Advertising Provides Key To Microsoft-Yahoo Deal

So Microsoft is back, this time in talks over an unspecified "transaction" with Yahoo.

A couple of weeks ago, I said Yahoo may have blundered its way into a better outcome for its shareholders, and this latest twist strengthens my conviction. With a possible deal with Google still being considered and Microsoft back at the table, much-derided Yahoo is suddenly looking like Cinderella at the ball. Yahoo's management may yet emerge as heroes.

Microsoft maintains that it isn't discussing another takeover bid, though it reserves the right to do so. What might they be talking about?

Speculation has focused on combining Yahoo's and Microsoft's search businesses, which are a distant No. 2 and No. 3, respectively, to Google's. April figures from Nielsen Online, a research firm that tracks Internet usage, put Google's share of the U.S. search market at 62% versus 27% for a combined Yahoo-Microsoft. Surely the trend of ever-shrinking market share hasn't been lost on executives at Yahoo and Microsoft. So combining their search operations makes about as much sense as the Sears-Kmart merger.

The only advantage would be cost savings. Yahoo spends about $1.2 billion a year on "product development," much of that presumably on the search arms race with Google. It's hard to say how much Microsoft spends, but let's assume a comparable figure. Combining the two operations would presumably cut close to $1 billion in costs. I assume Microsoft would buy Yahoo's search operations, with some sort of revenue-sharing arrangement.

But why stop at search? A combined Yahoo-Microsoft still has the edge over Google in display advertising. Kevin Johnson, president of Microsoft's platform and services division, said in a widely circulated memo to employees this past weekend that his aim was to "disrupt" the market in search and "win" in display advertising. He noted that Microsoft's ad revenues had increased 40% compared with declines at Yahoo and Google. This intense competition doesn't yet reflect Google's deployment of recently acquired DoubleClick but suggests an intense campaign ahead.

Display is where Yahoo's sheer numbers are most compelling. What Yahoo has going for it is content and a vast number of unique visitors. Scale is what matters, just as it does for Super Bowl advertising. Scale is Yahoo's most valuable asset.

In the most recent quarter, about 87% of Yahoo's revenue came from advertising. If Microsoft essentially buys all of Yahoo's ad business, both search and display, then it gets nearly all the benefits of a merger. Yahoo would become a pure content company, basically outsourcing its ad business to Microsoft.

There's a deal that starts to make sense. This surely wouldn't be lost on Google, which has concluded a successful search advertising test run with Yahoo, and which would benefit from a display deal as well. In my previous column I called for Yahoo to turn over all its search advertising to Google, but that seems too limited now that Microsoft has upped the ante. Google should also be looking to acquire Yahoo's entire ad business in a cash-and-revenue-sharing deal.

The big question is price, but given the huge potential advantages to both Google and Microsoft, it should be a big number. As a Yahoo shareholder (I also own Google), I say let the bidding war begin.
By: James B. Stewart
Wall Street Journal; May 21, 2008

Microsoft Offers Reward

Microsoft Corp. announced a plan to pay consumers who buy items they find through the software company's search service, the latest in a series of moves to gain ground on Google Inc. in the lucrative business of Internet search.

The idea to get consumers to use a search service by enticing them with financial rewards has been tried by companies before with little success. Microsoft, a relative latecomer to the search business, believes it can improve upon the concept by implementing it on a broader scale and by coupling it with new options for advertisers.

Microsoft Chairman Bill Gates announced the new service, Microsoft Live Search cashback, at the company's annual event for advertisers. The program includes products from 700 merchants, including Barnes & Noble.com and Overstock.com. Consumers who buy items from participating merchants after searching for them and clicking on an ad can get a cash rebate via an online Microsoft account they create.

The offering is designed to help attract a greater share of commerce-related queries.

Microsoft also is hoping the program will draw new advertisers seeking a more precise return on their investment and choices beyond traditional models, such as paying every time an ad is viewed or clicked on.

Merchants who participate in the program will be able to select a variety of options for buying advertising from Microsoft, including paying Microsoft only when a customer completes a sale. Google has begun testing a similar model that calls for advertisers to pay Google only when a consumer completes a specified action, such as buying a product or filling in a form.

The Live Search rebates are set as a percentage of the purchase price of an item and vary among merchants. Users can find a 5% rebate on a $60 coffee maker or 2% on a $120 digital camera, for instance.

Ellen Siminoff, chairman of search-marketing company Efficient Frontier Inc., said advertisers are eager to test new models that can help them spend their dollars more wisely, but that a variety of tools already exist to help them calculate spending on the likelihood it will result in a particular action, such as a sale. She predicts marketers will spend more money on the program if it increases the number of searches through Microsoft's search engine.

