“This is hypercompetition, make no mistake,” Bill Gates, November 2005.

Gates is worried about Google and has been for a while. For years, observers have watched Microsoft, imagining the frantic pacing behind closed office doors in the executive suites, waiting for something major to happen. There have been articles about the rearrangement of furniture around the board table and the flinging of furniture across Steve Ballmer’s office but, for the most part, very little of substance has been written about Microsoft’s plans to deal with Google. That’s because, until recently, the moves Microsoft has made have appeared to be either cosmetic and internal, or clumsily executed and easily thwarted. This week, work that’s been happening in the background is showing fruit.

For Microsoft, the month of May has come in like a triumphant lion. When you are used to being the king of the pride, nothing says success like taking big chunks of business from the competition and over the past few days, Microsoft has scored big gains in its fight against Google. These gains, coupled with today’s rumours of a Microsoft/Yahoo partnership, make the Wizards of Redmond suddenly dangerous, opening two new phrases in the ongoing search engine wars.

Microsoft’s resurgence actually began last month with the hiring of former Ask Jeeves CEO, Steve Berkowitz as SR. VP of MSN’s online business group. A Microsoft press statement said Berkowitz will be, “…responsible for running the Online Business group, which includes include MSN.com, MSNTV and MSN Internet Access programming, advertising sales, business development, and marketing for Live Platforms, MSN and Windows Live.”

The recruitment of Berkowitz gives Microsoft an important voice with an outside view whose credibility as a search business leader has been established several times over. His hiring also indicates Microsoft is starting to look outside of its own box for leadership as it moves forward into an era that can only be described as cooperative competition, a historically difficult phrase to utter on the Microsoft campus.

Microsoft has been in talks with other Internet technology firms such as Yahoo, eBay and Amazon for months now as Google’s stable of services and products continues to grow and present threats to firms that would otherwise be its search partners. Ever since its talks with AOL were short-circuited at the last moment by Google in January 2006, Microsoft has been looking for a strong content-distribution partner.

Earlier this week, Microsoft’s new search tool, WindowsLive became the engine powering Amazon.com’s search engine A9.com and navigation/data aggregation service Alexa.com. Amazon had used Google to provide search results for their users in a deal dating back to 2003, making the partnership one of the larger distributors of AdWords advertising. That deal expired this month, allowing Amazon to make the switch.

Google was the previous search engine partner of choice for Amazon for a number of reasons. In 2003, Google was the undisputed leader of search tools, providing approximately 75% of Internet search results across several platforms, including AOL and current rival Yahoo. It also provided paid-advertising services across Amazon search properties, an arrangement that should have been as lucrative for Amazon as it would have been for Google. In previous years, working with the then upstart Google was not only a measure of coolness; it had the makings of a secure partnership with a growing company that prided itself on avoiding evil doings.

The tenor of relationships between Amazon and Google began to change late in 2005 when Google introduced its mysterious Google Base listings system and the development of secure online payment system. Though it likely loses a bit in revenues by dropping Google, Amazon is also moving to protect itself from Google’s apparent encroachment into the business of online sales.

A similar chill is developing among many of the largest players in the Internet services sector. Late last month, the Wall Street Journal reported auction giant eBay was in talks with Microsoft and Yahoo, mapping out a cooperative strategy to compete with Google. Other tech firms are also rumoured to be speaking informally with each other, all with an eye on the suddenly disruptive growth of Google.

The most interesting rumour stemming from these meetings speaks of a partnership or merger between Microsoft and Yahoo. According to a story, “A Microsoft, Yahoo Tie-Up?” appearing in today’s Wall Street Journal, Microsoft and Yahoo executives have been involved in talks ranging from greater collaboration to out-right acquisition. While the prospects of Microsoft acquiring controlling interest in Yahoo are slim, increased cooperation between the two is very likely.

For Microsoft, Yahoo has a good pay per click advertising system in Yahoo Search Marketing (YSM). It also has the most trafficked set of web properties in the United States with hundreds of millions of loyal users. Its ad distribution network is scheduled for system-wide improvements in the coming weeks. Yahoo also holds thousands of older patents purchased during its acquisitions of AltaVista, Overture, AlltheWeb, and dozens of other search related firms.

For Yahoo, Microsoft’s ability to control defaults on Windows users’ desktops, combined with the distribution of subtle branded inclusions in subsequent Windows operating systems, gives Microsoft an advantage Google is struggling to adapt to. If Microsoft wants to default users to WindowsLive before offering a selection of other search engine options, it can. Google and Firefox have a similar arrangement.

Both Yahoo and Microsoft want to present themselves as credible alternatives to Google’s AdWords programs and each provides the other with the tools necessary to build one. For Yahoo, a deal with Microsoft represents the widest possible distribution network for YSM advertising.

For advertisers and search marketers, a deal between Microsoft and Yahoo could bring much needed competition and growth to the search marketing industry. It could also benefit search engine users by introducing a healthier competitor in the organic or natural search listings.

The coming months are going to be very interesting as discussions between many of the largest players on the Internet continue. The Amazon announcement and Yahoo speculation follow last week’s revelation that Microsoft is going to spend $2Billion more than it had previously projected with the bulk of those monies directed towards Internet services.

In a defining series of internal memos on the nature of Internet Services, Microsoft chairman Bill Gates, and Chief Technical Officer Ray Ozzie, stressed the urgency of competition with Google to Microsoft’s staff.

“…We must reflect upon what’s going on around us, and reflect upon our strengths, weaknesses and industry leadership responsibilities, and respond. As much as ever, it’s clear that if we fail to do so, our business as we know it is at risk. We must respond quickly and decisively.” Ray Ozzie memo, Oct 28/05 to: Executive Staff and direct reports

“The next sea change is upon us. We must recognize this change as an opportunity to take our offerings to the next level, compete in a manner commensurate with our industry responsibilities, and utilize our assets and our broad reach to reshape our business for the benefit of the users of our products, our customers, our partners and ourselves.” Gates Oct. 30/05 email memo to: Executive Staff and Direct Reports; Distinguished Engineers

The world of search is never still but the next few months are shaping up to be among the most interesting and defining times for business and advertising online. Microsoft is finally making its moves and in typical style, they are big, bold and broad. It has never faced a competitor as skilled or as universally loved as Google but the process of going after Google has clearly begun.