity stake we're taking in Facebook is a strong vote of confidence in this platform," said Johnson.
"The trend we see is continued improvement and great progress with the overall monetization [of Facebook]."
The structure of the deal closely mimics that of a December 2005 agreement that Google inked with AOL. The search giant at the time paid $1bn for a five per cent stake in the fledging internet provider and made Google the exclusive advertising provider on AOL's websites.
Greg Sterling, founder and principal of Sterling Market Intelligence, believes that Google was also in the market for the Facebook partnership, which might have driven up the price.
"This wouldn't have been the only source of ad inventory for Microsoft, but it would have been quite a frustrating thing for Microsoft to have lost this to Google," Sterling told vnunet.com.
"There aren't a lot of big prizes that remain, and this is one of the big prizes."
Facebook plans to use most of Microsoft's investment to fund further expansion. The company plans to expand its staff to more than 700 by the end of 2008.
Sterling said that this desire to expand might be one of Facebook's top selling points. The analyst sees Facebook going beyond the social networking aspects of earlier sites like Friendster and Myspace and building into a web portal.
"They're hopeful that it becomes about more than the entertainment and voyeurism that has been a part of social networks in the past," said Sterling.
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