According to preliminary reports, Yahoo! (NASDAQ:YHOO) is recording some early success with its revamped search business, Project Panama. Online measurement company comScore Networks reports that since Yahoo! launched its new search business on Feb. 5, 2007, its click-through rate increased by 5% after its first week (ending Feb. 11) and another 9% after its second week (ending Feb. 18). But can a new and improved Yahoo! catch a tried-and-true Google (NASDAQ:GOOG)? I recently talked Yahoo! and other search-related business with Pulitzer prize-winning reporter David Vise, a senior commentator with breakingviews.com and the author of The Google Story.

Yahoo vs. Google
Mac Greer: David, Yahoo! recently launched what whey call their Project Panama, a new ad-ranking algorithm aimed at improving Yahoo's paid search. Do you think Yahoo! can compete with Google in paid search, or has the horse left the barn?

David Vise: I think that Yahoo! is a No. 2, but I think Google is a runaway No. 1. Google is synonymous with search. Look up "Google" in the dictionary, and it is the noun that has become a verb, "to Google." Yahoo! does have a space in search that is enviable to many people, but in reality, when you look at the numbers in terms of search, Yahoo! has less than 25% of the share. So Google is more than double its closest competitor, and that gap is growing.

Yahoo! has another problem with Project Panama that it is seeking to address. That is, Google is far better at converting searches and clicks into dollars than Yahoo! And Yahoo!'s ability to convert clicks and searches on Yahoo! into bottom-line profits has been very poor, and the company CEO, Terry Semel, has admitted as much. So it will be interesting to see how much Yahoo! can close the gap with Project Panama, and to the extent that it fails to do so, Google's lead will only widen. Remember, Google profits about 50% from searches done on Google.com, but it is the tremendous network that Google has created of literally hundreds of thousands of websites around the world that accept its ads and that it shares revenue with generously that give it a tremendous amount of market clout that goes well beyond its owned and operated sites.

MG: And David, I was stunned to see this stat from Piper Jaffray: Google earns two to three times as much on every user search than Yahoo!?

DV: That's right. It is a stunning figure, and you can bet that while Yahoo! is very publicly rolling out Project Panama, Google is very quietly also doing things to ramp up and improve its monetization of search. That kind of an edge between a No. 1 and a No. 2 in an industry increases the gap so widely that one could envision a time when you get to the point where Google essentially has little or no direct competition and where it really is in a monopoly position, as far as not only the information people are looking for, but also in terms of dominating Internet advertising.

MG: And if Project Panama doesn't take off, can we assume that Yahoo! CEO Terry Semel may not be Yahoo! CEO Terry Semel?

DV: Yes, I would say Terry Semel's future as the CEO of Yahoo! is tied directly to the success of Panama. If Panama succeeds, Semel is the CEO. If Panama goes down, Semel goes with it.

Google vs. Baidu.com
MG: Let's talk about a country where Google is not the search leader. The country is China, which, of course, represents a huge potential market for Google. Currently, according to research firm Analysys, Baidu.com (NASDAQ:BIDU) had a 58% share of China's search market in the last quarter of 2006. That is compared to Google's 17% share. David, what do you make of Baidu.com's success in China?

DV: Baidu is a homegrown success story, and it is obviously giving the Chinese users what they are looking for in a way that goes well beyond Google. My understanding is that Baidu allows users of its service to download full-length books, motion pictures, and other things that are copyright-protected without any hesitation or reservation. That has made it a much more popular site than Google, which does exercise restraint in the area of copyright, even if it doesn't live up to the letter of the law at all times.

I think Baidu also has the support of the Chinese government, which wants to see businesses that are homegrown succeed. But I think Google is making up ground fast. I am also very suspicious of the statistics that you provided.

MG: But is it your impression that Baidu is the leader? Because that is what I have read in other areas.

DV: I think Baidu is the market leader, and I think Google is No. 2, but I don't think the gap is as wide as you suggested. I think Google is extremely popular in China.

Searching for Google's future
MG: Let's talk a bit more about Google in terms of a big-picture question. Google has been public for around two-and-a-half years, so it's getting a bit long in the tooth there, David. Going forward, what does Google do for an encore, or do they stick to their knitting and focus on search?

DV: Well, I think, first and foremost, Google focuses on search. That is what it does best, and the company says it puts about 70% of its resources into improving the quality of search. There is the potential out there for very specialized vertical search engines in areas like health care, for example, to give results that are superior to those that could be found on a broad search engine like Google.

So Google is taking steps to try to improve the quality of search, and I think the number of users on the Internet will continue to grow, the number of cell-phone users will continue to grow. So Google needs to be out there aggressively as it is with its brand, cutting deals with mobile-phone manufacturers and suppliers and others, so that it is right out there as countries like India see what is going to be a very rapid expansion over the next three to five years in the number of cell-phone users.

But I think in terms of the business, Google can continue to grow online. In addition, Google is looking to pick up a larger share of the advertising dollars that are handled on radio, on television, and in print even by reselling space in newspapers. So I think Google is looking to grow through advertising in virtually all of its forms and believes it has technology that can do so.

Recently, the company had a disagreement with the two founders of dMark, a company that Google had acquired that specialized in optimizing and targeted radio advertising, so the two founders left Google. The company has not had the kind of success out of the box with radio and newspaper advertising that it hopes to, and for the most part, its talk about television has been nothing more than that -- just talk. So it remains to be seen whether Google can grow successfully in these areas, but it believes that it has the ability to provide targeted advertising to audiences watching motion pictures, watching television, listening to the radio in a way that other entities don't.

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You've heard what David Vise thinks. What do you think? Will Project Panama give Yahoo! investors something to shout about? Will Baidu continue to out-Google Google in China? And what will Google do for an encore? Of the three companies, currently Yahoo! is favored in our Motley Fool CAPS community, where it garners a three-star rating. Baidu and Google, on the other hand, both have only a one-star rating. Share your thoughts and get some other perspectives at CAPS, our free interactive stock database.

David Vise is the author of The Google Story. For more Foolish reading on Google, Yahoo, and Baidu:

Yahoo! is a Motley Fool Stock Advisor recommendation. Baidu is a Motley Fool Rule Breakers recommendation. Try out these or any of our other Foolish newsletters for yourself, free for 30 days.

Mac Greer does not own any shares of the stocks discussed but thinks that Yahoo! should lose the exclamation point and focus instead on quietly announcing its presence. The Motley Fool has a disclosure policy.