A report released by Cherry Hill Research that I have finally had time to sit down and read concludes that for Microsoft the Search Engine War was over before it even started.

There will be no great war between Microsoft and Google/Yahoo, because despite Microsoft’s vast resources, Google/Yahoo! have already left MSN far behind. There will be skirmishes, of course, but these will be irrelevant. Microsoft is as far behind in the web business as it was when it launched its online effort ten years ago, and short of disastrous mistakes by Google and Yahoo!, nothing Microsoft does on its own is likely to change that. Microsoft’s best chance to make MSN the industry leader is to spin it off, most likely in a merger with AOL. This won’t guarantee success—the combined entity would still be in third place—but it would create a company far stronger than either AOL or MSN on its own.

Cherry Hill Research describe how although Microsoft has vast experience making late entries into markets and then taking them over, this experience is exclusively tied to the software business, where as search is really media supported by software. Microsoft has in fact not been a late entrant to the search portal market, however historically choose to fight its main battles on the software side IE: for browser dominance against Netscape. However although it won the desktop market, this isn’t actually the profitable part of the Internet or search business, so although they are providing the browser, for that last ten years they missed the opportunity to concentrate on what really mattered – developing as large a media empire as possible.

It’s a good report focusing on the core business metrics behind the major players in the industry. 

Download  The Web War Is Over—And Microsoft Lost
(Cherry Hill Reserch - September, 2005)

There is also very nice summary of how each player may be fairing financially based on their SEC filings - See below.  Its shows how close the battle between Yahoo! and Google really is.