In Microsoft’s latest quest to challenge Google for search market share, it has finally struck a deal with Yahoo! to really stir things up.

After months of speculation over a possible deal between Microsoft and Yahoo!, they have finally announced their collaboration to take on their chief rival, Google.

The deal proposed will see the two companies joining forces, with Yahoo!’s search engine being powered by Microsoft’s Bing and Yahoo! becoming Microsoft’s online sales team, with Microsoft integrating Yahoo!’s search technologies into it’s search platform in a last ditch attempt to knock Google off the top spot.

Yahoo! will be in charge of selling search advertising and AdCentre will become the self-serving ad platform, however both companies display advertising platforms are not due to alter at all, as both will maintain their current programs separately.

Yahoo! will predominantly focus on their media sites such as, Yahoo! Finance and Yahoo! Sports, as they are currently performing well in their categories and are attracted millions of unique visitors each month.

The term of the agreement is currently 10 years and should help to create a search platform to compete with Google. Last month they reached a combined market share of 28.4%, according to ComScore, which is slowly catching Google’s share of about 65% and the two companies intend for their combined share to grow further when their technologies are combined to form the ultimate search platform.

The deal that has been announced sees Yahoo! being paid an 88% share of all the search ad revenue that it generates, which is expected to be worth somewhere in the region of $275 million in operating cash flow.

Both companies are confident that the deal will be very profitable for both parties. Steve Ballmer, boss at Microsoft said, “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”.

Also CEO at Yahoo!, Carol Bartz has said, “This agreement comes with boatloads of value for Yahoo!, our users, and the industry, and I believe it establishes the foundation for a new era of Internet innovation and development”.

Yahoo! believe this deal will boost their operating income by around $500 million and secure $200 million in savings.

This deal ends years of negotiation between the two companies. Back in January 2008 Yahoo! turned down an offer of a rumoured $47.5 billion from Microsoft to buy them out, when Yahoo! demanded more money which was later rejected by Microsoft.

However this deal shows Microsoft finally achieving it’s goal of increasing its market share and posing more of a threat to Google’s share of the market and Microsoft’s CEO Steve Ballmer hopes that by combining the resources of #2 and #3 search engines is what is needed to really challenge Google’s position.

What do we think?

It is going to take more than this to really challenge Google’s dominance. Google has established the position it has through creating (mastering?) the ulimate search journey – a simple process with decent, relevant results which has encouraged more an more people to use it.

It is now the de facto search engine and ‘to Google’ is now commonly understood across all walks of life. Until the search experience itself suffers and is clearly bettered by the competition, it is hard to see why there will be a significant migration away from Google.

Long may the battle continue and we welcome the prospect of serious competition but the cynic in us remembers the promises of the new Panama PPC platform – what impact did that have? Our money is still on Google for the forseeable future…