• by Mark Walsh  @markfwal, January 7, 2009

Beating out rival Google, Microsoft announced a five-year deal with Verizon Wireless to be the default search provider on the wireless carrier's phones as well as handling mobile advertising services.

The long-rumored agreement with the nation's No. 1 wireless operator gives Microsoft a stronger position to challenge Google's commanding share of the mobile search market and make inroads into mobile advertising. Microsoft CEO Steve Ballmer announced the deal Wednesday in Las Vegas at the Consumer Electronics Show.

Effective in the first half of 2009, Microsoft will power search on Verizon's mobile portal as well as local and Internet search on the carrier's feature phones and smartphones. Depending on the device, Microsoft Live search will allow Verizon customers to use voice commands as well as typed queries to get information.

The pact also calls for Microsoft to manage search and display advertising on Verizon's mobile Web service, creating what the companies called "a one-stop integrated way for advertisers and ad agencies to reach mobile consumers."

"Mobile search and mobile advertising offer tremendous opportunities for innovation and growth, and Microsoft is in a unique position to deliver a fully integrated, voice-enabled solution for Verizon's customers," Ballmer said.

Neither Microsoft or Verizon provided financial terms related to the agreement. But in a story about a potential deal between the companies, The Wall Street Journal in November reported that Microsoft would share search ad revenue with Verizon, with guaranteed payments to the carrier of about $550 million to $650 million over the five-year length of the deal. That amount was roughly twice what Google offered, according to sources cited in the story.

John Stratton, Verizon's chief marketing officer, emphasized in a statement that the alliance with Microsoft would help the company achieve its strategic goal of building mobile data revenue. "Wireless data--from business-to-business data to multimedia services--now represents more than 25% of our revenue," he said. "Getting wireless search and advertising done right is critical to continuing to make wireless content relevant to our customers and our business."

With its $5.9 billion acquisition of Alltel Corp. set to close on Friday, Verizon will become the country's largest wireless carrier, with about 78 million subscribers. By aligning with the industry's biggest player, Microsoft aims to get a leg up on both Google and Yahoo in mobile search and advertising.

Already, Google has a search and ad partnership with Sprint Nextel, while Yahoo is the default search provider on AT&T's MEdia Net Web portal and on T-Mobile's Web2go service in the U.S. and on T-Mobile phones in Europe. Google is the default search provider on T-Mobile G1 phone, powered by the search giant's Android mobile operating system.

"This has the power to dramatically improve Microsoft's share of mobile search," said Greg Sterling, who leads the local mobile search practice at Opus Research. "That won't happen automatically, but it has that capacity."

He noted that the broad scope of the partnership will extend to more specialized services such as "location-aware" searching, providing users with maps, directions, traffic updates and other relevant information based on their location.

The question is whether wireless customers will embrace new types of search services or stick with the search brand most use on the desktop--Google. With a 60% share of the mobile search market, Google already appears to be extending its hegemony to handheld devices. Yahoo is second with 18%, and Microsoft is a distant third at 6%, according to Nielsen Mobile.

"Google has very purposefully and intensively developed mobile applications, so they're working to maintain their leadership, and grow it," said Sterling.

Mobile search overall is still at an early stage. As of the third quarter, only 19 million U.S. cell subscribers used the mobile Web for search out of a total of 260 million, according to Nielsen. Some 11 million used a carrier's default search box.

But mobile search and related advertising is expected to grow along with the wider use of mobile data services and more sophisticated devices. Juniper Research forecasts local mobile search ad revenues worldwide to reach $4.8 billion by 2013.