Erik Selberg, a developer on the Windows Live Search team, has a blog post entitled General disarray at The Big 3 where he writes

given the recent trends in query share. I’ll summarize for those who don’t want to read to the bottom of Danny’s post:
sullivan-ms-query-share-dorp.jpg
Greg’s take:

Ouchie. As Danny says, “[Not] a pretty picture for Microsoft … They haven’t held share. It’s drop, drop, drop.”

It really is remarkable how badly Microsoft is doing against Google. I never would have thought that, nearly four years after they started their “Underdog” project to build a Google-killer, Microsoft would not only be badly behind in search, but also actually losing market share.

Well, what did anyone really expect?

Let’s put some things into context. First, all of the above is brutally, painfully true. Google hired smart, self-starters who are into big risk / big reward.
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Yahoo is just in a rough place. They’ve got Google dominating, and they’ve got us coming up from behind.
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And then there’s us at Microsoft bringing up the rear with declining query share. Well… yeah. While our management set the goal of having relevance that beat Google after 2 years (then 3, and I believe 4 now…) it’s not realistic to think that it can be done quickly. If you ask Google, Yahoo, or the fine SEOs at WebMasterWorld or other such places, they’ll all say that Live Search has increased in quality over the years so that it’s much closer to Yahoo and Google. Not yet better, but no longer laughable. And yeah, we’ve done our own share of copying feature parity, and we’re starting to do a few things that cause Google and Yahoo to do the same (ok, noODP is a small feature, but it’s a start!).

Here’s the honest truth… Microsoft will continue to lose share until it can make Live.com something people chose versus just the IE default. That will happen when the average person starts to see Live.com as a bit better than Google. Right now, Google wins on brand (people like them a lot) and quality, so it’s to be expected that existing Yahoo / Live customers will migrate to Google than vice-versa and new customers will pick Google more than Live or Yahoo. Google is making people focus on features, which should tell people that they’re worried about how we’re catching up, and are going to put more people on their core products to keep and extend their lead. So it’s going to be a tough, tough battle for Microsoft to get there…

As I read Erik's post, one phrase kept repeating itself in my head over and over again; "Stay the Course...Stay the Course...Stay the Course". I find it amazing that people like Erik still think that competing with Google is about being a bit better than their search engine or having relevance that beats theirs in a few years. Competing with Google's search engine is no longer about search results quality, it is about brand and distribution. This is why even though the search engine that powers MSN Search or Windows Live Search has gotten better and better Microsoft's share of search engine market has dropped almost 50% since it announced that it would launch its own search engine to compete with Google's. Competition with Google really should focus on addressing both of these points.

Brand

The verb 'google' is now in the Mirriam Webster dictionary. That is the power of brand. Anyone who regularly uses the Internet be they young or old thinks Google is synonymous with search.

Anecdote: My girlfriend once told her kids we were takin them to the zoo and her seven year old jumped on computer and went straight to http://www.google.com to fiind out what animals she'd see that day. 

Distribution

The combination of the proliferation of search toolbars and a new generation of Web browsers with built-in search boxes (e.g. IE 7 and Firefox) have reduced the need for users to actually go to websites to perform a search. This means that it is now very important to be the search engine that is used when a user enters a search directly from their browser. Guess which search engine is the one used by your browser if you
  1. Are you a user of the Firefox browser?
  2. Are you a user of the Opera browser?
  3. Are you a user of IE 7 and have installed Adobe Acrobat?
  4. Are you a user of IE 7 and have installed the Java runtime?
  5. Are you a user of IE 7 and have installed the WinZip archive utility?
  6. Are you using a newly purchased Dell computer?
  7. Are you a user of the Google Toolbar?
Yes, the answer is Google in every case. So even if you are an Internet n00b who hasn't made up their mind about which search engine to choose, there is a large chance that the default search engine you end up using thanks to recent innovations in IE 7 and Firefox will be Google.