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Wednesday, July 30, 2008

The 3D Internet Will Change How We Live

Last summer, several hundred thousand very real dollars disappeared into a Ponzi scheme in the popular virtual world, "Second Life." The owner of the "bank" behind the scheme fled, and hasn't been seen since last October. There were no investigations, lawsuits or arrests.

Second Life users had invested "Linden Dollars" in the scheme, hoping to make money. Linden Dollars are purchased with real cash, and can be converted to real money on an exchange run by Linden Lab, the company behind Second Life.

After the debacle, the angry mob surrounding the virtual bank's ATMs appeared to consist mainly of hookers, mafia enforcers, skateboard punks and theme-park mascots. Though these computer-generated "avatars" represented real people in front of computer screens, some of whom lost real money, you're forgiven for not caring. It was as bizarre as it was tragic.

The picture is changing though – faster than you think. Real-life rules are starting to be applied to virtual worlds. Second Life banned unlicensed "banks" earlier this year, after previously banning casinos and simulated child pornography. Users cheered.

Virtual worlds may look like toys for the geekiest of geeks, but they have quietly slipped into the mainstream. Second Life reports that over the last two months, 1.2 million accounts were logged in for over 65 million total hours.

Other virtual worlds, like the PG-13 rated "There," China's forthcoming "HiPiHi," youth-oriented "Barbie Girls" and teen-oriented "Habbo Hotel" attract millions more. Big technology players are involved too. Sony is developing a 3D environment for its popular PlayStation 3 called "Home," and Google recently launched its own world, "Lively."

Dozens of major brands and organizations, including MTV, Playboy, CBS, Cisco, Toyota, L'Oréal and the American Cancer Society have significant virtual-world presences. IBM has made a particularly strong commitment to virtual worlds, and regularly holds meetings on a sprawling, privately firewalled Second Life campus.

Washington is paying attention. Earlier this year Rep. Ed Markey (D., Mass.), chairman of the House Subcommittee on Telecommunications and the Internet, presided over a hearing on virtual worlds. The hearing was simulcast into Second Life, where Rep. Markey was represented by an avatar.

The financial marketplace, of course, hasn't missed this opportunity – $345 million was invested in 39 virtual world-related companies in the first half of 2008. Last year, Gartner Research predicted that 80% of all active Internet users will have a virtual-world presence by 2011.

Bandwidth and processing power are constantly growing, leading to several convergent trends. First, interfaces are moving closer to reality. Over the last 30 years, we have gone from punch cards to typed commands to drag-and-drop folders to Windows Vista's 3D panels. Second, hardware that makes 3D immersion possible – from motion-control devices like Nintendo's Wiimote to $90 Webcams that track face and body movements – is now reaching average consumers' homes.

Finally, we are becoming an increasingly networked society. Eighty-two percent of American homes now have Internet access, up 11% percent from 2006.

The allure of the 3D Internet is easy to see. What auto maker would be content to put 2D pictures of a new SUV on its Web site when it can offer buyers a virtual, first-person drive down a snowy mountain road? What sculptor will want to display 2D photographs of her work when she can invite collectors on a guided tour of her virtual sculpture garden?

No privately held virtual world is going to end up in sole possession of the 3D Internet, just as no early 2D "walled garden" network provider like Prodigy, Compuserve or AOL owns the 2D Web today. A number of industry groups are working on open 3D standards. As soon as one of these gains widespread acceptance, anyone will be able to build a virtual world that is connected to any other similarly coded virtual world – just like HTML now allows anyone to create a 2D Web page that is connected to any other 2D Web page.

If current trends hold, the Internet will evolve into a 3D space, and virtual worlds will become an integral part of human communication. Real life will never be the same.

By: Benjamin Duranske
Wall Street Journal; July 17, 2008

Icahn Finalizes Proposed Slate for Yahoo

Little Progress Seen In Full Acquisition Of Firm by Microsoft

Yahoo Inc. and its opponents dug in for battle as investor Carl Icahn finalized his proposed slate of Yahoo directors and Microsoft Corp. pressed its own case for why a deal with the Internet company would benefit Yahoo shareholders.
[Carl Icahn]

The back-and-forth among the three parties, which included differing accounts of a proposal to break up Yahoo that the company rejected over the weekend, is part of the lead-up to an Aug. 1 meeting of Yahoo shareholders that will include a vote on Mr. Icahn's proposal to install a new Yahoo board.

But as the tension between Mr. Icahn and Yahoo escalates, there are few signs of progress on the option shareholders appear to want most: a full acquisition of Yahoo by Microsoft. That option, which Microsoft had spent the early part of this year pursuing, is no longer being seriously considered, people familiar with Microsoft's thinking say.

Instead, Microsoft executives are focused on buying Yahoo's Internet search business, a far-cheaper option and one that could boost Microsoft's efforts to counter Google Inc.'s steady growth.

Microsoft submitted its latest proposal for such a deal Friday. Mr. Icahn, who wanted his directors to control the remainder of Yahoo, helped deliver the offer to Yahoo. Yahoo's board rejected it Saturday but said it would be interested in selling the whole company.

By pushing for an outright purchase, Yahoo could be increasing its chances for keeping its board in place and fending off Mr. Icahn's assault. Investors continue to prefer a full acquisition to a more-complex deal for the search business of the sort Microsoft proposed in recent days. While Microsoft has focused on alternatives to a full purchase, Yahoo is keeping the notion alive by reminding shareholders that it told Microsoft it is open to such a deal and could complete it before the shareholders meeting.

"Yahoo definitely has the upper hand," said activist investor Eric Jackson, who represents a loose group of shareholders that collectively own 3.2 million Yahoo shares. But the momentum could shift, he said, if Mr. Icahn comes up with another offer.

One large Yahoo shareholder said in an interview Monday that while he preferred a full acquisition, he believes that Microsoft's latest search deal is a good start and that the Yahoo board ought to be replaced if it couldn't execute it.

In a letter to Yahoo shareholders Monday, Mr. Icahn continued to try to garner support for selling the search business to Microsoft, and he promised to fast-track discussions over that deal if his nominees were elected. The investor, who controls funds that own nearly 5% of Yahoo, accused Yahoo of distorting the facts in issuing its rejection of Microsoft's latest offer. He said that by his calculation, the value of the search sale to Microsoft, combined with the remainder of the company and other aspects of the deal, would be valued at close to $33 a share to Yahoo shareholders. The offer included a cash payment to Yahoo as well as an equity investment and a loan to the company.

A critical piece of Microsoft's offer was its guarantee of revenue that would be paid to Yahoo after it bought the search business. Under the proposal, Microsoft guaranteed to Yahoo from $19.5 billion to $26.5 billion over the next 10 years, according to people familiar with the situation. In return, Yahoo would need to guarantee that its Web site, which feeds traffic to the search business Microsoft would buy, would continue growing at a certain level, these people say.

Yahoo, in a letter to shareholders and in filings with the Securities and Exchange Commission, Monday disputed the value of the proposed deal and reiterated a laundry list of problems with the proposal.

In particular, the company said Microsoft's revenue guarantees were below expectations for its own business, called the proposal's estimation of cost savings "unrealistic" and said a recently struck agreement with Google can generate higher operating income. Mr. Icahn still "lacks a plan that makes sense for Yahoo stockholders," Yahoo Chairman Roy Bostock and Chief Executive Jerry Yang wrote in a joint letter.

Microsoft chimed in with a statement Monday, disputing Yahoo's account of talks last week, specifically Yahoo's contention that on Friday, Microsoft gave it an unreasonable deadline of 24 hours to agree to a deal. Microsoft said the offer wasn't an "ultimatum" but rather an attempt to see if Microsoft's offer was sufficient to "form the basis for the parties to engage in negotiations over the weekend on a letter of intent and more detailed term sheets."

