The Yahoo and Microsoft deal: what’s behind it?

Not long after the news of the new Google operating system (see Microsoft and Google compete head-to-head comes another big news item: Microsoft and Yahoo!, the world’s biggest software firm and its leading online portal respectively, have reached a deal for a ten-year web search and advertising partnership. The combination is likely to create a serious rival to Google, the online giant that dominates both of these markets.

The agreement is supposed to help both parties overcome their biggest problems: Microsoft will get a boost its search service, called Bing (its platform to serve online advertisements). Yahoo! will be able to cut costs and increase revenues and will no longer have to invest millions in its search and advertising technology. Yahoo!‘s boss, said that the tie-up “comes with boatloads of value” for her firm.

Yahoo! had been in talks with Google, but this fell apart after it looked like the agencies responsible for monitoring monopoly power would not approve such an agreement. The big question is whether this combination will be able to threaten Google’s dominance in web search. The deal will mean that Microsoft handles nearly 30% of searches in America—compared with Google’s 65% of the market. Microsoft’s share may well rise.

At any rate, the battle lines between Google and Microsoft are now clearly drawn. The grand alliance between Microsoft and Yahoo! is part of an even bigger battle between the technology titans that is likely to drag on for years.