In April, Microsoft sites captured 9.1% of the U.S. search market, roughly flat from April 2007, according to comScore Inc. Google's market share in the period rose to 61.6% from 56.1%.

Microsoft withdrew an unsolicited offer to buy Internet giant Yahoo Inc. May 3 but has floated a proposal that includes acquiring Yahoo's search-advertising business, according to people familiar with the discussions.

The software company has tried to use financial incentives before to lift its share of the search market. In 2006, Microsoft tried a sweepstakes-like search service through which users could win prizes if their search terms matched those on a random list. Last year, it started its Live Search Club, in which users earn prizes for completing puzzles that involve searches.

The company's latest attempt is based on technology and partnerships Microsoft acquired by buying comparison-shopping site Jellyfish late last year. The company also said Wenesday that is was exploring the possibility of incorporating cash-rebate options into travel services bought through Live Search, which will begin displaying results from another recent acquisition, travel Web site Farecast.

By: Jessica E. Vascellaro and Robert A. Guth
Wall Street Journal; May 22, 2008

Icahn, Microsoft merger maven?

Billionaire investor Carl iCahn has a bone to pick with Yahoo's board of directors for not accepting Microsoft's buyout offer.

The notorious shareholder activist Carl Icahn formally announced that he is launching a proxy fight. He has formed a 10-member slate in an effort to unseat Yahoo's current board at the company's annual shareholder meeting on July 3.

Icahn, who stated that he has acquired roughly 59 million shares of Yahoo, has also sought antitrust clearance from the Federal Trade Commission to acquire up to another $2.5 billion in Yahoo shares.

Icahn is leaning on such high-profile tech names as Mark Cuban in his efforts to unseat Yahoo's current board at its annual shareholder meeting and to pave the way for a Microsoft-Yahoo merger. Cuban, owner of the Dallas Mavericks and chairman of HDNet, ironically sold Broadcast.com to Yahoo for $5.04 billion in 1999.

Icahn has been making his mark in the tech industry of late, most notably in the last year or so, with his actions regarding Motorola and BEA Systems. Over the past 13 years, he's logged more wins than losses in his proxy fights, according to FactSet SharkWatch.

Microsoft earlier this month walked away from its multibillion-dollar bid to buy Yahoo when the two companies failed to come to agreement over the purchase price.

Some CNET News.com readers were suspicious of Icahn's motives.

"Icahn specializes in what's best for him," one reader wrote in the TalkBack forum. "Is he in this for the long haul? Or just the short-term profit?"

On the other side of the merger manners meter, Hewlett-Packard proved that friendly blockbuster deals could still be done today.

HP plans to acquire computer services firm EDS for $13.9 billion in a deal intended to boost HP's services revenue. HP expects that the addition of EDS will more than double HP's services revenue of $16.6 billion in fiscal 2007.

But the sheer size of the deal is more than a bit daunting. The deal represents the combination of the largest number of people that the IT services sector has seen, Gartner analyst Ben Pring said, and HP faces serious challenges when it comes to integrating two vastly different companies. The track record of deals like this is "pretty spotty," Pring said, and IBM's purchase of PricewaterhouseCoopers demonstrated that the transition can be tough.

In other merger news, CBS has agreed to acquire CNET Networks, the publisher of News.com, in a deal valued at $1.8 billion. The acquisition will make CBS one of the 10 most popular Internet companies in the United States, with a combined 54 million unique users per month and about 200 million users worldwide, the companies said.

Google wants to make friends
Google has unveiled a preview of Friend Connect, a way to add social features to a Web site without programming. Meanwhile, Facebook has announced its own Facebook Connect, in which members will be able to use their Facebook identities across the Web--profile photos, names, photos, friends, groups, events, and other information. Facebook profile content, for example, could appear on other social sites, and Facebook event listings could theoretically connect with external event and invitation services.

It's a big move for Facebook. Until this point, the social network has had a reputation for keeping its cards close to its chest--even banning the account of popular blogger Robert Scoble when he used a script to export his Facebook contact list to Plaxo. But Facebook has a representative in the Data Portability Workgroup, and executives have said Facebook has wanted to bring its information outside the site eventually.

Google Friend Connect, on the other hand, employs several more-or-less standard networking technologies--OpenSocial as a foundation for richer Web applications; OpenID to handle login chores; and OAuth to let users approve the grafting of new branches onto their existing social networks.

It's yet another option in the complicated and fast-changing set of alliances and standards efforts in the social-networking domain. When Friend Connect was first announced, Google engineers explained that it would take advantage of other social-networking sites' APIs to enrich the program--including Facebook's.

