So Microsoft (MSFT) got its wish. Thanks to a long-awaited deal with Yahoo! (YHOO), the software giant is poised to become the clear No. 2 in the most lucrative Internet market of them all: search. Under the agreement, Yahoo will use Microsoft technology to respond to searches made on Yahoo sites and to serve up the ads that appear alongside the results. If the deal is cleared by antitrust regulators, which is no sure thing, Microsoft will triple its search market share to nearly 30% and become the only meaningful alternative to Google, which holds 65% of the market.
The deal casts Microsoft in an unfamiliar role. The software maker that drew fire for years for its allegedly anticompetitive behavior now must prove itself an effective force for competition against Google (GOOG). Advertisers and online publishers want a viable alternative to the search titan. But analysts question whether Microsoft can avoid losing ground as it implements the complex Yahoo partnership, which could take two years, and afterward come up with real innovations in the business. "We can't afford a hiccup on this," Microsoft CEO Steve Ballmer said in an interview.
There is cause for optimism. Microsoft's Bing, the search engine it launched two months ago, is a hit, having begun to gain market share. And by combining Bing's search with Yahoo's, Microsoft will get more data about Web surfers' behavior to refine its technology.
A Much Larger Audience
Just as important as answering Web surfers' queries is delivering the ads that appear next to them. That, after all, is where Microsoft will make its money. Although the company's adCenter technology works reasonably well, many advertisers haven't bothered to use it, because it couldn't deliver as many eyeballs as Google could. Since all ads on Yahoo sites now will run though adCenter, advertisers using the system will be able to reach a much larger audience than in the past. "If you're an advertiser, you're going to be able to triple your reach overnight," says Robert Murray, chief executive of digital ad agency iProspect.
Advertisers are willing to give Microsoft a chance. Some complain Google's dominance has led to a lack of innovation and excessive costs for advertisers. "We think a formidable competitor is going to put some pressure on Google's model," says Chris Paradysz, CEO of ad agency PM Digital.
Ballmer negotiated tough terms with Yahoo. While analysts had expected he would have to spend $1�billion or more to get Yahoo to throw in the towel on search, Ballmer won't pay anything up front and will only have to cover the expenses of taking over Yahoo's search operations, an amount he says is "a few hundred million." That's a bargain, especially since Microsoft once offered $48 billion for all of Yahoo.
Microsoft has long struggled against Google. Now Ballmer is gaining substantial ground in his pursuit. "Microsoft doesn't necessarily get it right the first time," says Yahoo CEO Carol Bartz. "But by God, you can't beat 'em on persistence."