Microsoft also addressed a dispute over whether the proposed deal would require changes to Yahoo's board and top management. Microsoft said its proposal "did not include changes to Yahoo's governance." A person close to Yahoo said "governance was a part of the offer," which was discussed in multiple calls between Yahoo, Microsoft and Mr. Icahn.

Sandeep Aggarwal, senior Internet analyst at investment bank Collins Stewart LLC, said Mr. Icahn probably can win a few seats with the search deal on the table but is unlikely to replace the entire board if Microsoft is unwilling to buy the whole company. "Convincing investors to vote in a new board because Microsoft will do a potential search deal is not going to be as easy as changing the board for a full acquisition," he said.

Mr. Yang prepared Yahoo employees for the proxy fight to intensify in a company-wide email Monday. "Proposals and attacks by Microsoft and Carl Icahn leading up to our meeting are likely to get even more contentious," he wrote.

By: Jessica Vascellaro and Robert Guth
Wall Street Journal; July 15, 2008

Yahoo Announces New Board - Formal Announcement

Jerry Yang Last Days ?

Yahoo! Inc., a leading global Internet company, announced today that it has reached an agreement with Carl Icahn to settle their pending proxy contest related to the Company's 2008 annual meeting of stockholders.

Under the terms of the settlement agreement, eight members of Yahoo!'s current Board of Directors will stand for re-election at the 2008 annual meeting: Roy Bostock, Ronald Burkle, Eric Hippeau, Vyomesh Joshi, Arthur Kern, Mary Agnes Wilderotter, Gary Wilson and Jerry Yang. In view of the settlement agreement with Mr. Icahn, and the termination of the proxy contest, Robert Kotick has decided not to stand for re-election to the Board at the 2008 annual meeting.

Following the 2008 annual meeting, the Yahoo! Board will be expanded to 11 members. Carl Icahn will be appointed to the Board and the remaining two seats will be filled by the Board upon the recommendation of the Board's Nominating and Governance Committee from a list of nine candidates recommended by Mr. Icahn, which includes the eight remaining members of the Icahn slate of nominees and Jonathan Miller, currently a partner in Velocity Interactive Group and former Chairman and CEO of AOL.

As part of the settlement agreement, Mr. Icahn, who owns an aggregate of 68,786,320 shares, or 4.98% of Yahoo! common stock, has agreed to withdraw his nominees for consideration at the annual meeting and to vote his Yahoo! shares in support of the Board's nominees.

"We are gratified to have reached this agreement, which serves the best interests of all Yahoo! stockholders," said Yahoo! Chairman Roy Bostock. "We look forward to working productively with Carl and the new members of the Board on continuing to improve the Company's performance and enhancing stockholder value. Yahoo! is a world-class company with an extremely bright future, and collaborating together, I believe we can help the Company achieve its ambitious goals."

"This agreement will not only allow Yahoo! to put the distraction of the proxy contest behind us, it will allow the Company to continue pursuing its strategy of being the starting point for Internet users and a must buy for advertisers," said Yahoo! Co-founder and Chief Executive Officer Jerry Yang. "No other company in the Internet space has our unique combination of global brand, talented employees, innovative technologies and exceptional assets, attributes that will help us take advantage of the large and growing opportunity ahead of us. I look forward to working together with our new colleagues on the Board to make that happen."

Mr. Icahn said, "I am very pleased that this settlement will allow me to work in partnership with Yahoo!'s Board and management team to help the Company achieve its full potential. While I continue to believe that the sale of the whole Company or the sale of its Search business in the right transaction must be given full consideration, I share the view that Yahoo!'s valuable collection of assets positions it well to continue expanding its online leadership and enhancing returns to stockholders. I believe this is a good outcome and that we will have a strong working relationship going forward. Additionally, I am happy that the board has agreed in the settlement agreement that any meaningful transaction, including the strategy in dealing with that transaction, will be fully discussed with the entire board before any final decision is made."

In response to Mr. Kotick's decision to step down from the Board, Mr. Bostock said, "I would like to personally thank Bobby for his dedicated service to Yahoo! these past 5 years. Bobby has been a valuable resource to our Board and the Company and we are grateful for his contributions. He wanted to help see the Company through this recent chapter, but made it clear to me that once the proxy contest was resolved, he was eager to focus his efforts on his work as CEO of the newly merged Activision Blizzard and his other business and civic pursuits."

The Company intends to file the full text of the settlement agreement later today with the Securities and Exchange Commission, and will also file and mail to its stockholders, supplemental proxy material.

Forward-Looking Statements

This press release (including without limitation the statements and information in the quotations in this press release) contains forward-looking statements that involve risks and uncertainties concerning Yahoo!'s strategic and operational plans. Actual results may differ materially from those described in this release due to a number of risks and uncertainties. The potential risks and uncertainties include, among others, the expected benefits of the commercial agreement with Google may not be realized, including as a result of actions taken by United States or foreign regulatory authorities and the response or acceptance of the agreement by publishers, advertisers, users and employees; the implementation and results of Yahoo!'s ongoing strategic initiatives; the impact of organizational changes; Yahoo!'s ability to compete with new or existing competitors; reduction in spending by, or loss of, marketing services customers; the demand by customers for Yahoo!'s premium services; acceptance by users of new products and services; risks related to joint ventures and the integration of acquisitions; risks related to Yahoo!'s international operations; failure to manage growth and diversification; adverse results in litigation, including intellectual property infringement claims; Yahoo!'s ability to protect its intellectual property and the value of its brands; dependence on key personnel; dependence on third parties for technology, services, content and distribution; general economic conditions and changes in economic conditions; potential continuing uncertainty arising in connection with Microsoft's various proposals to acquire all or part of Yahoo!; the possibility that Microsoft or another person may in the future make other proposals, or take other actions which may create uncertainty for our employees, publishers, advertisers and other business partners; and the possibility of significant costs of defense, indemnification and liability resulting from stockholder litigation relating to such proposals. More information about potential factors that could affect Yahoo!'s business and financial results is included under the captions "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Yahoo!'s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, as amended, and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, which are on file with the Securities and Exchange Commission ("SEC") and available at the SEC's website at All information in this release is as of July 21, 2008, unless otherwise noted, and Yahoo! does not intend, and undertakes no duty, to update or otherwise revise the information contained in this letter.

Friday, July 25, 2008

Rosetta Stone Claims Infringement

A maker of language software is suing a smaller competitor for alleged trademark violations in an effort to combat what it claims is "piggybacking," a practice in which companies use major players' brand names or other trademarked words in the text of search ads to lure Web surfers to their own sites.

The case highlights a particular struggle for companies that rely heavily on the Internet for advertising and putting their brands before the public.

Rosetta Stone Ltd., an Arlington, Va.-based maker of software for teaching and learning foreign languages, filed a suit in federal court in California last week against Rocket Languages Ltd., Libros Media Ltd., members of an affiliated advertising program and other defendants, who were not identified. The complaint alleges, among other things, that Rocket Languages and its affiliates purchased and used the words Rosetta Stone, which are trademarked, or confusingly similar variations as "keywords" in several Internet advertising programs, including Google's AdWords program and Yahoo's Marketing Solutions program.

As a result, according to the complaint, when a user of one of those search engines types in "Rosetta Stone" or "Rosetta Spanish," the search may produce ads for Rocket Language's products or other ads as well as the Rosetta Stone ad. The complaint also alleges the defendants used the trademarked words Rosetta Stone in the headlines of the links they sponsored that appear on the right side of the Google search page.