However, a post on Facebook's developer blog explains that the social network has suspended Google Friend Connect's access to its API, citing a violation of its internal terms of service. Facebook contends that while its users would manually opt in to Friend Connect, they would not have control over the third-party sites that would then use Friend Connect through Google's API.

Meanwhile, Comcast is adding a social dimension to its services through the acquisition of Plaxo. Terms of the deal were not disclosed, but the purchase price is thought to be in the $150 million to $170 million range. The acquisition is a big win for Plaxo, whose Pulse social-networking service, with 1.5 million active monthly users, has been overshadowed by the likes of Facebook and MySpace.

Web surf's up on street, stars
Google is gathering 3D data along with the photographs it takes for its online Street View service, a potential boon for those of us who fantasize about flying like Superman through urban landscapes--at least virtually.

"The imaging technology includes lasers that collect 3D geometry data," the company said in a statement. However, for now, at least, the 3D information is just experimental, Google said.

Savvy observers, looking at Flickr pictures of Google Street View cars gathering images in Milan, had identified the 3D laser scanners in April. At the time, Google didn't comment, but it now has confirmed the scanners, as well as the expansion of Google Street View to Europe.

Google Maps now can also show real-estate listings, presenting pushpins that show houses for sale. To show real-estate results, click "Show search options," then select "Real Estate" from the drop-down list. The Web site then shows a list of properties for sale on the left tied to pushpins on the map on the right.

Search results can be refined by specifying price range or number of bedrooms and bathrooms. In addition, there's a text mode that will be more familiar to the classified-ad crowd. (Huh? Text mode for a mapping site? There's still a small map visible.)

But soon you will be seeing less from Google's Street View; the company has begun testing face-blurring technology, responding to privacy concerns from the search giant's all-seeing digital-camera eye. The technology uses a computer algorithm to scour Google's image database for faces, then blurs them, said John Hanke, director of Google Earth and Google Maps.

He likened the issues some have with Street View to the ones that took place when Google introduced aerial views to Google Maps. It took time for the public, regulators, and Google to get comfortable with the feature, but "it needs that debate. We see that and try to let it play out."

Meanwhile, Microsoft launched its WorldWide Telescope, a free Web-based program that allows Web surfers to explore galaxies, star systems, and distant planets. The program, which was developed by Microsoft's research arm, weds images from the Hubble Space Telescope, the Chandra X-Ray Observatory Center, the Sloan Digital Sky Survey, and others.

Microsoft said WorldWide Telescope will be made available for free as a tribute to Jim Gray, a Microsoft researcher who disappeared off the California coast while sailing last year.


By Steven Musil
CNET News.com; May 16, 2008

Google, IBM Join Forces To Offer Cloud Computing Services

"The cloud has higher value in business," says Google CEO Schmidt.





As Microsoft and Yahoo go their separate ways, IBM and Google are cozying up to move into what they think will be the dominant IT delivery model of the future--so-called cloud computing.

Over the next year, IBM and Google plan to roll out a worldwide network of servers from which consumers and businesses will tap everything from online soccer schedules to advanced engineering applications. The IBM-Google cloud, fresh off testing at several major universities, runs on Linux-based machines using Xen virtualization and Apache Hadoop, an open source implementation of the Google File System.

Google already has launched numerous cloud-based services for consumers, such as e-mail and storage. With the exception of security requirements, "there's not that much difference between the enterprise cloud and the consumer cloud," Google CEO Eric Schmidt said earlier this month during an appearance in Los Angeles with IBM chief Sam Palmisano. "The cloud has higher value in business. That's the secret to our collaboration."

A STUDY IN CONTRASTS
Palmisano and Schmidt insisted that their companies are similar, despite obvious differences. "We're boring, they're exciting. We're slow, they're fast. We're fat, they're skinny," Palmisano joked. But the contrasts are mostly skin deep, he said, noting that the companies share "a common technical alignment."

IBM believes the cloud model will allow it to reach small and midsize companies around the world, which it says represent a $500 billion IT market that it has trouble serving profitably through the usual sales channels. Google and IBM could conceivably supply computer users--both business and consumer--with hosted offerings ranging from basic productivity software like word processing and calendaring to sophisticated management and security tools through IBM's Tivoli brand and Google's Postini unit.

Under a portion of its cloud strategy it's calling the Blue Business Platform, IBM plans to launch an online marketplace offering its own pre-integrated products and services, as well as those from other software developers. Customers will be able to use the software they buy "on premises or in the cloud," Palmisano said.

