Yahoo! (YHOO) and Google (GOOG) actually have something to worry about, if Steve Ballmer is not bluffing. The Microsoft (MSFT) CEO says that he company is prepared to spend 5% to 10% of its operating income on search engine initiatives over the next five years. Microsoft’s annual operating income is about $22.2 billion.

Ten billion dollars could buy Microsoft a lot of opportunities to increase its piece of the search engine market. Recent data show that its new Bing product is already taking business from Yahoo! and Google. Once the novelty of the product wears off, if Microsoft has kept most of those gains, there is no reason to think it cannot invest enough capital to significantly hurt Yahoo!, the No.2 search engine company.

There are plenty of places for Microsoft to spend the money. The first is in becoming the exclusive search provider to the world’s largest web properties including AOL (TWX), MySpace (MWS), and Facebook. All of these companies need substantial new revenue to prove their economic viability. Microsoft can provide them with a steady stream of earnings in exchange for access to their tens of millions of visitors.

Microsoft will also have to get significant market share in the mobile search engine market. The will mean offering the large carriers significant sums of money for partnerships. It has already done this with Verizon Wireless (VZ)(VOD) and that contract could serve as a template for others.

Microsoft  has the opportunity to be the default search engine on new PCs. It has had success in cutting a deal with Dell (DELL). It could easily cost the world’s largest search engine company a small fortune to set-up similar arrangements with most of the five or six largest PC manufacturers in the world, especially the Asia-based operations–Acer, Sony (SNE), and Lenovo.

Microsoft may indeed do the improbable and double its US search share from 8% to 16% over the next year of two. For $10 billion, it may do even better than that.

Douglas A. McIntyre

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