Yahoo takes a page from Microsoft

The Web portal on Tuesday announced a new service dubbed "Yahoo Essentials" that will piggyback off Microsoft's highest-profile software--its Windows operating system and its Internet Explorer Web browser. Yahoo also struck a deal with PC maker Compaq Computer to distribute Yahoo Essentials on its new Presario desktops and laptops.

People who sign up for Yahoo Essentials will get a collection of services set as their default on Windows. The bundle includes instant messaging, e-mail, a browser toolbar, photos and file storage, many of which will become default services on the Windows XP Start menu.

As previously reported by CNET News.com, the service will take over IE by turning Yahoo into its default home page and search engine, redirecting any keywords entered into the IE address bar into Yahoo's search results.

Yahoo's move into Microsoft's most treasured real estate is not unprecedented, since other companies can write programs that run on Windows and IE. However, Microsoft has for many years viewed Yahoo as one of its biggest competitors on the Web and has modeled elements of its MSN portal to compete head-to-head against Yahoo.

"Yahoo is now going to be in Microsoft's sights because Microsoft is going to view them as taking eyeballs away from MSN," said Carl Howe, an analyst at market research company Forrester Research.

To date, Yahoo has remained largely on the sidelines during the highly visible battle between Microsoft and AOL for control of the desktop. Microsoft has viewed the popularity of AOL's online service and applications such as instant messaging as a threat to its operating system, and has engaged the online giant in a series of skirmishes. Earlier this summer, the companies scrapped negotiations for AOL to ship with Windows XP.

Both companies have focused on "owning" Internet users by creating environments in which people depend on them for all of their online activities, whether shopping, exchanging instant messages or sending e-mail. Now, it appears Yahoo has taken a step toward doing the same.

The "Yahoo Experience"
Parts of the service quietly launched Monday in conjunction with an upgrade to Yahoo's Instant Messenger software. When downloading the update, consumers were given the option to receive the new IM client on its own or as part of a package called "Yahoo Experience."

Among other things, people electing the second option were directed to Yahoo's search page rather than to Microsoft's MSN search service when they typed a word or phrase into the browser command line.

"Yahoo Experience is an early test version of something we're launching" Tuesday, a Yahoo representative said Monday, declining to comment further.

A Microsoft representative also declined to comment on the feature. But Microsoft seems likely to respond in some fashion.

"I think you'll now see some new security technologies in IE that somehow manage to block this," Forrester's Howe said. "Microsoft does not like to yield control of its platform that easily."

Web surfers who elected to download Yahoo Experience on Monday received an upgraded version of Yahoo Companion, a previously released product that accesses Yahoo services such as search, Internet e-mail and news by adding a second toolbar below the standard menu offered on IE.

Electing to install Yahoo Experience also changed the settings in IE, harnessing the command bar as a Yahoo search tool. For example, a person typing the word travel would be taken to a Yahoo search page. Without Yahoo Experience, the person would be directed to MSN's search page.

The new service does not appear to alter other Web browsers, such as AOL Time Warner's Netscape.

Direct challenge to Microsoft
The changes to IE appear to be a direct challenge to Microsoft's control over the command bar--power it has wielded to push its own MSN search service past rivals, including Yahoo.

Microsoft offers a service through partner RealNames--modeled on AOL Time Warner's keyword service--that allows common words to link directly to Web pages without requiring surfers to type in more complex Internet addresses. RealNames has struggled to gain acceptance, but it recently signed a deal with domain name registrar VeriSign that could boost its presence.

Meanwhile, the Redmond, Wash.-based software giant has become more aggressive in capitalizing on its ownership of the Web browser market. IE is used by more than 85 percent of all Web surfers, giving Microsoft an enormous advantage in promoting its own services.

Last month, for example, the company quietly tweaked IE to redirect surfers who mistype Internet addresses, such as "www.microsoft.con," to its MSN search service, rather than to a standard 404 "page not found" error message.

The switch, billed as a service enhancement by Microsoft, helped the company claim a No. 1 search ranking last month, based on custom research from Jupiter Media Metrix. Microsoft said MSN Search had more than 32 million unique users in the United States, compared with Yahoo Search's 29 million users.

Yahoo immediately refuted the claim, saying the numbers came from a custom report the software giant asked a third-party research firm to create. Yahoo added that many MSN Search queries are "involuntary," referring to Microsoft's recent changes in the browser.

Elusive paying customers
The new Yahoo feature raises questions about how far the struggling Web portal is prepared to go to draw its already loyal customers even closer. Although Yahoo has signed up millions of members who turn to the site daily, it has had difficulty turning them into paying customers--a feat it desperately needs to accomplish to shake off growing doubts about its advertising-dependent business.

The company has undergone a wave of changes in the past 12 months, including naming new CEO Terry Semel, who assumed the helm with a mandate to rekindle Yahoo's sagging fortunes. Semel has focused on figuring out ways to generate more revenue from Yahoo's millions of visitors and to expand the company's roster of corporate customers.

The company reported a 44 percent decline in revenue in the third quarter compared with last year, falling to $166.1 million, and said it may lay off additional employees as it seeks to refocus its business. More details of the company's strategy are expected next month at an analyst conference Yahoo is hosting at its headquarters in Sunnyvale, Calif.