Rocket Languages, which is based in New Zealand, did not return a call placed to its Los Angeles office, where it conducts its U.S. operations.

"A number of these cases have been filed against Google itself," said Paul C. Llewellyn, a trademark lawyer in New York. "But Google has been vigorous in defending their cases, because the AdWords program is one of their main sources of revenue."

While the mere purchase of the Rosetta Stone trademark for a sponsored link might be enough to trigger federal trademark law, Mr. Llewellyn said, the case may come down to whether Rosetta Stone can prove there is a substantial likelihood that a significant number of consumers are going to think Rosetta Stone is somehow affiliated with the ads.

That may be a more difficult claim to prove. As late as Monday afternoon, a Google search for "Rosetta Stone" turned up sponsored links titled "Don't Buy Rosetta Software," and "Rosetta Spanish a Scam?"

Mr. Llewellyn says consumers are unlikely to believe Rosetta Stone is associated with those Web sites.

By: Dan Slater
Wall Street Journal; July 8, 2008

Ad Revenue Is Expected To Grow 40% to 45% Inc. said it expects its brand advertising revenue to grow 40% to 45% this year due to the Beijing Olympic Games, before slowing in 2009. The Chinese Internet portal company forecast the pace to slow to 20% to 30% in 2009 following this year's Olympics-related boom. Revenue from brand advertising rose 42% last year to $112.1 million, accounting for 59% of overall revenue, which rose to 41% to $188.9 million. The Nasdaq-listed company is an official sponsor of Internet content for the Games.

Tuesday, July 22, 2008

Jobs vs. Gates: A thirty year war

Apple's Steve Jobs and Microsoft founder Bill Gates have been trading barbs for years. Here's a look back at one of history's biggest geek rivalries.

Jobs On Gates:

"Microsoft does not want us to succeed, and they are not going to help us." -Steve Jobs, in Computer System News (July 10, 1989)

"Being the richest man in the cemetery doesn't matter to me," he says. "Going to bed at night saying we've done something wonderful . . . that's what matters to me." -Steve Jobs, comparing his innovation to Gates' in The Wall Street Journal (May 25, 1993)

"The only problem with Microsoft is they just have no taste, they have absolutely no taste.... I guess I am saddened, not by Microsoft's success - I have no problem with their success, they've earned their success for the most part. I have a problem with the fact that they just make really third-rate products." Steve Jobs, appearing on the PBS program "Triumph of the Nerds" (June 1996)

''I wish him the best, I really do. I just think he and Microsoft are a bit narrow. He'd be a broader guy if he had dropped acid once or gone off to an ashram when he was younger.'' -Steve Jobs in The New York Times (January 12, 1997)

"Our friends in Redmond, they spend over $5 billion in R&D, but these days they just try to copy Google and Apple. So I guess it's a good example of how money isn't everything." - Steve Jobs, speaking at Apple's Worldwide Developer Conference (August 7, 2006)

Gates On Jobs:

"Steve made it very difficult [for Apple employees] to be part of a team approach that a company of Apple's size really needs to have. I mix those skills somewhat better than Steve.'' - Bill Gates, in The Seattle Times (October 1, 1985)

"If Steve's [NeXT Computer] machine is successful, I will say it will confuse me." - Bill Gates, in Computer System News (November 27, 1989)

''You can always tell whether you're on a Mac or on a PC. Just stick your applications in there and see whether they'll run.'' - Bill Gates, in the San Jose Mercury News

"As good as Apple may be, I don't believe the success of the iPod is sustainable in the long run. You can make parallels with computers: Apple was very strong in this field before, with its Macintosh and its graphics user interface - like the iPod today - and then lost its position." - Bill Gates, to Reuters (May 12, 2005)

"Nowadays, security guys break the Mac every single day. Every single day, they come out with a total exploit, your machine can be taken over totally. I dare anybody to do that once a month on the Windows machine." - Bill Gates, in Newsweek (February 1, 2007)

Microsoft without Gates

The challenge isn't replacing Bill. That's already happened. Ballmer's big issues now: growth, Google, and those pesky Apple ads.

Steve Ballmer was sobbing. He repeatedly tried to speak and couldn't get the words out. Minutes passed as he tried to regain his composure. But the audience of 130 of Microsoft's senior leaders waited patiently, many of them crying too. They knew that the CEO was choked up because this executive retreat, held in late March at a resort north of Seattle, was the last ever for company co-founder Bill Gates, as well as for Jeff Raikes, one of the company's longest-tenured executives. "I've spent more time with these two human beings than with anyone else in my life," Ballmer finally said. "Bill and Jeff have been my North Star and kept me going. Now I'm going to count on all of you to be there for me."

What the executives were witnessing was the end of an era. On July 1, Gates officially retires from daily duties at the software giant. He's leaving in order to begin a second life as a full-time philanthropist and to explore his dizzying range of intellectual interests.

But his departure raises some obvious and very large questions about the future of Microsoft: Can the now $60 billion behemoth keep finding new ways to grow? Will Ballmer and his lieutenants be able to successfully adapt their products to an increasingly web-driven world? In short, does the company have what it takes to thrive without its iconic founder at the helm?

All in the timing

There are plenty of reasons this may seem like an inauspicious time for Gates, 52, to be leaving his life's work behind. This spring Microsoft (MSFT, Fortune 500), led by Ballmer, failed to consummate a big deal with Yahoo (YHOO, Fortune 500), which it now seems to have pushed into the arms of archrival Google (GOOG, Fortune 500). Last year's rollout of the latest version of Windows, called Vista, was a public relations and consumer marketing disaster. The rest of the software industry, meanwhile, is either supporting its products with advertising, like Google, or starting to rent them as online services. Microsoft has yet to gain traction in either business.

And then there's Apple (AAPL, Fortune 500). From the iPod to the iMac to the iPhone, its products have cornered the market on cool. Apple's small share of the PC market in the U.S. is growing fast - it was 7.4% in the first quarter of 2008, up from 5.1% a year earlier, according to International Data Corp. (IDC). Perhaps even more alarming, its ubiquitous "Get a Mac" TV ads have painted the personal computer loaded with Windows software - the central achievement of Gates' 33 years at Microsoft - as a loser. To a lot of consumers out there, Microsoft really does seem like that bumbling nebbish played by Daily Show contributor John Hodgman.

But despite setbacks, despite image problems, and despite Google, Microsoft is in many ways stronger than it has ever been. Just look at the numbers. Revenues grew 18% in the just-ending June 2008 fiscal year. And net profit is up even more, rising 27% to a stunning $18 billion, according to the consensus of Wall Street analysts who follow the company.

From this position of financial strength, the software giant is going on the offensive. In interviews with Microsoft's leadership, it is clear that those pesky Mac ads have managed to shake some complacency out of the company. Sometime later this year, Microsoft will launch a rebranding campaign for Windows, its core product. It's Ballmer's answer to "Get a Mac." And while Yahoo may have turned down Ballmer's $47.5 billion acquisition bid, the CEO says he'll spend as much as it takes to build a business that challenges Google on the web. The famously competitive Gates may be leaving, but Ballmer insists Microsoft will be no less aggressive without him.

It takes two

The post-Gates era has actually begun already, for all practical purposes. And that is much to the relief of Gates himself. The Microsoft co-founder spent a full decade executing a painstaking succession plan. Mostly he did it by progressively passing business leadership of Microsoft to his college pal Ballmer, 52, who became president in 1998 and CEO in 2000. Four years ago Gates told Ballmer privately he wanted to leave, and then two years ago announced publicly he would do it this July. "I've been No. 2," Gates says of his role in recent years. "I haven't been the decision-maker on anything."

