Today, Yahoo died as a search engine. If the deal with Microsoft is approved, what will replace it will be Bing, the search engine that Microsoft launched only two months ago. Within a few months time, Microsoft will go from owning 8 percent of the U.S. search market to 28 percent (comScore). That is still less than half of Google’s 65 percent, but it could give Microsoft a fighting chance in the search wars against Google.

While the agreement was a long time coming, Bing was the cherry on top, so to speak. Earlier today, I spoke with the two executives who oversaw the negotiations for both sides, Yahoo EVP Hillary Schneider and Microsoft SVP Yusuf Mehdi. I asked how big an impact Bing’s sudden success had on bringing the deal to a close. “Seeing Bing as a live experience was a nice assurance,” says Schneider, “but did not change our rationale or timing. This was a conversation that went on over several months. Bing was introduced after we had material momentum in how we wanted to approach this partnership.”

Yet Bing was able to gain market share in its very first month, and it took it from Yahoo, not Google. And Bing is just going to get better. Yahoo faced the very real prospect of market share erosion from below as well as from above. Now in one fell swoop, Microsoft will control all of Yahoo’s search volume. In a conference call today, Steve Ballmer explained how important market share is in search:

Do we think we will have better algorithms for relevance? Yes we do. There is a feedback loop in search. the more searches you serve, the more you learn about what people click on. Scale drives knowledge. There is a return to scale from seeing that much activity [that is more] than Yahoo or MSFT see independently

Microsoft will measure the success of this deal in two ways: increased market share with advertisers and increased market share with consumers. When I asked Mehdi what success would look like a couple years out, he defines it in terms of “shares of queries and spends.” Even before mentioning gaining share with consumers, he says: “Success is a smooth transition for advertisers as they shift more share of wallet from traditional media and competitors to get the better ROI.”

Microsoft will also become the new home for Yahoo’s search technologies. That is a good thing because even before this deal was announced, the spirit of technology innovation at Yahoo which produced projects such as Yahoo Boss and Search Monkey seems to have fizzled. These efforts will now be passed on to Microsoft. The fortunate news is that Mehdi says he wants to keep those projects alive. “For Search Monkey and Boss, we will integrate that technology and determine how to take that forward. There is a lot of goodness there.” At least Microsoft knows a good developer platform when it sees one.

So the deal is good for Microsoft. It puts them in the game, and they didn’t even have to pay $1 billion upfront. But is it good for Yahoo?

Instead of that upfront payment, Yahoo is getting 88 percent of search advertising revenues on Yahoo-owned sites every year for the next five years (at which point the so-called TAC rate will be renegotiated for the last five years of the deal). “This is a materially higher TAC than any of the previous arrangements,” says Schneider. But it’s also not much higher than what big affiliates like AOL are believed to be getting from Google today. And Yahoo needs to keep paying its sales force, but can only keep 88 percent of the revenues they generate. (Although there are some revenue-per-search guarantees baked into the deal to protect Yahoo on the downside).

Investors aren’t thrilled with the deal, and it is not just because they tend to value cash over potential. This is a ten-year arrangement between two lumbering giants that is filled with execution risk. It is a very complicated deal. Yahoo’s sales team has enough trouble communicating with its own engineers. Now they have to learn how to talk to Microsoft’s.

The two companies will work hard to pull this off. Their futures depend on it. And the deal is structured in a way that makes sure both sides make more money the more searches and advertising dollars Bing generates. Getting to that ideal state, though, won’t be easy. In the meantime, as they work through all of the implementation issues, Google could strengthen its position and take even more share.

No matter what happens, Yahoo just took itself out of the search game. It got Binged.

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New stats from monitoring service StatCounter suggest that for the second time since its launch, Microsoft’s Bing has surpassed Yahoo Search as the second most used search engine in the United States. Shortly after publicly debuting the new service, Bing already jumped over Yahoo Search – if only for one day – which many attributed to the launch momentum. But Bing has proven to be a very solid product that many seem keen to try out even after a month.

According to the new data, Bing took 12.9% of the US market like comScore had earlier measured. With the strong jump, Bing comes out ahead of Yahoo Search (10.15%), while Mountain View remains the undisputed king of the mountain with a US market share of 75%.

StatCounter CEO Aodhan Cullen comments on the leapfrogging of Yahoo Search by Bing, saying: “The jump in Bing’s share may reflect a positive review of the search engine compared to Google which appeared online in the New York Times on the 8th and in the print version on the 9th July.” I’m not really sure if that is in fact the reason and if this isn’t just the service’s regular growth path. After all, Microsoft has shown a remarkable drive to keep the momentum for its decision engine going, recently adding Twitter messages to search results and bringing the search platform to its Hotmail service. Surely one newspaper article can’t be the only reason for its steady rise in share?

In any event, while Google shouldn’t be particularly worried about losing its dominance on the search market yet, the other players in the field better be watching Bing’s progress very closely. Microsoft is doing it right, and users are noticing, too.

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Maybe it works, but seeing ads on Google for Microsoft’s new Bing search engine just doesn’t seem to send quite the right message. Plus, the ads link to a nearly blank landing page, since Bing hasn’t launched yet.

Microsoft is rumored to be spending up to $100 million to advertise the Bing launch. I wonder how much of that Google will end up getting…

There are also ads pointing to a Ning site called BingHub. I can’t imagine why whoever created it is spending cold hard cash to promote that, either.

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