The IBM-Google alliance started a couple of years ago with a phone call from Palmisano to Schmidt. "Sam called and wanted to know what we thought about distributed computing," Schmidt said. "We weren't looking to sell them anything," Palmisano insisted. Last October, the companies gave their joint platform project to several top engineering universities, including Carnegie Mellon, MIT, and Stanford, to poke away at. Now, IBM and Google say it's ready for wider use.

Their partnership is solidifying just when Microsoft's efforts to acquire Yahoo have broken down. Microsoft's approach to the cloud trend is to move some of its applications to the Internet under a strategy it calls software plus services. But the bulk of its profits still come from products either sold in boxes or preinstalled on PCs. Microsoft's enormous user base gives the company time and space to get its Internet efforts right. But, for the first time in years, Redmond is seeing clouds on the horizon--and they look a lot like Google and IBM.


By Paul McDougall
InformationWeek; May 12, 2008

The War for the Web

Microsoft was smart to walk away (for now) from its $44 billion bid for Yahoo. It's never good to overpay. But the software giant – whose stock has flatlined for eight years – was onto the right strategy in looking to the Web for growth.

Can't Microsoft build something on its own? Why the rush to pay billions for Yahoo? The simple (and wrong) answer was that adding Yahoo's 20% Web search market share to Microsoft's 10% meant that it could compete against Google's 60% share. Technology changes too fast for that to make sense except on paper. Programs run anywhere these days – on your desktop computer, on servers in data centers, on your iPod, cellphone, GPS, video game console, digital camera and on and on. It's not just about beating Google at search, it's about tying all these devices together in a new end-to-end computing framework.

With the Microsoft/Yahoo deal breakdown, everyone assumes Google walks away with the prize. Not so fast. This contest is just starting. For Microsoft or Google or anyone else to win, they need four key elements of an end-to-end strategy:

- The Cloud. The desktop computer isn't going away. But as bandwidth speeds increase, more and more computing can be done in the network of computers sitting in data centers – aka the "cloud."

There, search results can be calculated, companies' payrolls processed, even the complex graphics for video games can be drawn. But it's not cheap. These clouds are multibillion-dollar investments. Google spent $842 million in the last three months on servers, data centers and fiber optics.

Today, there are several major clouds: Google, Yahoo, Microsoft, Amazon and smaller players IBM and Sun. Can there be more? Sure, but it would require a business model that could not only pay for it, but could rip it out every few years and modernize it. Google's $20 billion Web advertising business gives it the cash flow to do so. Advantage Google.

- The Edge. The cloud is nothing without devices, browsers and users to feed it. Book buyers are basically paying for Amazon's data centers. Yahoo is a favorite for finance and sports enthusiasts, who pay for its data centers. Google worked its way into the toolbars of Firefox, and even Microsoft's browser.

And Microsoft? It was stripped of its ability to control Windows desktop real estate during the late '90s Netscape feud. Accused of using its overwhelmingly popular Windows operating system to unfairly dominate other new markets, Microsoft settled the dispute with the Justice Department in 2001.

Now Microsoft scrambles for other advantages. One lies in smart mobile devices, which is the fastest-growing location to launch search requests. Microsoft software runs on about 20% of smart phones in the U.S.

Don't underestimate the value of Microsoft's other market stronghold, its X-Box video game platform. Now you know why Google is scrambling to plant a flag in the cellphone business with its Android technology and bids for wireless spectrum. So far, advantage Microsoft.

- Speed. Once you build the cloud, it's all about network operations. Whoever can deliver search results faster, wins. Users only realize this subconsciously, but it's true: Google's dominant share is as much about speed as it is for relevant results. Compare it to Microsoft or Yahoo and you'll see. Google built data centers next to waterfalls so electricity could be cheap enough to help it win the speed war.

New cloud applications appear every day – backing up files, managing your money, editing photos, running the back end of multiplayer games like World of Warcraft. Now corporate America is evaluating moving its accounting, scheduling, order management and the like into the cloud, and speed will be a top priority. Advantage Google.

- Platform. Yahoo's mistake was relying on expensive workers to update Web pages and sell ads, and especially to run Yahoo Finance, Sports, HotJobs and Travel. Google hates using people for these tasks. The company may love programmers and probably customers as well, but it tries to put absolutely no one in between them. Google's genius was to automate all its Web page creation and to have a market set prices for ads.

But even though Google has more than 10,000 employees, the company doesn't have a lock on brain power – especially since its stock is not climbing as fast as it once did, and with young coders setting their eyes on the next big startup.

Having a fast cloud is nothing if you keep it closed. The trick is to open it up as a platform for every new business idea to run on, charging appropriate fees as necessary.

