Microsoft and Yahoo make their move in search of Google's crown

US pair sign 10-year deal in attempt to break rival's search engine monopoly

They may not be quaking at Google just yet, but the internet search landscape looked set for significant upheaval last night after Microsoft and Yahoo announced they had agreed to combine their resources, technology and expertise to grab a bigger slice of the lucrative cyber-inquiry market.

Some details remained outstanding, and the agreement is subject to approval by competition regulators in Washington DC, but the two companies said they were confident of closing the 10-year deal in early 2010. Together, they reason, they have a better chance of challenging Google, which has grown to dominate search business on the web.

"We face a formidable competitor in one aspect, and that is search," Yahoo's chief executive Carol Bartz said in a conference call. "What this deal is really about is scale." However, she was forced instantly to counter early observations from Wall Street that the deal seemed less favourable to her company than to Microsoft. Shares in Yahoo slipped in early trading.

Even for Microsoft, which saw a boost in its sale price, the arrangement is a piddling version of what it first had in mind for Yahoo, namely to buy the company outright. Its former CEO and co-founder, Jerry Yang, put paid to Microsoft's offer of $47.5bn before stepping down last November.

But Microsoft has reason to cheer. The company was emboldened by praise received after the recent launch of its own answer to Google called "Bing". Under this deal, Bing will be the chosen technology for the joint venture. Yahoo will license its technology to Microsoft, allowing it to use any parts it deems useful, and will handle all advertising sales for both companies.

There is also no upfront payment to Yahoo as some analysts had expected. Instead, a revenue-sharing agreement will be put in place with Microsoft paying Yahoo 88 per cent of search revenue from each of their sites.

Even together, the two companies will hardly have the heft to displace Google easily. According to Comscore, a research firm, Yahoo and Microsoft together accounted for less than half of Google's existing 65 per cent share of the US market in June. Microsoft remains the baby in the field, taking credit for just 8.4 per cent of searches last month, while Yahoo accounted for just under 20 per cent.

But it gives the companies the scope to flex their internet search muscle. It will be up to Google to decide how seriously it takes the new challenge. "They should be worried," Danny Sullivan, editor of SearchEngineLand.com, asserted yesterday. "It's going to give Microsoft a much bigger share of the search market in one fell swoop."

Steve Ballmer, the chief executive of Microsoft, conceded that the deal will face "opposition" from a certain "competitor", which may lobby the regulators to stop the agreement in its tracks on competition grounds, but he predicted that such an effort would fail.

"We have a good case for how this improves competition. Through this agreement with Yahoo, we will create more innovation in search, better value for advertisers and real consumer choice in a market currently dominated by a single company," Ballmer said, in a joint statement announcing the agreement.

If the deal goes through, internet surfers will not be aware of much difference. The Yahoo sites will still offer search capacity, and the on-screen Yahoo branding will look exactly the same. Only the most observant will notice the small qualifier announcing that each search is "powered by Bing".

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