Mr. Softy Diggs Harder

You don't expect Google (Nasdaq: GOOG  ) to lose out against Microsoft (Nasdaq: MSFT  ) in a footrace, but that's just what happened yesterday. Popular news aggregator Digg chose Microsoft as its contextual marketing provider, ahead of more experienced providers like Yahoo! (Nasdaq: YHOO  ) or Google.

Digg has become a Web 2.0 darling. The site lets registered users decide which news stories get featured. Giving consumers a voice apparently works; Digg is now attracting 17 million unique monthly visitors.

This isn't the first dot-com hotshot that has sided with Microsoft. It inked an ad distribution deal with Facebook last year. Terms of the Digg deal weren't disclosed, though it will find Microsoft populating the site with its targeted ads over the next three years.

Losing out on Digg won't kill Google. In fact, the company's owned sites have been growing revenues faster than Google's AdSense network of third-party publishers. However, this move makes Microsoft's adCenter more relevant to potential sponsors.

Google may provide excellent coverage through its own sites and via third-party publishers like AOL and News Corp.'s (NYSE: NWS  ) MySpace, but advertisers can't ignore Microsoft if they want to reach the young audiences that flock to Facebook and Digg.

Landing Digg will also make Microsoft an attractive marketing partner for other Web 2.0 sites. If Microsoft is good enough for Facebook and Digg -- two of the stickiest sites in cyberspace -- how can it not be good enough for the rest of the Net?

Sure, this probably just boiled down to Microsoft's willingness to pay more than Google for Digg's eyeballs. Microsoft's rich. Google is too, but it may be saving its pennies for wireless spectrum licenses as part of its master plan to create an open wireless Internet. Its focus may also be on getting its DoubleClick acquisition approved. If Microsoft and Yahoo! are moving to nibble away at Google's market dominance in third-party advertising, now is the perfect time to attack.

Microsoft gets it. Your move, Yahoo!

Yahoo! is a Motley Fool Stock Advisor recommendation. Microsoft is a selection in the Inside Value newsletter service. Dig through either newsletter (free for 30 days) to discover investing gold.

Longtime Fool contributor Rick Munarriz wonders if there is one "g" too many at Digg. He does not own shares in any of the companies mentioned in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy, and it sings like a bird.

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