SAN FRANCISCO -- In its quest for Internet domination, Google ( GOOG) has proved itself the king, at least on the desktop. But on mobile devices, the fight for the throne continues, and Google finds itself battling Microsoft ( MSFT) for the crown. Microsoft is reportedly in the final stages of negotiating a deal with Verizon ( VZ) to become the carrier's default search engine on all of its cell phones. Google has also been jockeying for a deal. If Verizon chooses Microsoft, that would deal a big blow to Google in the mobile space, which many industry observers consider the Internet's next frontier. Verizon is positioned to become the largest carrier in the U.S. once it has acquired privately-held Alltel. The Federal Communications Commission recently approved the acquisition. Just three months ago, Verizon was rumored to be sealing an agreement to make Google its default search engine. But according to a recent report in The Wall Street Journal, Microsoft came up with more favorable terms in which it would share with Verizon revenue from ads on Web search pages, with guaranteed payments to the carrier of about $550 million to $650 million over five years, or roughly double Google's offer. Verizon spokesman Jeffrey Nelson would not comment on where the company stands with either Microsoft or Google. "We aren't going to negotiate major business relationships in the media," he wrote in an email.
But Sanford Bernstein analyst Jeffrey Lindsay says Verizon is bargaining from a position of strength with both Google and Microsoft. "Verizon is negotiating its hand very well and forcing them to bid against each other," he says. "With the strategic stakes being so high, we wouldn't say that Microsoft has it in the bag by any means." Lindsay maintains that Google must win over Verizon if it wants to dominate the mobile Web as it does desktop computers. "It would be a huge setback for Google if they missed the deal," he says. "It would probably behoove them to do what it takes to make sure they get it." For Microsoft, whose presence on cell phones is rather limited, a deal with Verizon may be even more essential. Roger Entner, a telecom analyst for Nielsen IAG, notes that although Microsoft has developed a Windows operating system for mobile devices, it is largely reserved for high-end devices and is not tightly integrated with search, a crucial revenue stream. He further points out that Google is already the default search engine for Sprint ( S), and Yahoo! ( YHOO) is linked to AT&T ( T). "There's only one dance partner left in the U.S.," Entner says. "Either
Microsoft is dancing with Verizon or they're going to sit this one out." Entner asserts that a loss for Microsoft would be far more devastating than a loss for Google, which has already made inroads on the mobile Web, including the creation of the Android operating system, which T-Mobile has adopted on its new G1 phone.
"If Google wins this, Microsoft is shut out of the mobile search game in this country," he says. "Microsoft can't let them win this." Still in its infancy, the mobile Web has the potential to generate big bucks. According to comScore, more than 17 million wireless subscribers performed a Web search on their mobile device in September, or about 7.7% of total users. Of the 17 million, 60.1% used Google for their search needs, compared with 36.4% for Yahoo! and 10.3% for Microsoft. Research from eMarketer shows that in 2007, an estimated $35 million was spent on mobile search advertising in the U.S. That number is expected to climb to $107 million this year and $242 million next year. For total mobile advertising -- which includes search, display, and messaging ads - spending in 2007 was $878 million. eMarketer predicts it will grow to $1.66 billion this year and $2.81 billion next year. Rajeev Chand, a wireless analyst with Rutberg & Co., says that while being the default search engine on any mobile device has its advantages, that may become less important over time. "Today, users will use the default search provider because mobile is still new and the interface is tough," he says. As the industry matures, however, users will learn to bookmark their preferences and bypass search altogether, Chand says. Entner agrees that in the long run, default search providers might not make much of a difference. "But in the long run we're all dead," he says. "This is about the short run. If you can kill the competition in the short run, there's no one around in the long run to take your cookies away."