Picture 14Yahoo announced that it is integrating Facebook Connect across its properties today, giving the world’s biggest social network a prominent stage for showing how its social graph can interact with content. Yahoo is putting Connect on mail, news, sports and finance, letting users show how their friends are using Yahoo’s content and allowing them to share that activity back on Facebook.

Yahoo’s Vice President of Communities Jim Stoneham wrote today:

“…we will open the door between two of the Internet’s largest online communities. You will be able to see your Facebook friends’ activities on Yahoo! and share Yahoo! content – ratings, photos, article comments, and more – directly on your Facebook stream. We’re doing this by deeply integrating a service called Facebook Connect across Yahoo! properties worldwide, which we announced today.”

This is much more of a win for Facebook. It lets the social network demonstrate the value proposition of Facebook Connect to 500 million people and outside brands, plus it gives them a stronger position as the de facto identity provider across the web.

Connect lets you log-in to other services with your Facebook ID. For content providers, it is supposed to kick off a virtuous cycle of traffic for both parties. Users visit the site, interact with it and share what they’ve been doing or find interesting on Facebook, potentially attracting some of their friends to visit as well. For first movers, the effect can be quite dramatic: The Huffington Post attracted 3.5 million referrals from Facebook a month after launching Social News using Connect, a service that let you track what your friends were reading. However, as more partners sign up, there will be an increasing amount of clutter to break through.

Yahoo for one is stepping into dangerous territory. At its core, Yahoo has always been about being your starting point for the rest of the web. It’s done that by offering a range of content and essential services like e-mail. But as Facebook Connect spreads its tentacles across the web and aggregates content more effectively with 350 million users sharing at least 2 billion pieces items a week, it will increasingly become the starting point for the web. It’s also a bit ironic, given that Yahoo tried to acquire Facebook for $1 billion.

Facebook is not just the place to see what your friends are doing anymore. It’s the place to see what they’re reading, thinking about, and what’s entertaining them. And that’s a real challenge to Yahoo Ultimately, Yahoo is doing itself no favors by hollowing out its core offerings, as it did with the recent deal handing search responsibilities to Microsoft’s Bing.

Chief executive Mark Zuckerberg, himself, took a veiled dig at Yahoo’s approach in a speech in October, saying he always wanted to maintain Facebook as a “technology” company. Yahoo has lost much of its technical luster over the last decade, evolving into more of a media and advertising company.

I looked around at Valley companies. I really wanted to build a technology company. Some call themselves technical companies. But they’re not. We were always really committed to just kind of maintaining technical folks and entrepreneurs running the company.

Indeed, that will probably be what pays off in the end.