Microsoft knows this. I sat through a keynote speech by Bill Gates maybe 15 years ago. Asked why Microsoft makes all the money in the software business, he snapped: We don't make all the money. Actually, we only make money because we are a platform for others to use our software to make money themselves.

Only by opening up system internals to thousands of hungry developers can anyone truly create an operating system in the cloud. Google has made open announcements but is still quite closed. Advantage Microsoft.

So with the failure of the Yahoo bid, where does that leave Microsoft? The answer is found in Microsoft's mantra: embrace, extend and innovate. Made famous in a 1994 Microsoft executive memo, this mantra has worked again and again: Windows dominated Apple for decades, the Excel spreadsheet bypassed Lotus 1-2-3, and the Internet Explorer browser destroyed Netscape.

Of course, Microsoft could come back and bid again for Yahoo at $25. But there is a go-it-alone strategy: Embrace the Web search and advertising business. Maybe even do what Craigslist did to newspaper want ads, devaluing search advertising by offering the same thing for free, or really cheap.

The trick is to then extend and innovate. Run code that figures out what users are looking for, not just on servers, but on X-Boxes, Zune music devices and even Apple iPhones. Some of the new markets aren't even twinkles in developers' eyes.

At the moment, neither Google nor Microsoft, or anyone else, has nailed down cloud, edge, speed and platform. All the loosely coupled electronic devices in our pockets need to work together seamlessly with Facebook applications in the cloud. Who will do it? Unclear.

The continuing battle between Microsoft and Google will mean fierce competition – adding features, building data centers, cutting deals and spending money on speed and customer convenience. That's the way to move technology forward. It's great to see Microsoft with some fight left in it. Not only hasn't the Internet yet matured, it's becoming an ever-more high stakes game.

By: Andy Kessler
Wall Street Journal; May 6, 2008

Microsoft Ends Pursuit of Yahoo, Reassesses Its Online Options

Software Maker Cites Divide Over Price; The Google Factor

Yahoo Inc. Chief Executive Jerry Yang didn't really want Microsoft Corp. to buy his company. By Saturday, Microsoft Chief CEO Steve Ballmer didn't want that either, leaving both technology companies facing fundamental questions about their futures.

The failed courtship leaves Microsoft with limited options for achieving its strategic goal of expanding its presence online and may not close the door to another bid for Yahoo down the road.

In a letter to Mr. Yang Saturday in which he withdrew Microsoft's takeover offer, Mr. Ballmer cited a divide over price, saying Microsoft had been willing to raise its offer for Yahoo to $33 a share, or about $47.5 billion, and Yahoo demanded at least $4 a share more.

But some people close to the matter believe that the two sides could have found a middle ground if negotiations continued, particularly since some of Yahoo's major shareholders had signaled late last week they would support a takeover by Microsoft at a price in the range of $34 or $35 a share.

Microsoft's battle for Yahoo represented part of the scramble by technology and media giants to capture the flood of advertising dollars moving online and to block Web giant Google Inc. from extending its dominance in online-search advertising.

Mr. Ballmer had said in recent days that he was confident Microsoft could go it alone to build a competitive online-advertising business without buying Yahoo. At the same time, he had faced skepticism from within Microsoft about its ability to pull off such a large acquisition at a time when the software maker faces many other challenges. Mr. Ballmer himself had shown hints of such doubts in recent weeks, say people familiar with the matter.

He also squared off against a Yahoo that was increasingly confident that it was worth much more than Microsoft had been offering. While Mr. Yang and Yahoo directors preferred from the start that the Internet company stay independent, they were particularly emboldened by the success of a test late last month to carry search advertising from Google. "There was just nothing that showed any sign of this potentially coming on track," said one person familiar with Microsoft's thinking, who questioned Yahoo's stated willingness to sell the company to Microsoft at the right price, as it had said publicly.

Having averted a sale to Microsoft, Mr. Yang probably will have to placate shareholders who had been hoping for a deal. Analysts estimate Yahoo shares will fall to between $20 and $25 a share without Microsoft's bid to prop them up, down from their 4 p.m. close of $28.67 Friday in Nasdaq StockMarket trading.

Yahoo is hoping to seal a broader search-ad pact with Google in the coming days, but antitrust experts warn that will surely encounter intense regulatory scrutiny. And the company, which has struggled to focus and execute its plans in recent years, faces deep skepticism from investors about the financial targets it has released for 2009 and 2010 to justify its value on its own.