Of course, he also had to find a replacement for himself as product master planner and technology strategist. He and Ballmer decided to split those jobs up. After Gates arranged to purchase technology soulmate Ray Ozzie's faltering startup Groove Networks in 2005, he quickly set about grooming 52-year-old Ozzie, best known as the father of Lotus Notes, to succeed him as Microsoft's chief software architect. The other half of his technical responsibilities went to longtime colleague Craig Mundie, 59, who oversees Microsoft's $8 billion in annual R&D and spearheads long-term technical strategy.

But one thing is clear: There wouldn't be any post-Gates Microsoft, at least not anytime soon, were it not for Ballmer's willingness to stay around and mind the store. "Every conversation Bill has had with me about being able to transition from Microsoft is always in the vein of he couldn't be transitioning if Steve wasn't there," says Melinda Gates, Bill's wife. "You don't walk away from your life's work if it's not going well. He just could never do that."

Ballmer's management style has matured in the eight years he's been CEO. "He used to be in everyone's shorts, in every detail," says marketing boss Mich Mathews. "But he has changed profoundly. He is a general manager now." Ballmer made a conscious decision to step back from day-to-day management and take a larger view as he realized that his partner Gates was no longer going to be there to strategize alongside him.

Even though he never was a serious computer programmer, by all accounts Ballmer is just as good at math as Gates is. He lives and breathes data. "Steve has a computer in his head," says Bob Muglia, a 20-year company man who heads the Server and Tools division. Ballmer expects his subordinates to be adept in math as well. He distributes 11-by-17 sheets filled with numbers detailing the progress of various operations. The numerals are so small that executives use transparent magnifier rulers to see them. But there are never any columns showing percentage changes. Ballmer believes people ought to do that in their heads. It saves space on the paper for more numbers.

Ballmer has spent the past few years surrounding himself with a seasoned group of lieutenants. Kevin Johnson, 47, a 16-year company veteran who previously ran worldwide sales, now oversees both Windows and online services. To replace Raikes, who is about to become CEO of the Gates Foundation, Ballmer recently hired Stephen Elop, 44, to run the $19 billion Business division, which centers on Microsoft Office. Elop was CEO of software maker Macromedia until he sold it to Adobe, and more recently No. 2 at Juniper Networks. Bob Muglia, 48, the Server division chief, oversees development of the complex software employed inside business infrastructures. And Robbie Bach, 46, another 20-year veteran, runs Entertainment and Devices, which includes the Xbox game system and software for mobile phones.

Growing a giant

The CEO hasn't been afraid to look outside the tech world for leaders or ideas. Two years ago Ballmer lured away International Paper CFO Chris Liddell, 50, for the same job at Microsoft. And around the same time, he persuaded Kevin Turner to leave his job as Wal-Mart's (WMT, Fortune 500) CIO to join Microsoft in a newly created chief operating officer role. Turner, 43, is a stickler for accountability and measurement. At Microsoft, he's developed a 30-metric "scorecard" with concrete annual goals - in everything from customer satisfaction to growing Windows market share - or every manager in 65 countries where the company sells its products. Each month Turner gets a report on what he calls ROB, the rhythm of the business. It's the list of 30 metrics, each with a color next to it - red, yellow, or green. You don't want to be a manager with more than one red.

The challenges that Microsoft faces are - literally - enormous. At its scale, growing means confronting the law of large numbers. Ballmer notes with exasperation that to increase earnings by 15% for 2009, the company will have to create $4 billion in new pretax operating income. At that size, can Microsoft still possibly be a growth company?

Wall Street is not hopeful about the prospects. According to Reuters, the consensus of analysts is that earnings growth will slow in each of the next two years, to 13% in fiscal 2009 and 10% in 2010. Microsoft's stock price has been more or less flat - in the mid-to-high 20s - for about six years. (Late last year it got up into the mid-30s, but its bid for Yahoo caused it to plummet back to the 20s, where it remains.) Right now Microsoft trades for just 16 times its trailing 12 months' earnings, below the S&P 500's trailing P/E of 22. Yet analysts agree that Microsoft will report earnings-per-share growth of 31% for fiscal 2008. By contrast, Standard & Poor's estimates that the S&P 500's earnings per share will grow just 8.3% this year.

The biggest reason that Microsoft can pull off that kind of performance is that its venerable Windows operating system monopoly remains wildly profitable. Despite the problems with Vista, Windows sales grew 11.3% in the 2008 fiscal year, to $16.7 billion, according to Goldman Sachs. About 75% of that is operating profit.

One key to Microsoft's growth plan is for the company to stay resolutely global. Two-thirds of revenues already come from outside the U.S., and Ballmer and his team expect that percentage to increase significantly. There is an enormous appetite around the world for the software Microsoft produces. IDC figures show that Microsoft's fastest growing markets are Central and Eastern Europe and Latin America, as well as countries like Vietnam. In Russia, now the company's fifth-largest market, business grew 100% this year, according to CFO Liddell. He says that in conversations with Wall Street, "most discussion is driven around what's happening in the U.S. economy in the next quarter. And - well, I try not to be facetious, but it matters less and less as time goes by." According to Microsoft, there are now more people using Windows in the world than there are English speakers.
The Ulitimate nemisis

When Liddell talks to investors, he often gets the sense that they don't appreciate the breadth of Microsoft's business. As evidence, he estimates that about half the questions he's asked on conference calls concern the money-losing $3.3 billion Online division - or Windows Live Services, which includes Microsoft's search product and Hotmail - even though it represents only about 6% of company revenues. Of course, that's the division that competes with Google.

Investors aren't the only ones obsessed with Google. The one concrete commitment Gates has made to Ballmer, other than continuing to chair board meetings, is that he will keep working with the search and advertising team. He's promised he'll spend two and a half hours on it each week. Why did Gates decide to focus on this particular problem? Google's overwhelming dominance of online advertising continues to thwart Microsoft's ability to grow its online consumer business. Inside the company, the subject inspires almost daily handwringing sessions.

While Gates talks casually about the likelihood of a "share breakthrough in the search market that's still very much in front of us," at the moment Microsoft is almost hopelessly behind in both market share and mind share when it comes to searching on the Internet. Concedes Gates: "Today you'd definitely say about consumer search and advertising, Couldn't we have gotten in sooner and understood those things?"

There is more involved here than just simple Google envy. Ballmer et al. believe that online advertising is the business where its greatest potential revenue and profit growth lie. So far only about $40 billion of the world's $500 billion in ad spending has moved online. But Ballmer expects the Internet portion to be $80 billion in just two years. While total worldwide spending on business technology is much bigger, around $1.6 trillion, it isn't growing nearly so fast.

So Microsoft is making unprecedented investments in infrastructure. "You have to throw so much in the pot just to play," says Ballmer. This year Microsoft will put about $1.7 billion into data centers and servers for its online business. In addition, the company has been pouring resources into the basic technology of search for almost five years. And it has caught up with its rival by at least one fundamental measure - the relevance of results at, its search home page. Independent experts now rate Microsoft roughly on a par with Google.

The problem is attracting search traffic in the first place - and right now Microsoft is going in the wrong direction. Its market share of U.S. searches has steadily declined this year, from 9.8% in January to 8.5% in May, according to Comscore. Google, meanwhile, scored 62% of searches in May, and 21% were on Yahoo. Taking a page from the U.S. auto industry, Microsoft recently announced a "cash back" program, in which certain retailers will give a consumers a discount if they buy products they found using Live Search.

