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Why The Facebook-Microsoft Alliance Should Worry Google

When Google executive chairman Eric Schmidt said recently that a "gang of four" rules today's tech industry, he notably left out Microsoft, arguing that Google, Apple, Amazon, and Facebook control the landscape. Here's why he's wrong.

The parallels between Microsoft and Facebook have always been strong. Founded by college dropouts from Harvard, Bill Gates and Mark Zuckerberg, the two have overcome vicious competition to create some of the world's most influential technology companies and ubiquitous products. And though times have changed for the nearly four-decades-old Microsoft, never have the connections been stronger between it and Facebook.

Yesterday the two companies cemented their relationship with the announcement of a new strategic partnership. Part of a deal with Skype, which Microsoft is in the process of acquiring for $8.5 billion, the new service will give Facebook's hundreds of million users access to free video chats with anyone on the network. It was a partnership that both Zuckerberg and Skype CEO Tony Bates described a mutually beneficial: Facebook gains access to a world-class video service, while Microsoft gains access to the world's largest social network.

"We have a really good relationship with Microsoft," Zuckerberg said. "Now that you [Skype] are owned by Microsoft, that gives us the sense of stability that it's going to be with a company we can trust—that we know we have a longstanding relationship with."

Indeed, as Bates explained, Facebook was the very first stop for Skype after the details of deal came online. "The day we announced, we came to see Mark," he said. "For both of us, [Microsoft CEO] Steve [Ballmer] and I, it was the most important strategic relationship."

It's far from the first strategic partnership between Microsoft and Facebook, either, as Zuckerberg noted. The companies have been working together closely for years now. Back in 2007, Microsoft took a $240 million equity stake in Facebook to form a strategic alliance—in fact, it came to light that Microsoft had actually tried to buy Facebook for $15 billion at that time. Microsoft became the exclusive third-party ad platform partner for Facebook, and began selling advertising for the social network both domestically and abroad.

The partnership has only flourished—when Microsoft purchased the equity stake, Facebook boasted just 50 million users. Now? Zuckerberg says they've hit 750 million users, and expect to hit a billion in the near future.

Outside advertising and Skype partnerships, Microsoft has also forged a critical partnership between Facebook and Bing for social search data. "They [Microsoft] are really the underdog here. They're incentivized to go out and innovate," Zuckerberg said at the time. "When you're an incumbent in an area…there is tension between innovating and trying new things versus what you already have." Additionally, the companies have developed Facebook functionality on Xbox Live and deep integration with Windows Phone 7; judging by the looks of the recently unveiled Windows 8, we should expect the partnership to continue as such.

When Google executive chairman Eric Schmidt said recently that a "gang of four" rules today's tech industry, he notably left out Microsoft, arguing that Google, Apple, Amazon, and Facebook control the landscape. But given Microsoft's long and continuing relationship with Facebook, it's wrong to exclude the Redmond-based company from the conversation—the Microsoft-Facebook partnership makes room, at the very least, for a "gang of four-and-a-half."

And given Facebook and Microsoft's widening footprint in industries Google lusts after, it's perhaps no surprise Schmidt would like to pretend the latter company does not exist. (He even went so far as to say that PayPal and Twitter might round out the fifth and sixth gang members, and not Microsoft, which he does not consider a driver of consumer products.) With Bing's leverage of Facebook social data, Microsoft now has a leg-up against Google in search. Facing the Skype-Facebook partnership, Google is launching Google+ at a significant disadvantage. And with Windows Phone 7, with whatever Facebook decides to contribute to its social elements, there will be even more competition for Google's Android platform.

[Homepage image: Flickr user c'est la Viva; top image: Flickr user Diana Beideman]

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