A breakup of its stand-alone mobile group and a shakeup of its wireless carrier relationships for mobile search are challenges Yahoo must overcome to gain market share from competitors such as Google and Microsoft.

Yahoo?s CEO Carol Bartz recently broke up the company?s mobile group and spread out the employees across other departments, leading to the departure of several senior executives. In addition, T-Mobile USA discontinued its search deal with Yahoo, instead tapping Google as its default mobile search provider, although Yahoo is still the default on the carrier?s European networks.

?These deals [between search engine providers and carriers] are primarily about revenue share and who is providing a good deal,? said Julie Ask, San Francisco-based vice president/principal analyst at Forrester Research.

?Mobile search revenue is relatively small today both as a percentage of total paid search revenue as well as mobile marketing spend,? she said. ?That said, search is a relatively popular activity for cell phone users, especially within the browser.

?One of the challenges of mobile is that there is still relatively little inventory, so it is hard to spend a lot of money?given how little inventory, it is also challenging to break it up into ever-smaller pieces, say, by using location as a filter.?

However, mobile search is an invaluable tool for brands and retailers.

?Search is powerful because it shows intent?intent to buy, get a slice of pizza, or whatever,? Ms. Ask said. ?The mobile commerce market is growing, but there is still relatively little that people purchase on their cell phone and it is hard to prove ROI and the number of influenced sales.?

Mobile search advertising, especially with the rise of smartphones with GPS, is very effective at driving consumers to bricks-and-mortar locations.

And despite the fact that it is the early days, Google, Microsoft and Yahoo all understand the stakes.

As smartphone penetration increases and brands start to realize the potential of mobile search, revenue will grow quickly.

Three-way battle for market share
Last month, Microsoft and Yahoo received clearance for their search agreement without restrictions from both the U.S. Department of Justice and the European Commission, and will now turn their attention to implementing the deal.

Yahoo is transitioning its algorithmic and paid search platforms to Microsoft, with Yahoo becoming the exclusive relationship sales force for both companies? premium search advertisers globally (see story).

While the deal is designed to help both companies compete more effectively with Google, Yahoo and Microsoft are still competing in many areas, including the battle to form relationships with carriers to be the on-deck default search portal.

?The first thing I think is really interested fragmented nature of existing relationships and how it is impacting overall handset distribution,? said Josh Martin, senior analyst of wireless media at Strategy Analytics, Newton, MA.

?These relationships seem to an extent forged at a time when smartphones were not necessarily going to come with an embedded search engine tied to a particular provider, but the market is shifting,? he said.

Google is the default search engine for Apple?s iPhone, which runs on AT&T?s network

AT&T recently announced that it will go with Yahoo as the default search engine for the Motorola Backflip, the carrier?s first smartphone based on Google?s Android operating system, and many other Web-enabled handsets from AT&T already have Yahoo as the default browser.

Microsoft?s Bing is the default search engine for Verizon Wireless, which is the No. 1 carrier in the United States in terms of the number of subscribers.

Most Sprint and T-Mobile USA subscribers now have Google as their default search engine.

Search-engine branding
Does a consumer?s preference for Yahoo Mail, Microsoft?s Hotmail or Google?s Gmail determine which search portal they tend to use?

How much brand loyalty is there when it comes to search engines? Does online loyalty translate to mobile loyalty?

?If a carrier switches out its default search engine, will consumers care or notice? Probably not,? Mr. Martin said. ?How many users will go in and change the default browser setting? Probably not many.

?These carrier deals are clearly a boon for the search providers that are preinstalled on Web-enabled handsets,? he said.

?Mass-market consumers are buying these devices now, and there?s a good chance that the default search engine provider will remain the search engine provider for the life of the phone.?

Who holds the cards in these negotiations? Who has the leverage?

?Someone like a Yahoo or a Microsoft probably does?t have a ton of power in negotiations with carriers, because they need to get on handsets,? Mr. Martin said. ?They have no alternative, so carriers hold a lot of sway.

?Microsoft will have more influence when Windows Phone 7 launches,? he said. ?If you develop a handset that consumers are salivating over, you have the ability to demand things.

?Middle of the road smartphones such as the HTC Droid Eris [based on Google?s Android OS], you have less leverage, but if you?re HTC, do you really care who your search engine provider is??

Handset manufacturers partnering with different carriers and operating systems, carriers partnering with different handset manufacturers and search providers, search providers launching operating systems?it is enough to make your head spin.

Consumers have made it clear over and over again that they appreciate choice. And while fragmented, the current mobile environment does provide that.

?There?s a fine line that has to be walked?as we?ve seen with regulatory environments, if you too closely associate certain aspects of the platform with your operating system, you can get into trouble,? Mr. Martin said.

?A little fragmentation in the mobile search space could be good for Google and Microsoft, because it is proof that there are options for consumers,? he said.

Yahoo's rebuttal
Cory Pforzheimer, senior manager of corporate communications at Yahoo, Sunnyvale, CA, provided the following statement:

Yahoo seeks to be the center of people?s online lives. We have been more tightly integrating our mobile business into the company?s DNA as we create the best possible user experiences for our consumers and partners regardless of device or access point.

As the adoption of Yahoo?s mobile services continues to grow globally, mobile continues to be a key priority for the company.

Mobile is a key priority for Yahoo, as we are at the forefront of innovation and the development of personally relevant Internet experiences for consumers globally.

With more than 80 carrier partnerships for our award-winning mobile search experience, including the recently announced partnerships with O2 in Germany and Chunghwa Telecom in Taiwan, we are displacing our largest search competitor as the trusted partner of choice.

As long-standing partners, T-Mobile USA and Yahoo will continue to work together on a variety of significant initiatives, including the recent partnership for Yahoo Mail and Yahoo Messenger and prominent placement for category leading services including Yahoo News, Yahoo Sports, Yahoo Finance, Flickr and weather, all of which will be available from T-Mobile?s Web2Go portal.

Yahoo remains the exclusive mobile search service for millions of consumers across T-Mobile's European footprint.