Yahoo deal

In addition, the company is focusing heavily on unique features for searching maps, video, and images. The chances of getting a typical information seeker to shift from Google to are small. But if you really can search video, for example, in a different way, perhaps Microsoft's brand cachet could grow. Another more blatant and costly play for search converts is Microsoft's recent deal with Hewlett-Packard (HPQ, Fortune 500) to make Live Search the default for browsers on that company's U.S. PCs. Google has a similar deal with Dell. One way or another, says Ballmer, "we've got to get scale."

That's why he sought Yahoo. The more searches Microsoft gets in its inventory, the more money advertisers are willing to bid to buy ads. If Yahoo's new deal to subcontract with Google and combine some of their searches is sealed, it will be awful news for Microsoft, because Google will be able to charge even more to advertisers on every search.

The failure of the Yahoo deal raises questions about Ballmer's judgment and decisiveness. Buying Yahoo would have enabled Microsoft to triple the size of its search business; Yahoo also has a far better brand appeal for online consumers. But though Ballmer initially made a very aggressive offer - 62% higher than the price at which Yahoo stock was then trading - he failed to seal the deal. After months of wrangling, he upped his offer slightly to about $47.5 billion. When Yahoo CEO Jerry Yang reportedly wanted a couple of dollars more per share (some $5.7 billion), Ballmer said his calculations showed it wasn't worth that much. He walked away and said the negotiations were finished. But they weren't.

He and Kevin Johnson soon reconsidered, and on May 18, Microsoft instead proposed a deal to purchase Yahoo's search business for $1 billion and make an $8 billion investment in the company, which Yahoo also rejected. (Yang's unwillingness to deal with Microsoft has earned the wrath of shareholders, most notably activist hedge fund manager Carl Icahn.)

Ballmer claims the deal's failure means only that more money and time will have to be invested internally and on other, smaller, acquisitions. But many observers in the tech world are wondering why he wasn't willing to follow through and pay up. "He's shown almost no aptitude for organically growing a business that can compete with Google," says George Colony, the CEO of Forrester Research. "So he had to acquire something. Yahoo was obviously the best candidate. But he failed in that too." Unless Microsoft comes back with yet another offer - always a possibility - it is likely to remain way behind Google for the foreseeable future.

A Battered brand

While the Google battle is about growth, the feud with Apple is mostly about honor. It pains Ballmer and his troops react viscerally when they watch those Apple ads - and when they see how much they've harmed Microsoft's reputation. The consulting firm CoreBrand calculates Microsoft has declined from 11th among global brands in 2004 to 59th today, and reports that the two-year-old "Get a Mac" campaign has almost certainly played a role.

The ads hurt even more because they strike a nerve. On the whole, Vista has been a business success. After all, about 140 million PCs have shipped worldwide thus far with this latest version of Windows built in. But even at Microsoft, where acknowledging mistakes is rare, people concede that Vista had flaws, at least at first, and that its launch was embarrassing. Microsoft execs have high hopes for the next version, Windows 7, which they say will emerge in 2009. It is designed to make the operating system on your PC only a piece of a larger Windows experience that will include your cellphone and the web. In the meantime, Ballmer does not intend to keep tolerating Apple's insults.

The new marketing campaign, which is supposed to run for three years beginning later this year, is an urgent attempt at triage for both Windows and the larger Microsoft brand. The expensive, aggressive, long-overdue rejoinder to Apple will be unprecedented at the company in its scope. A year ago Ballmer okayed the effort, led by Bill Veghte, who is responsible for both Windows and search. He partnered with marketing boss Mich Mathews, then the two recruited an all-star team from across the company - the best experts at branding, packaging, online advertising, and other specialties.

Two days a week this group drove to a special skunkworks away from the Microsoft campus in Redmond to work quietly on the project, code-named FTP168 (the "FTP" is said to stand for "free the people"). Ballmer approved an additional $200 million for Windows advertising this year, even though in nonlaunch years there is typically no budget increase at all. The aim of the campaign will be to talk about things you can do with your PC that you could never do before.

Even more important, Windows itself is being reconceived. In the next 18 months Microsoft will launch three separate "Windows" products, more or less in tandem. Aside from the flagship Windows 7, which will succeed Vista for PCs, the company will launch a new version of Windows Mobile as well as a new version of the services known as Windows Live. For the first time, they're going to be promoted as aspects of the same thing. "We're making a huge bet that a closer relationship between the PC, the phone, and the web is what the consumer wants," says Veghte. Windows Mobile is itself a fast-growing success story after many years of investment. The software currently operates on about 120 million cellphones worldwide, and the company will sell 30 million copies this year.

Microsoft people talk a lot about "soft-ware plus services," but this new Windows wave, combining software on the PC, the phone, and the web, will finally put the slogan to the test. It may not be dominant in search or e-mail, but Microsoft does have a large web population that is getting steadily bigger. Johnson says there are 430 million users of Windows Live Services each year, a figure growing 20% annually. Those services include Hotmail and Live Search, as well as instant messaging and blogging products and things like the clip art function in Office Online. At the moment 80 million people each month use that service alone.

Microsoft is also selling web services to business. Any company that wants to purchase 5,000 seats or more for a Microsoft Exchange e-mail system can use something called Exchange Online, completely hosted by Microsoft on servers it dedicates to that company. Coca-Cola Enterprises has 70,000 employees using such a system. Microsoft is also now beta-testing a do-it-yourself version of Exchange Online, in which companies as small as five people will be able to create a corporate e-mail system just by going to a website and submitting a credit card number. Microsoft will host and maintain the service.

Some critics assert that the entire "software plus services" mantra is only a way to maintain Microsoft's historical grip on its customers. Says Marc Benioff, CEO of, the poster boy of the latest era in enterprise software: "The very term is evidence that Microsoft does not get it. They want software plus services because the software is their monopoly. They might as well rewrite it as 'monopoly plus services.' " It will be interesting to watch how much flak Microsoft gets for trying to use its Windows PC monopoly to draw people into its ad-supported online services.

Bill Gates can never be replaced. That's what Ballmer started telling his leadership team a couple of years ago. Instead, said Ballmer, he needed to be replaced by processes to duplicate elements of what he brought to the company. That is partly the genesis of the power-sharing arrangement between Ray Ozzie and Craig Mundie. And Ozzie's staff now manages what Microsoft calls its "quests." These are 70-odd efforts to create entirely new ways of using software in various parts of Microsoft's business - just the kinds of visionary efforts that might have been led by Gates back in the day. But he could never have spearheaded 70 of them. Today there are quests on things like computer vision and speech, on ways to write software using one-tenth as much code, and on how to create a "dynamic datacenter" with computers that know what software is running on them.

How long can a Gates-less Microsoft retain the driving, visionary ambition with which he imbued the company? (See sidebar.) Colleagues say Ballmer is even more competitive than the company co-founder, which is probably a big reason why Gates wanted his Harvard dormmate to join Microsoft way back in 1980. The fact is that the heart and soul of Microsoft has never remotely resembled John Hodgman's nebbishy helplessness. Microsoft is likely to remain, to use a phrase Gates particularly loves, hard-core, like the man who made it what it is.

By David Kirkpatrick
Fortune Magazine; June 26, 2008
Gates without Microsoft

Ah, retirement. Time to kick back, relax, and rethink philanthropy, learn biochemistry, eradicate malaria and develop drought-resistant crops.

Let me tell you about Bill Gates. He is different from you and me. First off, the billionaire co-founder of Microsoft has always been something of a utopian. In his mind, even the world's knottiest problems can be solved if you apply enough IQ. Accordingly, Gates, who has been spotted on Seattle freeways reading a book while driving himself to the office, covets knowledge. It's as if he's still trying to make up for dropping out of Harvard, as he spends just about any spare waking minute reading, studying science texts, or watching university courses on DVD.

