Bing recently passed Yahoo in search market share, right before it started to power the web giant's search results. This essentially means that Bing, with or without Yahoo, is now only second to Google, though still a distant second. See Schimdt talk about Bing at around the third minute:
Although Bing is still nowhere near Google in market share, the decision engine (as Microsoft likes to call it) is slowly but steadily gaining. Search is still Google's primary business, so Schmidt does have a point: Bing is cutting into Google's main revenue stream. Microsoft is pushing innovation efforts hard with Bing, causing Google to step up its game.