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Mobile search deals may set stage for deep partnerships

Being the default search provider may be of only marginal value, but wireless deals may set the stage for advanced search services down the road with the potential to drive real revenue.

Mobile search deals are hot and they offer easy money to wireless providers, but the real payoff may come as carriers take their search partnerships to the next level.

After years of holding out for the best offer, Verizon Wireless has partnered with No. 3 search provider Microsoft to make its Live search, and some related services, the defaults for Verizon phones.

"Mobile search and mobile advertising offer tremendous opportunities for innovation and growth," said Microsoft CEO Steve Ballmer in a statement. "We are confident that our advanced mobile search and mobile advertising technologies will help consumers get the most out of their mobile computing experiences and help advertisers reach consumers who are on the go more effectively."

After two years of negotiation and a reported $500 million payoff to Verizon, the five-year deal may mark the end of one era and the beginning of the next, in which basic default search settings are eclipsed in value by more tightly integrated, and intelligent, search deals.

Verizon Wireless was the last of the major carriers to sign a search partnership: Sprint chose Google in 2001, while T-Mobile and AT&T have both partnered with Yahoo. In most of these partnerships, the bulk of the carriers' related revenues come from shared profits derived from mobile searches, rather than lump sum payments.

But Web search giants are unlikely to stay content with simply being the default search engine. They will seek deeper integration with all parts of the mobile user experience.

"What's going on here is the classic example of trying to do a deal while you have something to deal with," said Tom Nolle, president of CIMI Corp. "If you look at search in general, even mobile search, there's a pretty large indication that the majority of users use whatever search engine they like, regardless of the default."

This is increasingly true as mobile Web browsers become more powerful and closer in form to their PC counterparts, where changing the default engine requires just a few quick taps. Nolle said that, according to CIMI Corp.'s own research, only about 15% to 25% of users will accept a device's default search behavior, with the vast majority of users tweaking their settings to their preference.

If those numbers hold true for this new deal, then Microsoft will gain only 12 million to 20 million Live search customers from Verizon's 80 million subscribers.

"If you look at the statistics that have been experienced by other operators, this is what's likely," Nolle said. "Verizon users will still mostly use Google over Microsoft."

For Microsoft, with less than 10% of search market share, that number is still a strategic boost. However, such search deals are attractive only to weaker-positioned challengers, according to Nolle.

Even more important than these individual deals, though, may be the relationships that spring from them. All three of the leading search engines have marked mobile as a primary growth opportunity, and it is a market that is still quickly evolving with the potential to produce billions in annual revenues over the next few years.

But much of that revenue may be derived from smarter, nontraditional searches that take advantage of the mobile network's unique properties, such as location awareness.

"I think these deals are minor unless there is a future draft choice [for deeper partnerships]," Nolle said. "If these deals are meaningful, they are going to be more meaningful for what they pull through than for the initial terms."

And while T-Mobile has been a close search partner with Yahoo, its recent work with Google shows that these partnerships can be anything but exclusive: The No. 4 carrier made a splash by being the first to market with Google's Android operating system, which not only heavily touts Google search but is tied to GMail, Google Maps and other Google services, many of which also happen to drive advertising revenue to the search leader's coffers.

Microsoft appears to be seeking a similar strategy with Verizon's phones, packaging its search along with other Live services such as maps, directions, traffic information and local business information.

Nolle said players like T-Mobile, as well as smaller regional carriers, were wise to pick their deals carefully and, particularly, not to focus on the initial bottom line.

Instead, he suggested that carriers should look for deals that have the potential to lead to larger, more lucrative partnerships, as well as the ones that might bring the carrier the most positive PR in its respective market.

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