Some say his wealth and famous opportunism are reminiscent of the robber barons of yore. Yet here is a man who has set a goal to eradicate malaria. Rich as he is - his net worth is an estimated $50 billion - you can't call the man greedy when he has pledged to give back to humanity all but a tiny fraction of 1% of that fortune.

These traits only begin to explain why Gates, at 52, has chosen to redirect his efforts toward more altruistic pursuits. On July 1 he will step away from an operating role at Microsoft (MSFT, Fortune 500) to devote more time to philanthropy and other interests. The shift has been on his mind for nearly a decade, and it reflects some important experiences over his lifetime.
Much is expected

Like that seminal time back in 1968 when his mother, Mary, spearheaded an effort to install a used Teletype terminal in his school so that her already autodidactic junior high schooler could teach himself how to program a mainframe. There was his epiphany when he first met fellow billionaire Warren Buffett in 1991 - and realized that it quite literally pays to follow your curiosity beyond your own area of expertise.

And there's the poignant letter his mother wrote in 1993 to his fiancée, Melinda French, cluing her in to the Gates family credo: "From those to whom much has been given, much is expected." (Mary Gates would die the next year.) That letter, in turn, led to the self-conscious irony in the slogan he and his wife hit upon for the Bill & Melinda Gates Foundation: All lives have equal value.

The genes, the IQ, the life of privilege, and the noblesse oblige have always been there. Given that background, it makes sense that he would turn his attention and wealth to the greater good. But there is a more selfish motive in the "retirement" of Bill Gates, and one that no one should begrudge him. For the first time since he quit Harvard to start Microsoft 33 years ago, Gates is going to have the time to indulge what his father calls his "world-class curiosity."

Gates' closest friends wonder how he will exploit this new freedom. "He doesn't know for sure where his mind is going to go," says Buffett, who has donated the bulk of his own $45 billion fortune to the Gates Foundation, largely because he believes his money will be used wisely and effectively. "Not only will it be fascinating, but I think it's going to be, for me, very satisfying to watch."

"He is one of the greatest business minds of all time, and you don't just shut that off," adds Nathan Myhrvold, the former head of Microsoft's R&D labs, who still kicks around ideas with his former boss via e-mail almost daily. "My guess is we have not seen the last business idea out of Bill Gates."
Setting a curious mind free

Bill Gates 2.0 will have three offices: one at Microsoft in Redmond, a second about 15 miles away at the Gates Foundation in downtown Seattle, and a third almost exactly equidistant between the other two (and much closer to home). In typical hyper-systematic fashion, Gates has allocated blocks of time to each location: a day in Redmond, two at the foundation, and two at the personal office, which he suspects will be his real "center of gravity." There will be a lot of overlap among his three roles. That's because the guy's greatest pleasure seems to be in finding connections among things he's interested in.

The biggest change, of course, will be in his workload at Microsoft, which will drop drastically. He'll remain chairman and weigh in here and there. "Other than board meetings and consulting on projects like Internet search technology, the only things I'll do are some company visits when I'm in developing countries," he says. "Or if there's some special award for someone at a company meeting, I'll come and present it. But that's about it." (For more on how Microsoft is coping with Gates' retirement, see the accompanying story.)

The opposite will be true at the foundation. Gates' official title, which he shares with his wife and father, is co-chair, but his real role will be as the organization's chief strategic thinker. And Gates is teeming with ideas, especially about things scientific. Unlike most benefactors, he doesn't merely want to eradicate malaria and AIDS; he wants to understand the nuances of immunology. He wants to learn about what happens on a molecular scale when a plant's genes are altered to improve hardiness. He insists on knowing the precise legal reasons women in developing countries are robbed of their estates when they become widowed.

"Here's how Bill thinks," explains Myhrvold. "He is always interested in looking at big systems in the world and understanding them at every level that he can. As an example, I got this e-mail from him today as part of this whole discussion on corn prices and crop yields and shortages resulting from ethanol production, and at the end Bill says, 'I really need to understand phosphates more.'"

Another big part of his new job will be to make more public appearances and do more arm-twisting of governments and corporations to do more for the world's poor. "I'm uniquely able to reach out to the big companies, to ask them not just to write checks but to offer more of their innovative power," Gates says. "There's a big category of my time for talking to drug companies, cellphone companies, banks, and technology companies, as well as talking with other people who are lucky enough to have superbig fortunes about how they want to give those back to society."

That does not translate to fundraising - on the contrary, the foundation plans to exhaust its $100 billion endowment by the end of the century. Gates is talking about setting an example for the plutocracy. Jeff Raikes, the former Microsoft executive who was just appointed CEO of the foundation, thinks that effort could have as much impact on the world as the works of the foundation itself: "He has an incredible opportunity to help shape the thinking of other multibillionaires by getting them to think about the process, the structure, the best practices."

Gates takes pains to stress that even in his more active capacity, "I'm not the CEO of the foundation. Jeff will be the CEO." That's simply not what he wants to do with his time. "Even today people at the foundation get lots of e-mail from me, but after Sept. 1 they'll get a lot more, because now I'll be able to take courses, read more, meet more smart people, and have better ideas."
Mellowing with age

In his younger years, Gates' gimlet-eyed idealism manifested itself in stubbornness and self-righteousness, an unusual boldness, and a tendency not to suffer fools. Most people who have worked closely with him can recall more than one instance in which he reacted to a comment or idea by standing up and hissing, "That's the stupidest thing I've ever heard in my life."

He hasn't lost that inclination toward intellectual arrogance. But in his philanthropic work, the shoe is sometimes on the other foot. He's not, after all, a microbiologist or a geneticist. Moreover, with age and maturity, Gates has become much better able to acknowledge what he doesn't know or when he's wrong.

"The classic CEO needs to be right, or rather needs to appear to be right more than he needs to actually be right - and that's not Bill," says his pal Myhrvold. "Lewis and Clark were lost most of the time. If your idea of exploration is to always know where you are and to be inside your zone of competence, you don't do wild new shit. You have to be confused, upset, think you're stupid. If you're not willing to do that, you can't go outside the box."

And that explains the third dimension of Bill Gates' new life - giving that "world-class curiosity" some room to run. His reading and learning have always been systematic. It's his nature. His father and sisters recall how young Bill would refuse to leave his room to come to the dinner table because he was too busy "thinking." But for many years, as he built Microsoft, his field of vision was of necessity rather narrow. One of the most important experiences that jostled him out of his single-mindedness was his first meeting with Buffett, on July 5, 1991. As Gates tells the story:

My mom called me at the office to come out to Hood Canal for a Fourth of July barbecue because she wanted me to meet Warren Buffett. And I said, "Mom, I'm working." But she insisted. So I took a helicopter so I could spend my couple of hours there and then get back quickly and work on software.

Then I met Warren, and I thought, "Oh, wow, this guy isn't just about buying and selling stocks and businesses. He is thinking about how the world works." And he asked me questions that I always wanted somebody to ask me, about why hadn't IBM (IBM, Fortune 500) been able to do what we had done, and how software gets priced, and why does one company have a defensible position. He wanted to understand the dynamics of the industry. To me it was way far away from, "What is your company worth?"

Then he explained to me about how Wal-Mart (WMT, Fortune 500) had not only changed things in its business, but how it had an effect on newspapers because they thought of their advertising differently than individual local stores had. And he talked about how banking really worked in terms of credit risk. The whole time all I could think was, "Hey, I'll be smarter about running Microsoft after I talk to this guy." And so I stayed the whole day.

Ever since then, Gates has tried to make more time to broaden his knowledge, and his capacity to absorb ideas has served Microsoft and the foundation well. But now reading, learning, and blue-sky brainstorming will be considered an integral part of his job description, and no doubt they will yield something.

