Earlier in the week, The Wall Street Journal and The New York Post reported that Facebook was in the final stages of making a decision on whether to do this deal with Microsoft or Google.
For Microsoft, which hasn't attained as strong a position in online advertising as it had hoped, and lags behind Google, landing this deal could be a major win, as long as Facebook proves to be as attractive an advertising vehicle as expected.
Microsoft and Facebook signed their original advertising deal in August 2006 and months later extended that agreement through 2011.
The Journal reported later on Wednesday that Facebook expects a profit of about US$30 million this year, on revenue of US$150 million.
Google and Yahoo provide ads for Facebook rival MySpace.
Since News Corp. bagged MySpace in 2005 and Google bought YouTube last year, "for Microsoft, this was a must-win," said Allen Weiner, a Gartner analyst. "They needed to do whatever it took."
With this deal, Microsoft sends a clear message that it is serious about its intention to be a major online advertising platform player, Weiner said.
Still, questions remain about social networking sites' full potential for advertising, since most of their content is largely unregulated and created by millions of individuals, resulting often in material that is vulgar and objectionable.
"There is some merit to those questions about social networking sites as viable advertising vehicles," Weiner said.
However, these sites will probably evolve and look very differently in five years, when, in addition to their core social networking functions, they'll also likely be platforms for delivering media content to its members, Weiner said.
Facebook plans to share more ideas for revving up its advertising business on November 6, at an event in New York to which it has invited what it calls "its closest advertisers."
"As part of [the event], Facebook executives will discuss new approaches for advertising online," a Facebook spokeswoman said via e-mail. "We are not sharing any further details."
Facebook, MySpace and others are also under close scrutiny from law enforcement agencies in the U.S. and abroad because sexual predators use social-networking sites to stalk and victimize people, in particular minors.
According to Hitwise, Facebook.com was the ninth most visited site in the U.S. during the week ended October 20. Within the social networking category, Facebook.com received 15 percent of U.S. visits during that week, placing second behind leader MySpace, which got 76 percent of visits, according to Hitwise.
The Journal first reported Google's and Microsoft's pursuit of the Facebook investment a month ago.