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Microsoft, Yahoo Ink Partnership Deal, Challenge Google

U.S. software giant Microsoft and Internet company Yahoo have agreed to a partnership both companies hope will change how Internet users search the World Wide Web. The agreement gives Microsoft access to the Internet's second largest search engine. But industry experts say the deal is part of a larger strategy to challenge the dominance of the Internet's biggest search engine - Google.

Every time a user goes online, invisible search engines scan billions of bits of information in a process that will ultimately help them decide which Web site to click on. These search engines are patented, complex algorithms worth potentially tens-of-billions of dollars. And, Microsoft, with its search engine, has made it clear it wants a bigger share.

In announcing the agreement with Yahoo, Microsoft chief Steve Ballmer said it will challenge Google as the Number One search engine.

"Right now, there is one company that really dominates that worldwide market for search and online advertising. The partnership we are announcing today will help to create a stronger Number Two, and increase competition in the search area," he said.

The agreement between the software giant and popular Internet portal Yahoo combines the second and third ranked search engines in the U.S. to better compete with Google, which, according to online measurement firms, commands more than 65 percent of the global market.

CRN online magazine editor Ed Moltzen says the deal is unlikely to unseat Google from its perch, but it could force the Internet giant to blink.

"If this deal does nothing but force Google to retrench and put their priorities maybe in a little bit different order, this could be considered a success for Microsoft," he said.

The deal caps a nearly five-year long pursuit by Microsoft to acquire the Internet pioneer. Last year, Yahoo rejected Microsoft's $47 billion acquisition bid. Analysts say Yahoo has lost some of its luster since then.

Now worth about $22 billion, the company remains profitable, but its revenues have slipped 13 percent since March.

Yahoo CEO, Carol Bartz says the 10-year deal will boost her company's annual operating income by $500 million, and reduce expenditures by about $200 million.

"This deal enables us to keep a healthy revenue stream, and invest in areas critical to our future, while Microsoft invests in search technology," he explained.

Key to Microsoft's success is gaining a foothold in the lucrative search market. Under the agreement, Microsoft's upgraded search engine, called "Bing", will become the exclusive search technology for Yahoo's Web sites. In return, the California-based company will have the right to sell premium search ads for both companies.

CRN's Moltzen says it is a good deal for Yahoo, but an even better deal for Microsoft, which did not have to make an upfront payment to ink the deal.

"This is an absolute steal for Microsoft. Yahoo wins the ability to stay an independent company, with a huge new friend, a huge new ally in Microsoft, which can help it concentrate on other things where they think they can be more successful," said Moltzen.

Despite receiving good reviews for its new search platform, Moltzen says, Microsoft faces an uphill battle with no guarantee of success.

"So, don't expect anything overnight because of this, but certainly within the next year, hopefully, as we are entering a better period with the economy, we'll start to see some real success or failure coming out of this," he added.

The deal is not expected to be finalized until early next year, and not until anti-trust regulators have had time to review its impact on the Internet ad market. For now, investors are not overly impressed. Microsoft shares edged three cents higher after the announcement, while Yahoo shares plunged more than 10 percent.