There are several small battles going on across the internet as companies come out with niche products that cater to one service or another. But the true “online world war” has been between three companies. Microsoft, Google, and Yahoo. According to ABC news:

In March, Google captured 54 percent of Internet searches, according to Nielsen/NetRatings. Yahoo had 22 percent of the market and Microsoft’s MSN/Windows Live Search had 10 percent.
Google, the search juggernaut, has had an advantage online because of its ability to monetize search. This has allowed the company to create a variety of other services that all direct and drive search traffic.
Microsoft’s advantage has always been its dominance of the software market. Because its software is inescapable (even on a Mac you probably have MS office), it has significant opportunity to direct customers to its own online properties and services.
Yahoo, the darling of the dot com era, has a very significant offering of games, community tools, IM, news and entertainment, making it a very valuable property. Just imagine how many people use Yahoo’s fantasy football tools. Those people are checking into Yahoo 20 times a day!
In addition to battling with each other all three face a variety of smaller, yet very significant challenges online, social networking sites like Myspace and Facebook are real threats, and even Google decided it was better to purchase YouTube rather than try to build its own video site. For Yahoo, the rise of social networking sites led to the purchase of Flickr, and Microsoft , well it has teamed up with Facebook.
The challenge for all three of them is monetization of traffic. And at the moment Google has the advantage, but a Yahoo Microsoft partnership is a major shift. Microsoft will obviously benefit from Yahoo’s experience and expertise online. It’s only a matter of time before they are monetizing traffic direct from the desktop and from within applications, and with the ability to leverage Microsoft’s unique software market dominance the new Yahoo/Microsoft will have a very real advantage. Google will have to pull some new tricks out of the bag to keep up.
In my wildest dreams this partnership will push exciting new things out of each company. Eric Schmidt is already sitting on Apple’s board and it’s only a matter of time before they are further connected. Maybe we are close to finally seeing an always connected virtual PC or MAC, with all the software and storage that you would need, accessible from anywhere and 100% connected to all the social activities you desire. Imagine having the information and power of the internet integrated into all of your software applications. Things like urban dictionary services integrated into Word so that the program could understand slang, or video services being integrated into PowerPoint, or a real selection of royalty free art providers integrated into Photoshop. The possibilities are endless.
So, is the partnership desperation or a stroke of genius? If they have the imagination necessary to execute on an extreme vision then I would say genius, if they simply merge without figuring out how effectively innovate, well, then desperation isn’t what I would call it. It would be more like stupidity. And there is still that issue about neither Microsoft nor Yahoo being able to monetize search traffic as effectively as Google. That is something that will have to be addressed. But I do have to say, I have a lot of confidence in Microsoft and Yahoo. You don’t get to be the number one software provider in the world without knowing how to innovate. And you don’t get to be number one, two, three, or even four or five on the internet without being able to stay ahead of the curve. The fact that these companies are who they are, in the position that they have means that we can expect great things. Microsoft, Google, and Yahoo are all great competitors, with very smart people, I’m sure they will do things none of us on our own could dream of. I just can’t wait to see it.
For more info check out what some of the pundits are saying:
Microhoo? Purchase of Yahoo by Microsoft Could Challenge Google’s Dominance
Running the Numbers on a Possible Yahoo/Microsoft Merger
Shock and Awe: Microsoft Bids $44.6B for Yahoo
Microsoft’s open letter : Breaking News: Microsoft offer to buy Yahoo!