Microsoft's withdrawal diminishes prospects that Google will face a dramatically bulked up competitor in Web search and online advertising anytime soon. Google's runaway success at the expense of Yahoo and Microsoft in recent years was one major driver of Mr. Ballmer's effort to close a deal. Now, Google is likely to handle at least some of Yahoo's search-advertising business, and Microsoft is heading back to the drawing board to consider its own options. "It's disappointing because one would hope there would be a more balanced marketplace," said Sir Martin Sorrell, chief executive of advertising company WPP Group PLC. "Google's dominance continues."

Microsoft could still eventually end up buying Yahoo. If Yahoo's share price plummets, shareholders could intensify efforts to pressure Yahoo's board to agree to a deal at a lower price. Already several shareholders have sued the company over its rejection of the Microsoft bid.

Mr. Ballmer's letter Saturday appeared intentionally crafted to spell out to Yahoo shareholders how hard Microsoft worked - and the amount it boosted its bid-to entice Yahoo's board to enter a deal. That is a typical tactic for a would-be acquirer hoping to spur shareholder activism and one followed by Oracle Corp. last year in its bid for BEA Systems Inc. After BEA rejected Oracle's offer, Oracle withdrew its bid and its executives took great pains to spell out the effort they made to persuade BEA to enter a deal. Shareholder pressure early this year forced BEA into Oracle's arms.

The takeover standoff that began with Microsoft's unsolicited $31-a-share offer for Yahoo on Jan. 31 finally came to a head Saturday morning in a meeting between Mr. Ballmer, Microsoft Platforms and Services Division President Kevin Johnson, Mr. Yang and Yahoo co-founder David Filo at the airport in Seattle, say people familiar with the matter.

Messrs. Yang and Filo said that Yahoo directors were open to a deal at $37 11 share, and that the two founders would accept that sum as well, despite their personal desire for $38 a share, these people say. "They were saying, this is as low as we can go. There was no indication they were coming off that number," a person close to Microsoft said.

In Seattle, the two sides discussed price and strategy for several hours and Messrs. Yang and Filo returned to California expecting Microsoft might counter with another offer, according to one of the people familiar with the matter.

In a subsequent telephone conversation with Mr. Ballmer, the Microsoft CEO told Mr. Yang that Microsoft was ending its pursuit of Yahoo. Mr. Ballmer sent his letter to Mr. Yang around 4 p.m. Pacific time Saturday officially withdrawing Microsoft's offer. After hearing Messr.s. Yang and Filo's position on Saturday, Microsoft concluded that the Yahoo founders didn't really want to do a deal, according to people close to the. software maker.

People close to Yahoo dispute the assertion that the Internet company wasn't prepared to continue negotiating on price. Yahoo believed that its shareholders weren't prepared to accept a deal in the price range Microsoft was offering, people close the company say.

Though Microsoft never let go of the threat of a hostile deal, Mr. Ballmer ultimately determined that such a course would have been too destructive. Even if it ultimately won shareholder support for a hostile bid, Microsoft would likely have run into trouble with regulators, its advisers warned.

"Despite our best efforts, including raising our bid by roughly $5 billion, Yahoo has not moved toward accepting our offer," Mr. Ballmer said in a Microsoft news release. "We believe the economics demanded by Yahoo do not make sense for us, and it is in the best interests of Microsoft stockholders, employees and other stakeholders to withdraw our proposal," he added.

Yahoo Chairman Roy Bostock responded in a press release, by saying, "From the beginning of this process, our independent board and our management have been steadfast in our belief that Microsoft's offer undervalued the company and we are pleased that so many of our shareholders joined us in expressing that view."

One person familiar with the matter said that the $37 a share Mr. Yang cited to Mr. Ballmer was based on the company's calculation of its value-particularly in light of alternatives such as a Google ad deal-and not what its large shareholders were demanding. Major Yahoo shareholders had signaled by late last week that they were open to a deal around $34 or $35 per share and were optimistic that the price gap with Microsoft could be bridged, according to people familiar with the matter.

Some people close to the situation believe Microsoft would likely have won a hostile takeover battle at $33 per share. But Mr. Ballmer in his Saturday letter to Mr. Yang cited that potential Google deal as a reason that Microsoft decided not to go hostile. "Your apparent plan to pursue such an arrangement in the event of a proxy contest or exchange offer leads me to the firm decision not to pursue such a path," he wrote.
Mr. Ballmer said this was because such a deal would undermine Yahoo's online advertising sales strategy and pose regulatory and legal problems Microsoft wouldn't want to inherit.

A person familiar with Microsoft's thinking said that enhanced employee severance benefits Yahoo instituted in February in case of a change of control represented a cost that Microsoft was also reluctant to bear. Other concerns within Microsoft may have also influenced Mr. Ballmer's thinking. The Yahoo bid was driven by a small group of executives from Microsoft's online group. That group had planned for the bid process to play out fairly quickly with Yahoo entering a friendly deal.