Think of his third office, the one equidistant from Microsoft and the foundation, as the billionaire-adult equivalent of his own room. It's a place for him to spend time exploring his own ideas, and occasionally trying to find an appropriate entity to pursue them, whether it be Microsoft R&D or someone at the foundation or one of the foundation's many corporate and nonprofit partners. He'll focus on ideas related to his philanthropy, but he also will spend a lot of time with the staff of Ph.D.s and inventors at Intellectual Ventures (IV for short), Nathan Myhrvold's Seattle-based skunkworks for discovering patentable new technologies. Previously IV hosted brainstorming sessions for foundation scientists, and Gates is an informal member of a group of IV partners and investors with more general interests that meets regularly. He plans to participate even more frequently after July 1.

"I'm not going to create a company," Gates vows. "The foundation is the top priority. But there are some other things that I might help along. The scientific brainstorming with Nathan's group has led to a new nuclear energy startup, and I'm a funder and advisor to that thing. It won't be a huge amount of time, but the truth is, cheap energy that's environmentally friendly is a breakthrough that is more important for the poor than the rich. And the poor need fertilizer, more reliable seeds, and better agriculture too. They can't cut back their eating, because that's called starvation. So I'm investing in that."

Myhrvold loves the irony of it all: "It's so funny: Here's a guy who never went to class when his poor dad was paying the Harvard tuition, and now the sheer love of learning has sucked him back in, hard-core. It's not like he needs a job. It's not like he's thinking, 'Oh, that would look good on my résumé.'"

It's too early, of course, to judge the legacy of Bill Gates. He's only 52. His kids aren't even out of elementary school. And he has only just stepped away from Microsoft, a company that once put IBM in its place, and which some would say is the most significant company to come along since General Electric (GE, Fortune 500).

Nor do we really know what - or even whether - Gates thinks of his place in history. As outgoing Gates Foundation CEO Patty Stonesifer puts it, "The Gateses by nature believe that the unexamined life is the one that's worth living. They don't like to talk about themselves. It's all about rational responsibility, not grand idealism."

Buffett, who knows him as well as anyone, says the notoriously competitive Gates will have to find new ways to judge his accomplishments rather than by market share or in dollars. "He'll be competing with his own standards," Buffett says. "In the end, he is going to want people to look at the Gates Foundation 100 years from now and say, 'This guy did it the way it should have been done.'"

With all he did at Microsoft, Gates has a tough act to follow. "Bringing personal computing to billions has totally changed the world, and it's changed it, net-net, way for the better," says Myhrvold. "So even before you look at what his foundation has done for Africa or for the poor, he's already done more for the good of the world than essentially anyone else in our lifetimes."

Melinda Gates isn't at all surprised by Bill's transformation from feared empire builder to enlightened philanthropist. "I think the foundation, because it's not all about business and competition, allows other dimensions of Bill's personality to come out," she says. "He's incredibly funny and has an unbelievably wry sense of humor. He also can be very emotional when he sees the pathetic living conditions of so many people. He's a genuinely nice guy. I think more of what I see at home and what we see inside the foundation will come out. That will be a really nice thing for him and for the world."

To which her husband would likely say, "That's the stupidest thing I've ever heard in my life."

Just kidding.

By: Brent Schlender
Fortune Magazine; June 26, 2008

Sunday, July 20, 2008

Targeted Ads Raise Privacy Concerns

Pressure Could Imperil Online Strategy Shared by Phone and Cable-TV Firms

Cable and phone companies say their growth increasingly depends on being able to deliver targeted advertising to their Internet and TV customers, but criticism from privacy advocates is threatening that strategy.

In the past few weeks, phone operator CenturyTel Inc. and cable provider Charter Communications Inc. shelved plans to use ad-targeting technology from Silicon Valley start-up NebuAd due to privacy concerns raised by their customers and lawmakers.

Last week, another cable company, Denver-based Wide Open West, pulled the plug on NebuAd's software, which it had used since March to track its customers on the Web and subdivide them by their browsing habits to attract online advertisers.

NebuAd is raising red flags among privacy advocates, lawmakers and others because, unlike other targeted-ad companies, which profile consumers based on their activity on a limited number of Web sites, Internet-service providers like cable and phone companies can use NebuAd technology to track consumers wherever they go on the Web. A similar company called Phorm is making inroads in the British market.

Both companies say the data they use is anonymous and can't be traced back to individuals. The technology categorizes consumers as they surf the Web. Marketers then buy ads to appear online before certain subgroups of consumers when the technology recognizes their encrypted identity.

Wednesday, the Senate Commerce, Science and Transportation Committee plans a hearing on the privacy issues raised by online advertising. Critics, meanwhile, are questioning whether the practices used by NebuAd and other ad-targeting companies violate wiretap laws, which prevent carriers from monitoring customer communications.

NebuAd says it believes its technology and approach is legal.

Fueling some critics' concerns, however, is that several senior employees of NebuAd previously worked for a leading maker of adware, or software that often tracked consumers and launched pop-up ads. Privacy advocates and lawmakers have assailed adware as deceptive, saying consumers often downloaded the snooping software unwittingly when they thought they were getting free games or music-sharing programs.

While CenturyTel, Charter and Wide Open West are smaller players, their decisions have big implications for the phone and cable industries, which are increasingly dependent on ad-related revenue and are eager to adopt some kind of ad-targeting technology whether for TV or the Web. Last month, the six big cable companies launched Canoe Ventures to figure out how the industry can boost ad revenue through TV targeting technology.

"Everybody in the industry is looking at the NebuAd trials, and the notion of [targeting] across all their platforms," says Craig Moffett, a telecom analyst at Sanford C. Bernstein. "This is likely to slow things down a bit."

NebuAd is scrambling to come up with ways to make its technology more palatable to consumers, lawmakers and privacy advocates, and is expected to announce Tuesday it is creating new privacy protections for consumers.

In an interview, NebuAd Chief Executive Bob Dykes said Internet-service providers using NebuAd will be able to periodically notify customers online that their Web surfing is being tracked. In addition, the providers also will be able to offer their customers new ways to opt out of NebuAd.

Analysts say that NebuAd and Phorm offer richer potential for ad targeting than their competitors. Internet-service providers can see not only if a customer is, for example, looking at auto Web sites, but that they are researching convertibles, says Emily Riley, an analyst with Jupiter Research.

With NebuAd's technology, the Web surfers are identified via encrypted computer Internet protocol addresses. The technology tracks their surfing and then lumps it into categories, such as automotive, for sale to advertisers. The data can be subdivided in great detail -- for example: consumers who have browsed for convertibles in the past 30 days.

Not all cable operators are retreating from NebuAd. Knology, based in West Point, Ga., is moving to test NebuAd's services.

But many online ad firms are distancing themselves from NebuAds and Phorm. Members of the Network Advertising Initiative, a trade group, have rebuffed both companies' efforts to join.

One reason, say analysts and ad executives: Several NebuAd executives once held jobs at Claria, formerly known as Gator; Claria and Gator were prominent adware makers. And last year, Phorm changed its name from 121 Media, which created a program called PeopleOnPage that security firms classified as spyware. Spyware tracks Web users' activity without their knowledtge.

The NAI declined to comment on any applications that "may or may not be pending."

NebuAd says that any connections to Claria are unfair. "NebuAd is not Claria," Mr. Dykes said. "If anything, our employees' Claria experience redoubles our dedication to complete privacy."

Phorm said it dropped its adware business in 2006.

