Microsoft, Yahoo said to be on verge of search and advertising partnership

There have been rumors that Microsoft and Yahoo are going to be striking some kind of deal regarding search and advertising soon. We haven't bothered to report on the speculation so far, but the rumors are getting more definite:

Yahoo is close to making Microsoft's Bing its search provider.

The deal, which would make Microsoft a more credible competitor to Google, is likely to be announced this week, and seems likely to be based on a revenue share, not on a big fat check upfront, as some at Yahoo had hoped.

Yahoo's request for an upfront payment (it is said to have asked for several hundred million), in addition to revenue guarantees that would amount to billions over the course of the deal, caused a breakdown last week in the on-again-off-again talks. But they were revived late on Thursday, according to executives with knowledge of the situation.

If this deal goes through, it'll be good news for the marketplace. A Microsoft/Yahoo alliance has the potential to finally create a true rival to Google in the search and advertising space, which the Mountain View based company currently dominates and is dangerously close to monopolizing.

Yahoo's research and development efforts have sputtered of late as the company has tried to cut costs. New CEO Carol Bartz seems to recognize that Yahoo could be greatly weakened if it pursues a go-it-alone strategy. Allowing Microsoft to be responsible for search infrastructure makes a lot of sense because it would free up Yahoo's resources to be invested into strengthening the services the company offers around its portal (yahoo.com), still one of the Internet's top destinations.

Yahoo has done this before. In 2000, it struck a deal to outsource search to Google, an arrangement that lasted until 2004. Arguably, that deal helped legitimize Google and turn it into the search giant it is today.

If Yahoo begins utilizing Bing, it may have the same effect on Bing, albeit over time. No doubt this is what Microsoft is hoping for. Plus...

...Microsoft is well-positioned to take control of Yahoo's search business because several key former Yahoo search execs, including former Yahoo search chief Qi Lu, now work in Redmond and are intimately familiar with Yahoo's business.

Microsoft will need to be patient. Steve Ballmer, to his credit, seems to realize that there is no way Google can be overtaken on its own turf overnight. Microsoft is going to have to keep improving its own product if it wants to lure users away from Google. A television campaign isn't going to cut it. Bing will actually have to deliver useful results for people to decide to make the switch.

The Yahoo deal would, however, give Microsoft a quick pick-me-up and increase Bing's market share, thus making it easier for Microsoft to take aim at Google.

The deal also promises to solidify the view that the software world is increasingly becoming dominated by conflict between Microsoft and Google.

The two companies, as of next year, will be competing against each other in virtually every product category. By signing a pact with Microsoft, Yahoo is pulling a John Edwards and jumping out of the main action (as far as it is concerned) to let the two tech titans battle it out in search.

(In fairness to John, he did not immediately take sides upon leaving the presidential race in early 2008, choosing to remain neutral. He did endorse Barack Obama before Hillary Clinton finally bowed out, however.)