CES 2009

This story was co-written by Marguerite Reardon.

LAS VEGAS--Microsoft is hoping two new distribution deals will give its Live Search a much-needed boost.

The company is announcing on Wednesday a global deal with Dell that will see Live Search be the default search engine and a Windows Live toolbar bundled on the bulk of consumer and small-business PCs sold by the computer maker over the next three years. That deal is in addition to a five-year deal with Verizon Wireless, which leaked out earlier on Wednesday.

It's the latest effort for Microsoft, which has been trying--and struggling--for the past four years to build a search business that can offer a substantive rival to Google. But the latest market share numbers indicate that Microsoft is falling even further behind. Searches at Windows Live Search fell 16.7 percent year over year, giving Microsoft 9.1 percent market share in the U.S. in November, according to Nielsen Online figures released earlier this week. Google's searches rose 21.7 percent, for 64.1 percent market share, and Yahoo's searches dropped 1.4 percent from November 2007, for 16.1 percent share.

In an interview, Microsoft Senior Vice President Yusuf Mehdi said that the search product has gotten good enough that the time is right to start promoting it more heavily. Microsoft has already struck deals with HP and Lenovo to increase the distribution for Windows Live and Microsoft's search engine.

"We've gotten to a point where the product is now in a good enough state that we want to start to get it out more formally in front of more customers," Mehdi said. "These two partnerships are very significant for us, because it...gives an opportunity to put our search offering out before a broader audience now in a pretty mainstream way, and I think you should think about it as the first step of us slowly bringing up the dial on how we start to promote our product.

Microsoft has also made other moves, including building its own ad-serving engine, spending billions to acquire Aquantive, and trying promotions such as its Live Search Cashback and other efforts designed to give consumers a financial incentive to use its search engine.

The Dell deal will kick off next month, while the Verizon deal will begin in the first half of this year and includes both mobile search and other mobile advertising services. "It's a big win for us and by far the largest search and mobile display relationship we've entered into with any mobile operator," Mehdi said.

Mehdi acknowledged that Microsoft needs more than distribution deals to truly compete with Google. "These distribution partnerships are part of our strategy," he said. "We know we have to do a lot of other things, including improve the product, including being able to market direct with consumers, and build loyalty and brand around our offering."

Mehdi wouldn't say how much market share Microsoft expected to gain with the Dell deal or talk about Microsoft's other plans, including a rumored rebranding effort. He did say the Dell deal is flexible enough to accommodate a name change.

Microsoft had supposedly been in a bidding war against Google for the Verizon deal, according to earlier reports from The Wall Street Journal. Verizon Wireless and Microsoft have declined to discuss financial details of the deal. But a source close to the company said the five-year arrangement is worth a minimum of $650 million with Microsoft paying Verizon on a per handset basis.

This is believed to be the largest mobile search and advertising deal to date. The Journal reported last year that Google's deal to offer search on Sprint Nextel phones was about half what Microsoft was willing to pay for the Verizon deal. Details about Yahoo's deal with AT&T announced last year weren't disclosed either, but it's believed that Yahoo promised AT&T about $400 million in guaranteed revenue to become its default search provider.

As for the details of the Microsoft/Verizon deal, starting in the first half of this year, Microsoft Live Search will be preloaded on new Verizon Wireless phones and smartphones to provide all local and Internet searches. Microsoft will also power search for Verizon Wireless' VCast content, allowing subscribers to search for ringtones, full music tracks, videos, and other VCast entertainment content and news.

Depending on which device they use, Verizon subscribers will be able to search for content either by voice command or by typing their queries. And the search tool will also provide location-based results, meaning subscribers will be able to search for restaurants, movie theaters, and other businesses nearby.

Also as part of the deal, Microsoft will manage all search and display advertising for Verizon's mobile Web services.

Today mobile search is still in its early days. Only about 9 percent of cell phone subscribers search the Net from their cell phones, according to ComScore M:Metrics. But usage is growing, especially as more consumers upgrade to smartphones like Apple's iPhone or Research In Motion's BlackBerry devices.

Despite its small size today, the big search companies see the mobile market, with more than 3 billion subscribers worldwide, as a huge opportunity. Winning Verizon Wireless, which is currently the second largest cell phone carrier in the U.S., is a big deal for Microsoft. Yahoo is powering search for AT&T, the largest cell phone U.S. carrier. And Google has a deal with Sprint Nextel, the third largest U.S. operator.

But it's still unclear how important these carrier deals will be. Microsoft and Yahoo have previously struck similar multi-year portal deals on the PC side with Verizon Communications and AT&T, but Google still dominates the overall search market. And just as they can on the PC, users still have the option to use any search engine they wish from their cell phone browsers.

So far, Google has managed to continue its search dominance on mobile devices with 60 percent of mobile subscribers who search the Internet from their phones using its search engine. About 36 percent of subscribers use Yahoo and 10 percent use Microsoft, according to ComScore.

Google may also have another advantage in mobile, as carriers start rolling out more devices that use its Android operating system. Android is an open-source mobile operating system that tightly integrates several Google services into phones, including Google's search products.

So far, T-Mobile is the only carrier selling a Google phone, the G1. But other Android phones are expected to hit the market later this year. HTC, the maker of the G1 is planning another Android device, as is Sony Ericsson. Motorola has also said it plans to use Android as one of its main operating systems in future phones. And LG and Samsung, members of Google's Open Handset Alliance, are also expected to release Android phones.