All Things Digital: What Will Google Do With MicroHoo?

With upwards of two-thirds of the search market, depending on which survey you use, one would not imagine Google would worry too much about any kind of hook-up of Microsoft and Yahoo.Think again.

While several sources at Google (GOOG), even off the record, have professed to me that they are not that worried about any search and online advertising deal the pair have finally struck, others admit that a more robust rival will force the company to compete and innovate more aggressively.

"We take nothing for granted, because anyone can make a comeback," said one person at Google, who points to Microsoft's laudable efforts with its Bing search service. "Especially with Microsoft's deep pockets and Yahoo's talent in the advertising market."

Sources close to the situation said Google will likely try to keep a low-profile in opposing the deal announced today at first, positing that regulators have the same opinion about fewer competitors in the market as they did when opposing a similar Google-Yahoo search deal last year.

"Is Google siccing the dogs on this deal?," asked one person familiar with Google's thinking. "Or will it wait for regulators to cast scrutiny on a deal that drops the number of competitors from three to two?"

Still, having three in the market has not been enough to lift the share of Yahoo or Microsoft very much in comparison to Google over the last several years.

According to a comScore (SCOR) report for June, for example, even combined, Microsoft (MSFT) and Yahoo (YHOO) have a share that is less than half that enjoyed by Google.

Microsoft accounted for 8.4 percent of the search market in the month, with Yahoo clocking in at 20 percent. Google grabbed the lion's share at 65 percent.

And that dominance means a financial windfall–as volume means more queries means better search ads means better relevance in an ever-virtuous and very lucrative cycle.

It is a cycle Google would like to keep intact, so much so that it made what turned out to be a very risky move to block Microsoft when it was trying to take over Yahoo last year.

Regulators ended up raising federal eyebrows about the proposed Yahoo-Google search deal, which was less sweeping than the Micosoft-Yahoo one announced today.

Google dumped Yahoo in the end–although not before the company found itself front and center on antitrust radar screens.

And there is has remained, with Christine Varney, Assistant Attorney General for the Antitrust Division of the United States Department of Justice, having become Google's most pointed critic.

She should be, given the Silicon Valley-born Yahoogle idea was an appalling reach by Google, as I wrote last April:

Anti-competitiveness would likely be Google's first arrow in what will surely be an attempt to slow down, if not block, the deal.

And while advertisers are more disposed to have a stronger No. 2 player to counter Google's growing power, the company might use the opportunity to shave the sharp edges of its ever-scarier reputation.

In a conference call early this morning about their deal, Yahoo CEO Carol Bartz and Microsoft CEO Steve Ballmer tried to paint a picture of Google as a scary and dominating search giant.

But, as Google will surely offer up, if Microsoft and Yahoo combined is the underdog, it might not look like so much of a bully after all.