Microsoft close to stealing Verizon search deal from under Google’s nose

Last week we saw Microsoft seeking to resuscitate the ailing Windows Mobile with a far reaching partnership with LG. Now it is pushing to get more influential mobile allies into its clutches, and is trying to oust Google from a valuable search deal with Verizon Wireless. It has also finally confirmed that there will be an interim upgrade to its mobile OS, release 6.5, before the delayed version 7.0, in a bid to restore confidence in its platform.

According to reports in the Wall Street Journal, Microsoft is revisiting its old strategy of pushing its OS and web services by getting close to operators rather than device makers. In August, Google was close to a deal with Verizon Wireless to get its search bar included as the default on the number one US operator’s handsets, often gaining a coveted home screen position, which significantly boost mobile web usage.

Now Microsoft is reported to be trying to gazump its rival, by offering Verizon a larger share of advertising revenue from searches and a guarantee of higher payments. Sources say Microsoft would guarantee payments to the carrier of $550m-$650m over five years, or twice what Google was offering. Microsoft would not just gain profile for its web services, and its own share of ad revenue, but is also looking to include deals for Verizon to carry more Windows Mobile devices, and put the OS at the heart of its smartphone strategy.

The combined deals are valued at $1bn, but the importance to Microsoft goes far beyond simple cash. Verizon Wireless putting Windows at the top of its portfolio would be a huge endorsement for the flagging smartphone OS, and the US cellco must seem like ready prey - it is under pressure to accelerate its moves into mobile web services and into open access, but without the expertise, or strong partners, to do this without significant risk; and though it has expressed interest in Android, it has made no commitments to the OS. Meanwhile, until the LTE phase, it cannot choose the other main alternative to Windows Mobile for high end mobile web devices, Symbian, since this is hardly present on CDMA platforms.

The search market is also very strategic to Microsoft in its fight with Google, and it made its most aggressive move earlier this year with a (failed) bid for Yahoo. Now it may be forced to go a more indirect route - ironically, the one Yahoo has been pursuing strongly itself, of picking off cellcos one by one to default on its search engine - in order to boost its measly share of the nascent mobile search market. This currently stands at 5%, compared to Google’s 61% and Yahoo’s 18%. Google recently called off an advertising partnership plan with Yahoo amid fear of regulatory probes.

Google is the default search partner for Sprint Nextel, and Yahoo for AT&T, the latter deal also a blow to the search leader, and making a Verizon win essential for US profile. T-Mobile works closely with Google since launching the first Android phone, G1.

For Verizon’s part, it appears to be tempted by Microsoft’s offer, and this reflects the sort of bartering that will become endemic across the mobile web world, with Google, Nokia, Apple and Microsoft fighting for pole position with the large cellcos. These operators will remain the primary channel for mobile web services and devices for many years, despite the impact of open access and direct-to-consumer offerings, and battles like this one show their continuing ability to influence the structure of the mobile value chain, even as they resist the pressure to become mere bitpipes.

Another boost for Microsoft’s LiveSearch came last week when Sun agreed to distribute the MSN toolbar with its Java runtime, replacing a 2005 agreement to bundle Google’s toolbar (the change only applies, so far, to the US and to IE users). Bloggers speculated that the move was a tit-for-tat action, since Google recently dropped Sun’s StarOffice from its Google Pack. Microsoft is slated to launch the final ‘Wave 3′ release of its Live services this week.

Meanwhile, Windows Mobile 6.5, which has been long rumoured, appears to be a reality. Motorola co-CEO Sanjay Jha, a close Microsoft partner, blew the cover recently and hinted at the interim upgrade for the current release 6.1. Now Microsoft CEO Steve Ballmer has confirmed there will be a 6.5, and told last week’s WinHEC developer conference: “With releases we’ll make this year - releases we’ll make with 6.5 next year, Windows Mobile 7, I think we have a pretty interesting roadmap.”

A key focus for the step upgrade is likely to be a more streamlined user interface, with handset makers like Sony Ericsson and HTC already improving on the basic Windows capabilities, and some enhancements made by ODMs and carriers are likely to be implemented in the Windows Mobile 6.5 platform. Although Microsoft can be defensive about its technologies, it has become more flexible in the mobile world, as witnessed by its initial hostility to Sony Ericsson’s unique nine-pane user interface for its Xperia X1 Windows phone, which it later reversed. Also, Windows Mobile 6.1 included the homescreen design that was originally created for the T-Mobile Shadow by HTC.

Ballmer also let slip that Microsoft might adopt an open source browser engine in future. In answer to an audience question at a Power to Developers event, he said he believed Microsoft would still need its own browser for the foreseeable future, because proprietary extensions were still necessary to broaden its functionality. But he added: “Open source is interesting. Apple has embraced Webkit and we may look at that, but we will continue to build extensions for IE 8.”