But as time dragged on, other Microsoft executives, including some in the group over seeing Office software, ex pressed their opposition to th deal, say people familiar wit the situation. Also, concern within the company grew over the challenge of integrating Yahoo's roughly 14,000 staff an various online services, the say. Whether these concerns affected Mr. Ballmer is hard to tell but people close to mm say he started to raise more question about the deal to his lieutenants.

Internal confusion over Mr. Ballmer's plans was rife in March at a three-day meeting of Microsoft's 150 top executives in upstate Washington. Despite exhaustive presentations on the future plans of each Microsoft business group, Yahoo was hardly mentioned. Only on the last day
did Mr. Ballmer mention the bid, in response to a question. He said few words on the topic, leading some executives to believe was distancing himself from the deal.

As a result, Microsoft executives were surprised when Mr. Ballmer on April 5 sent a letter to Yahoo directors threatening a hostile approach if they didn't reach a friendly deal by April 26. That spurred Yahoo executives and an entourage of ankers and advisers from both sides to meet with Microsoft on April 15 at a Portland, Ore., law firm for what one attendee described as an "information-sharing session about operational issues, strategy and other issues." presentation from Yahoo included a slide that said Microsoft's offer "significantly undervalues" Yahoo.

Late into the meeting Mr. Ballmer addressed the elephant in the room: "Where are we on price?" he asked Mr. Yang, according to two people who were present. Responding to Mr. Ballmer's question, Mr. Yang repeated that the original offer of $31 a share "substantially" undervalued the Internet company. Mr. Ballmer again asked for a firm price, and Mr. Yang said he didn't have a number.

After flying back to New York on the redeye from Portland, Microsoft's advisers call with their counterparts at Yahoo to address the price issue.

During the April 18 call, Goldman Sachs banker Gene Sykes, one of Yahoo's lead bankers, said that at $40 a share the Internet company would be open to a friendly deal. Yahoo's advisers added that below that threshold there would be likely be a lot of debate among Yahoo directors, stressing that the board wasn't specifically asking for $40 at that point, say people familiar with the matter.

Microsoft and its advisers believed that by asking Yahoo for a price they were sending a clear signal that they were willing to pay more than the original bid of $31 a share. But they viewed an asking price of $40 a share as an unrealistic starting point.

For more than a week afterward, there was silence between the two camps. On Saturday, the deadline Mr. Ballmer had set came and went without any movement.

On the following Tuesday, April 29, Mr. Yang called Mr. Ballmer and told him Yahoo might be open to a deal below $40. He described $40 as the "bankers' view," not the board's, according to two people close to Microsoft. Yahoo Chairman Roy Bostock also called Mr. Ballmer and, along with Mr. Yang, urged the Microsoft 'CEO to sit down with Yahoo to kick-start discussions.

On Wednesday, Mr. Ballmer arid Mr. Yang met at Yahoo's law firm in Palo Alto, Calif., the people familiar with the matter say. At the meeting Mr. Yang signaled that Yahoo could accept less than $40 a share.

People close to Yahoo said that Microsoft indicated at Wednesday's meeting it could raise its bid per share a "couple" or a "few" dollars. But Yahoo learned that Microsoft was willing to make a specific offer of $33 a share only in Mr. Ballmer's letter to Mr. Yang Saturday these people said. "We did not know what the offer was," said one person close to Yahoo.

People close to Microsoft say they had made it very clear to Yahoo by the end of last week that they were prepared to offer $33, and that at that price the software maker was "near the end of the rope." On Friday, Microsoft general counsel Brad Smith called Ron Olson, a lawyer for Yahoo's board, and told him Microsoft was prepared to pay $33, according to people familiar with the matter.

During their talks last week, Microsoft and Yahoo at least briefly discussed the possibility of Microsoft's buying just Yahoo's Web-search business alone, say people familiar with the matter, though they never reached an agreement on that either .. One person involved in the negotiations described the search-business talks as a "sideshow."

While Microsoft could eventually pursue Yahoo again, people close to the two sides said they didn't believe Saturday's withdrawal was a negotiating tactic designed to pressure Yahoo to accept a lower offer. Yahoo will now likely face pressure from its investors to justify why it couldn't reach a deal in the range of $33.

In addition to the Google negotiations, Yahoo has also been in discussions to merge with Time Warner Inc.'s AOL Internet unit, under an arrangement in which Time Warner would hold a roughly 20% stake in Yahoo, people familiar with the matter said. But Microsoft's withdrawal of its Yahoo bid could shake the AOL discussions off course. It is possible, for example, that Microsoft will become a suitor for AOL, say people familiar with the matter.

