Microsoft May Skunk Google in Verizon Bidding War

Microsoft and Verizon Wireless are said to be close to a deal that would make Windows Live Search the default search engine on Verizon handsets and expand the number of Verizon devices powered by the Windows Mobile operating system.

News of an impending deal between the software giant and the soon-to-be No. 1 wireless operator was first reported in The Wall Street Journal.

As part of the agreement, Microsoft and Verizon would share ad revenue generated by Windows Live Search queries. Verizon would also be guaranteed as much as US$650 million over five years — about twice what search engine powerhouse Google is offering, according to the Wall Street Journal.

James Gerace, a Verizon Wireless spokesperson, declined to comment. Brittany Robbins, a Microsoft spokesperson, also declined to comment.

The news of a pending Microsoft-Verizon deal comes just one day after Microsoft inked a similar agreement with Sun Microsystems. Under the deal with Sun, Microsoft’s MSN Search toolbar will be offered when users download Sun’s Java Runtime Environment, or JRE.

Details of the Deal Murky

It’s hard to predict what impact a Microsoft-Verizon mobile search deal will have on the industry, one Microsoft watcher said.

“It sounds like to me there will be some sort of deal where Verizon will put Live Search on the deck of some Verizon phones,” Matt Rosoff, an analyst at Directions on Microsoft, told the E-Commerce Times. “This isn’t a new tactic. Until we know how deep the deal is, it’s going to be hard to know how much impact it will have.”

Rosoff also takes announcement of this kind with a grain of salt.

“I’m really skeptical of these exclusive deals involving Microsoft and wireless companies,” he said. “They’re never as exclusive as Microsoft would like to make them out to be. Any deal they make will not really be a game changer in search — unless there’s some huge exclusive we don’t know about.”

Whatever the case may be, Rosoff said the agreements with Sun and Verizon won’t bear as much fruit for its search business as deals with major PC makers will.

“I’m not seeing either story being a really big deal,” he said. “Any win or partnership Microsoft can get for Live Search will be helpful, but the big deals Microsoft has with Lenovo and HP North America are the way you get big user numbers to your search site.”

Microsoft Willing and Able to Pay

Speculation that Microsoft might be willing to fork over twice as much money for cell phone real estate as Google did not come as a surprise to industry observers.

“It’s more strategic for Microsoft at this point,” Sid Parakh, an equity analyst at McAdams Wright Ragen, told the E-Commerce Times. “What (Microsoft’s) trying to gain is search market share. When you have critical mass, that’s when advertisers will come onto your platform. Will it be profitable over the life of the contract? I don’t know. I don’t think profitability is relevant at least in the near term.”

The spend-big-and-hope-for-the-best strategy is not new to Microsoft.

“This is how Microsoft often goes after new markets,” Directions’ Rosoff said. “It’s willing to take a lot less revenue than competitors to get a foothold in the market. It also means Microsoft might be willing to pay a lot more for search deals with PC makers.”

With most of its revenue still generated by sales of the Windows operating system and desktop software such as the Office application suite, Microsoft can afford to make huge investments.

“Google’s revenue mostly comes from advertising,” Rosoff said. “They need to make as much money as they can on it. But search advertising is only a tiny, tiny part of Microsoft’s revenue. So they can afford to pay huge sums of money on search advertising to gain market share.”

Mobile Search Still Nascent

Both Rosoff and McAdams’ Parakh noted that the mobile search advertising market is tiny when compared to searches conducted from PCs.

“It’s a tiny user base compared to the number of people conducting Web searches on a PC,” Rosoff said.

Still, the number of people using their mobile phones to browse the Web and conduct Internet searches is expected to grow, and grow quickly.

“There are more smartphones in the market, more usage of data services, more Web browsing,” Parakh said. “It’s poised to grow dramatically. Only about 7 percent or 8 percent of all mobile users conduct searches on their devices. There’s no reason to think that number won’t grow dramatically.”