CES-UPDATE 3-Verizon picks Microsoft search over Google, Yahoo

(Adds analyst comment, updates shares)

By Ritsuko Ando and Sinead Carew

NEW YORK/LAS VEGAS, Jan 7 (Reuters) - Verizon Communications Inc (VZ.N) has chosen Microsoft Corp (MSFT.O) to provide Internet search services for cell phones, in what is seen as a blow to rivals Google Inc (GOOG.O) and Yahoo Inc (YHOO.O).

Verizon Chief Executive Ivan Seidenberg said on Wednesday that Microsoft CEO Steve Ballmer would announce the deal later in the day at the Consumer Electronics Show in Las Vegas. Seidenberg, speaking at a Citigroup conference, gave no further details.

The agreement follows more than a year of speculation on whom would become the default mobile search provider for Verizon Wireless, which is set to surpass AT&T Inc (T.N) as the No. 1 U.S. mobile carrier after it closes its purchase of smaller operator Alltel later this week.

"It's certainly a feather in Microsoft's cap. Tough news for Google and tougher news for Yahoo," CCS Insight analyst John Jackson said of the agreement.

Microsoft made a bid for Yahoo last year, but walked away after they disagreed on price. Investors have been skeptical about whether the software company can win online advertising revenue away from Google and Yahoo, which are both stronger than Microsoft in the Internet search market.

"Microsoft really needed to win that," Nielsen's head of telecom research, Roger Entner, said about the Verizon deal. "It gives them a good fighting chance. Otherwise they would have been almost insurmountably behind Google" in mobile search.

However, the deal was not likely to change how many Verizon Wireless customers use their phones to surf the Web, Jackson said. While the details of the agreement have yet to be revealed, he said Google may have been a better choice to help Verizon offer personalized Web services, such as delivering ads that are relevant to users' interests.

"The ultimate goal in mobility is contextual awareness and the delivery of highly personalized experiences," Jackson said. "These are competencies Google has in spades, so it may be that Verizon's customers ultimately end up with an inferior experience relative to what Google might enable."

Last year, The Wall Street Journal reported the two companies were in negotiations and that Microsoft would share with Verizon revenue from advertisements shown in response to cell phone Web searches. Other previous reports had said Verizon was exploring a deal with Google.

Verizon shares rose 1.27 percent to $31.90 in on the New York Stock Exchange. Amid a broad tech slump following a revenue warning from bellwether Intel Corp (INTC.O), Microsoft shares fell 6.02 percent to $19.51 on the Nasdaq, where Google shares fell 3.61 percent to $322.01 and Yahoo shares fell 2.23 percent to $12.71. (Additional reporting by Tiffany Wu; Editing by Derek Caney and Matthew Lewis)