Microsoft's next course of action, say people familiar with the company, will likely be to try to form a tie-up with another Internet company that could pull more consumers and advertisers to its Internet services such as Web search.

In an interview on Thursday Mr. Ballmer noted that few Internet companies have the size that Microsoft would need to immediately get a boost to its business and market share in Internet advertising. Among them, he listed Facebook Inc., AOL and MySpace, the social-networking service owned by News Corp., which also owns Dow Jones & Co., publisher of The Wall Street Journal.

By: Kevin Delaney, Matthew Karnitschnig, & Robert Guth
Wall Street Journal; May 5, 2008

Internet Says: 'Me Want Cookie'


The last time cookies became a matter of public debate was when the "Sesame Street" character Cookie Monster was accused of encouraging poor eating habits among toddlers. Today's controversial cookies are the small text files that track where people go online. Web sites do a poor job of explaining how and why this information is used, even as details about our lives are increasingly knowable online. Risks to privacy make this a race between smarter self-regulation on the Web and threatened new regulation by the Federal Trade Commission.

Most privacy advocates understand that advertising pays for the otherwise free Web, but worry that cookies can be used for more than matching advertising to individual interests. Some want a "do not track" approach on the Web, similar to the "do not call" rules that block unwanted marketing phone calls. This sounds attractive but could undercut much of the marketing power of the Web.

Even those of us who are enthusiastic about using the Web for what it does best, including access to highly customized information, agree there's something potentially creepy about cookies. How are personal data used? Are our names, addresses and financial and health records really secret? Is anonymity permanent? These questions come just as what technology can do is changing our expectations about what information remains personal. We worry about cookies despite many of us voluntarily becoming open books via sites like MySpace, Facebook and LinkedIn, which are designed to share personal information that until recently would have been considered confidential.

The cookie debate reflects the tension between what technology will allow and what privacy we expect. One problem is that Web sites and marketers have failed to explain why cookies are harmless. Cookies simply indicate where users have been and do not include sensitive information like credit cards or Social Security numbers. When data about Internet usage are tracked, it's in an anonymous, aggregated way. Cookies mean people see personally relevant advertisements. Web sites use cookies automatically to localize news, weather and sports for users, and designers mine tracked data to improve user experiences. Cookies helpfully remember registration and other personalization.

A group called the Center for Digital Democracy urges more privacy protections by arguing that "Our 'virtual' identities may be composed of discrete and disassembled bits of information about ourselves." The group objects that the Web's purpose is "to get individual consumers to behave or act in ways that favor or reflect the marketer's goal."

For some, that's the point. "To paraphrase the famous New Yorker magazine cartoon, when you're surfing the Internet, it's still true that nobody knows you're a dog. But providers can learn that you like dog biscuits, and serve you content and ads accordingly," argues Randall Rothenberg, president of the Interactive Advertising Bureau. "If politicians restrict it unthinkingly, advertising relevance will diminish, and spam will have a renaissance."

Information that is aggregated offline usually is not seen as threatening. We don't object when marketers track us by ZIP Code, age or sex, or when our cars are counted by traffic surveyors, or when we get benefits once tagged as good customers. And there's at least an implicit bargain in the case of the Web: In exchange for seeing targeted advertising, we get access to Web sites, usually free. Internet advertising was more than $20 billion last year. Some 500 million people around the world got free email, and some 200 million Americans accessed free search engines.

There are efforts to break down cookies into less potentially personally identifiable details – "crumbled cookies" – but this is technically complex. As Google CEO Eric Schmidt put it, "What we've discovered about cookies is that every question leads to a one-hour conversation." What is clear is that intentionally releasing personally identifiable information is unacceptable. When Facebook alerted people about purchases by other members, it quickly had to drop the feature.

Scholar Joseph Turow has identified a "culture of suspicion." People don't understand how the Web works, so fear they are being spied on and manipulated. Many Web sites, however they actually use cookies, contribute to the skepticism by burying disclosure deep inside privacy statements. For a counterexample of full disclosure, take a look at the All Things Digital Web site, from the Journal's Walt Mossberg and Kara Swisher (http://allthingsd.com/trackingcookies/).

People involved in building the Web are rightly proud of the openness of the digital culture. Most consider that cookies cause no harm and are key to the growth of the Internet, but many Web users feel left in the dark about how information about them is used and not used. Unless people can be reassured, there is a real risk that some day soon we'll find the untested hands of regulators in the cookie jar.

By: L. Gordon Crovitz
Wall Street Journal; May 5, 2008