Bill Gates and Steve Ballmer had to do something. Microsoft has failed at building an internet search business to rival Google, while rival Yahoo! has never been weaker. Despite Wall Street's panic about Google's performance last night, the search leader is simply miles ahead of its rivals.

The timing of the Microsoft duo is shrewd. On Tuesday, Yahoo! came out with poor results, showing revenue growth of just 8 per cent, and unveiled a well-flagged 1,000 redundancies as Jerry Yang, founder and chief executive, battles to get his company back on track.

Then on Thursday, Google showed that its own growth rate was 51 per cent. The difference barely needs spelling out. Google's global market share is 62.4 per cent, according to Comscore, the internet measurement group. Yahoo! sits on 12.8 per cent and Microsoft, which has invested heavily in trying to build up MSN Search, is stuck at just 2.9 per cent.

Nor was it a one-off result. Yahoo! has been struggling for some time — profits actually fell 12 per cent in 2007 — an argument pointedly made by Steve Ballmer in the letter to Yahoo!'s board that he chose to make public. Microsoft tried to buy Yahoo! a year ago, after extensive discussions in late 2006 and early 2007, but with the then chairman Terry Semel saying: “Now is not the right time.”

Yahoo! wanted to wait to see what the impact was of its new advertising platform, Panama but, a year on, the new service has made no difference. Mr Ballmer knows that he packs a punch when he says that “the competitive situation has not improved” and by offering a 62 per cent premium to Yahoo!'s share price, the Microsoft chief executive cannot be ignored. He knows that no competitor can easily afford $44 billion either.

Yet by going public, Mr Gates and Mr Ballmer run a risk too, reminding the world that they are desperate for a deal. Microsoft, for all its success with operating systems and software, has poured fortunes into chasing internet growth but failed to deliver it. Yesterday, it conceded that it was losing money on its search engine.

Both sides, need each other; their weak market positions should help with the inevitable regulatory scrutiny, but logic is never enough for a merger. The only reason for Microsoft to have gone public is to bring a reluctant party to the negotiating table — and emotion will play a critical part. With Yahoo! hiring Goldman Sachs to handle what might emerge as a defence, it is not obvious that the 39-year-old Mr Yang is ready to become an employee of Mr Gates.

Microsoft, based up in rainy Seattle, remains unpopular in California's Silicon Valley. The group's centralised model of software production is anathema to the developers in the Valley. With Mr Yang holding 4 per cent of Yahoo!, and co-founder David Filo another 6 per cent, the pair have some leverage, but in the end must persuade shareholders to hang on.

That does not mean Microsoft has it easy either. The reaction to Google's figures is a reminder that the easy growth Microsoft sees in internet advertising, from $40 billion today to $80 billion in 2010, may not come to pass. Google didn't blame the US economy yesterday - but it did say it was unsure how much money it could make placing ads in social networking websites. It has also struggled to find a way to generate cash from video advertising and justify its $1.65 billion purchase of YouTube.

Google reckons that advertisers will maintain their internet spending, and so make cuts elsewhere. Really? Advertisers and media companies might start waking up to the limits of online advertising: it does not deliver bloc audiences like the Super Bowl or Coronation Street or USA Today or the Daily Mail can.

That does not mean online advertising will not be significant. It is still growing faster than conventional advertising, but it is easy to overvalue it. As it moves into the mainstream it becomes part of ordinary marketing campaigns, which means it becomes vulnerable to cutbacks when clients need to save money.

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