Microsoft and Yahoo today announced that, after months of courting and coyness, the two companies will join forces in the Web search arena to challenge Google's dominance.

Now comes the hard part—ensuring that the two veteran information-technology companies can make good on a deal that should deliver Microsoft's new Bing search engine a much larger audience while restoring relevance to Yahoo's fading star. The 10-year deal, which the companies hope to finalize early next year, calls for Yahoo to replace its own search engine technology with Bing, introduced early last month, and make its search sales force available to Microsoft to attract large advertisers.

In return, Yahoo would get to keep 88 percent of the revenue from all search ad sales on its site for the first five years of the deal, and will have the right to sell ads on some Microsoft sites. Yahoo estimates that within two years, about the time it will take the companies to get this new arrangement up to speed, the deal will provide the company with an additional $500 million in annual revenue while cutting expenses by $200 million (in part because Yahoo will no longer have to invest in further developing its search technology). Yahoo is expected to retain control of the look of its search and portal pages, even though the underlying technology will be Microsoft's.

If all goes according to plan, Microsoft and Yahoo will share about 30 percent of the U.S. search ad market, still a distant second behind Google's 65 percent, according to comScore, Inc.

This move is the latest in a chess match between Microsoft and Google, which earlier this month announced it is developing the Chrome Operating System, to go along with its Chrome Web browser and Android mobile operating system—all of which are technologies that impinge on the Microsoft Windows franchise. Microsoft had in January 2008 attempted to buy Yahoo for about $47.5 billion, an offer rebuked by former Yahoo chief executive Jerry Yang, who reportedly was looking for more money. Yahoo instead attempted to strike up an online advertising partnership with Google, a proposal later scuttled by the U.S. Justice Department. (Yahoo in January replaced Yang with Carol Bartz, who wasted little time resuming negotiations with Microsoft.)

Although government regulators are likely to scrutinize the proposed partnership, asking questions about, for example, how the companies plan to safeguard the privacy of any user data they share, the deal is expected to be approved since the combined search business will provide a stronger competitor to Google, according to a report issued today by FBR Capital Markets. FBR also questions how much Yahoo will benefit from the arrangement, since the company gets no upfront payment and is guaranteed no minimum revenue. Bartz also said in a conference call today that the company would lay off an unspecified number of engineers, the AP reports.

Image of Carol Bartz and Steve Ballmer © Yahoo