The debut of the new Microsoft (MSFT) search technology Bing was greeted by mostly positive reviews. The only legitimate complaint about the launch is that the world’s largest software company announced the product before it was ready to be shown to the public, wasting the opportunity to get a great deal of free traffic to the new Bing site. Microsoft will spend between $80 million and $100 million on the campaign to introduce the product. Redmond will have to spend several billion more if it wants to make significant progress against Google’s (GOOG) US share of 66% and Yahoo!’s (YHOO) 21% of the market.

Google is going to remain the primary search engine for the great majority of the Internet population. Most analysts would argue that it is still the best product.  Google’s engineers improve its search system religiously so the odds that Microsoft or Yahoo! will leapfrog it in core features is nearly impossible.

Microsoft has an opportunity to spend billions of dollars to make Bing the default search product on a number of large websites, PCs, and on mobile devices. Some of these transactions may involve Microsoft buying strategic positions in companies as it did with a $240 million investment in Facebook. Most of them will not.

Microsoft announced a deal with Dell (DELL) at the Consumer Electronics show earlier this year to the install the Windows Live toolbar on most of the consumer and small-business PCs sold by the firm over the next three years. Microsoft also announced a partnership with Verizon Wireless (VZ)(VOD) to be the default search provider on the cell carrier’s handsets. At the time the deal with the telecom company was announced the industry rumor was that it was set up to pay Verizon a minimum of $650 million over five years as a draw against the phone company’s portion of the ad revenues brought in from the relationship.

The press has recently become fascinated with the search advertising deal between News Corp’s (NWS) MySpace and Google (GOOG). Google gave Rupert Murdoch’s company a minimum of $900 million to be the exclusive search provider for MySpace and several other News Corp sites.  Most industry experts believe that Google will not be willing to renew the arrangement for payments for payments that are so expensive. That may give Microsoft an opening, but it will be an expensive one to take. It would certainly not be surprising if Microsoft had to pay several hundred million dollars to secure a multi-year exclusive partnership with the large social network.

There are probably a dozen critical search partnership opportunities that will arise over the next two years. Yahoo! will not be a bidder for these, in most cases, because it does not have the balance sheet or capital. That leaves Microsoft and Google, and it is not clear whether the world’s largest search company will pay a great deal to extend its already insurmountable lead. Google also needs to be concerned that the US government and antitrust authorities overseas do not begin to raise red flags over Google’s market share to make it the target of monopoly investigations. While Microsoft has been the target of antitrust probes in the past,  it will not run into that issue while it has less than 10% of the search market.

Microsoft’s most direct solution to its search market share problem is clearly a deal with Yahoo! which would combine the search operations of the two companies. While there is no reasonable estimate of what Microsoft would pay to “get” Yahoo!’s piece of the market, based on what the world’s largest software company offered for the entire portal company, Yahoo!’s board might expect a one-time payment or multi-year guarantee of $10 billion or $15 billion against some portion of the revenue generated over the life of the transaction.

Yahoo! may elect to go it alone. It is in a strong enough No.2 position that its management may feel that it can exploit that strength to double its share price. That would still leave the company’s market value well below where it traded when Microsoft made its buyout offer, but boards have been known to make financially irresponsible decisions before. Microsoft may have to show Yahoo! that it can take share away from it in order to get the smaller firm to be concerned enough about its own business to form a partnership. Proving the power of Bing is going to have to go well beyond good reviews. Microsoft is going to have to convince Yahoo! about its search commitment with its wallet.

There will have to be more deals like the ones with Verizon and Dell. Yahoo! and Wall St. will need to believe that Microsoft is willing to be as dogged about search as it has been about its Xbox gaming system, a product that had severe hardware problems which cost it $1.1 billion in 2007 and ran well behind Sony in sales for years. Xbox sales are now routinely higher than those of the Sony PS3.

Most experts believe that Microsoft has almost no chance of matching Yahoo!’s 21% of the American search market. That assumption may not be true at all, if there is no deal between the two search companies. Yahoo! only has $3.5 billion on its balance sheet and its operating margins are paper thin.

Microsoft may decide it does not need Yahoo!, at least not at an exorbitant price. Bing has turned out to be a good product and Microsoft can spend a fantastic sum of money bring in customers.

Douglas A. McIntyre

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