By: Emily Steel and Vishesh Kumar
Wall Street Journal; July 8, 2008

Friday, July 18, 2008

Google Push to Sell Ads On YouTube Hits Snags
Video Site Is Key To Diversification; The Lawsuit Factor

Wringing ad revenue from YouTube is proving to be a challenge for Google Inc.

Although users of the popular video-sharing site view clips more than one billion times on most days, the site hasn't been as popular with big corporate advertisers. World-wide revenue from YouTube ads has fallen short of Google's expectations this year, and is likely to total about $200 million for the full year, according to two people familiar with the matter.

YouTube is critical to Google's campaign to extend its advertising reach far beyond text ads tied to Web searches, its revenue powerhouse. Google wants to sell more video ads and display ads on YouTube and elsewhere. It also wants to crack the television, radio and newspaper ad markets. Its target: the 90% of global ad dollars that don't currently flow to the Internet.
Tim Armstrong, an advertising executive at Google, says a sketch drawing -- stick figures and all -- is guiding the Internet giant toward a new ad model. WSJ's Kevin Delaney reports. (July 9)

"Most advertisers are still testing the waters on YouTube," says Sean Muzzy, media director at Neo@Ogilvy, a digital ad agency owned by WPP Group's Ogilvy & Mather. Some big advertisers, he says, haven't been comfortable that their ads might appear next to amateur videos. Google Chief Executive Officer Eric Schmidt has acknowledged that the company hasn't yet found the best formats for video advertising.

Copyright litigation has complicated the YouTube ad push. Viacom Inc. sued Google last year in connection with clips of television shows and films posted without authorization by YouTube users. Although Google says it hasn't broken copyright laws, it significantly cut back on the number of clips it would sell ads against, so as not to sell them against infringing material, according to one person familiar with the matter.

Tim Armstrong, Google's head of advertising and commerce in North America, is helping to lead the diversification push. When he dug into complaints from salespeople about Google's system for selling YouTube ads, he uncovered another part of the problem: a sales system hamstrung by inefficiencies.

Some YouTube advertisers, for example, had to pore over three separate legal contracts. Before Google salespeople around the country could propose certain deals to YouTube advertisers, they first had to get approval to do so from a temporary worker in California. And lacking a fully automated billing system for YouTube, Google staffers had to calculate some bills manually.

By May, Mr. Armstrong and his colleagues had identified some 105 problems with YouTube's ad sales, according to one person familiar with the matter. The ad difficulties extended beyond YouTube. In its successful search-ad business, Google recently counted 24 separate internal systems for helping advertisers come up with search terms to have their ads displayed alongside. "Barnacles started to build up on the outside of the process," says Mr. Armstrong.

Twenty months after Google bought YouTube for more than $1.7 billion, Mr. Armstrong and his colleagues have begun to untangle the problems with its advertising operations -- which generated 98% of Google's revenue in the first quarter. The initiative is code-named "Project Spaghetti."

The effort could affect how successful Google is at expanding beyond advertising tied to online searches. If Google is to maintain its torrid growth rate in the years ahead, it needs to tap other forms of ad revenue.

In the first quarter, Google's U.S. ad sales were up 31% from the year-earlier period to $2.5 billion. (Google doesn't break out revenue by category of ads.) That growth rate would thrill most companies, but for Google, it's a slowdown. In the first quarter of 2007, U.S. ad sales jumped 49%. Still, Google exceeded analysts' estimates for revenue and profit in the first quarter, partly because of strength outside the U.S. Google's shares have dropped about 25% from their November closing high of $741.79.

It isn't the first time Google has wrestled with advertising problems. Six years ago, it changed its sales model for so-called search ads: When Google users conduct a Web search, ads related to the search words pop up next to the results. Google began charging advertisers only when users clicked on the ads, not every time they appeared on a user's screen.

That new advertising model was hobbled initially by overlapping sales databases and disparate billing systems. In 2002, Google launched "Project Drano" to overhaul the operation. Problems instituting a new system -- many ad campaigns were inadvertently shut down -- "nearly killed" Google, said Mr. Schmidt, the chief executive, in a 2005 interview. It took Google about six months to get it right, and the search-ad business exploded. (Google has a deal with MySpace to sell ads on that social-networking site, which is owned by News Corp., owner of Dow Jones & Co., publisher of The Wall Street Journal.)

Mr. Armstrong, who is 37 years old, describes Project Spaghetti as an effort to fix the plumbing behind all of Google's ad initiatives. The inefficiencies, he says, are a product of Google's rapid growth and its innovation. Streamlining the systems and developing new ad formats, he says, should eventually improve the company's bottom line.

Mr. Armstrong, a seven-year Google veteran, says the company's traditional search-ad business is still gaining market share, and has plenty of room for growth. Nevertheless, he's been working for several years to develop ways to sell ads in other media, believing that Google could help advertisers better reach target consumers and measure the results.

In 2005, Google began trying to broker ads sales for magazines. To branch into radio advertising, in 2006 Google bought dMarc Broadcasting Inc. of Newport Beach, Calif., which ran an online system for advertisers to buy radio time. Google tested placing TV ads on a small cable system near its headquarters, then signed an ad deal with satellite-TV provider Dish Network Corp.

Big Ambitions

Google's 2006 acquisition of YouTube signaled that it had big ambitions for online video advertising. YouTube's revenue was only about $15 million that year, Bear Stearns analysts estimated. But Google believed YouTube would be attractive to traditional TV advertisers and others.

Mr. Armstrong and his team had to persuade skeptical advertisers to start spending chunks of their ad budgets on Google's new offerings. At a September 2007 meeting of Google ad executives in New York, Eileen Naughton, who heads Google's display and video ad sales, illustrated the magnitude of the challenge with photos of Mount Everest and Sherpas.

Last fall, Mr. Armstrong says, he began to realize that internal problems were interfering with progress. Newly acquired companies such as YouTube and dMarc Broadcasting had their own sales systems, and Google was building others piecemeal. The end result was overlap and inefficiency.

In March, after salespeople complained that selling YouTube ads was taking longer than it should, he kicked off Project Spaghetti. In order to get a closer look at the problems, he moved that month to a cubicle in the middle of a YouTube ad team, two floors above his New York office. He says he was determined to find out exactly how YouTube ad sales worked.

In May, Google held "weeds days" for YouTube -- it wanted to get everyone into the "weeds," or details, of the ad-sales process. The result was the list of about 105 fixes, says one person familiar with the matter. Mr. Armstrong characterizes some of them as very minor.

One of the top five suggested short-term fixes was to allow ad salespeople to discount YouTube ads by 10% without securing management approval, the person familiar with the matter says. Another was to eliminate a requirement that a certain temporary worker -- she's referred to only as Miriam in an internal presentation -- had to sign off on YouTube ad proposals, which created a bottleneck. Mr. Armstrong says that step now has been largely automated, and the worker only gets involved later in the process. He declines to comment on discounting policies.

Project Spaghetti, Mr. Armstrong says, should be completed by the end of the third quarter. But even if the internal problems are ironed out, Google still has to persuade advertisers to spend more on its new ad offerings.

One complaint from mainstream advertisers is that YouTube -- where clips uploaded by users range from raunchy to heartwarming -- lacks enough content alongside which they want to run their ads. New Line Cinema, for example, created an ad campaign on YouTube last summer to promote its movie "Hairspray." The ads performed well, New Line said, but it had a hard time finding enough YouTube videos where it wanted to put the ads.

General Motors Corp. has been a regular buyer of Google search ads. More than a year ago, it experimented with advertising its Cadillac brand on YouTube. Since then, it hasn't significantly boosted its YouTube ad buying, says Mike Devereux, GM's executive director of digital marketing and customer relationship management. He says GM is watching Google's ad-diversification plan closely. "As they get their platform ready for other media, we will get there with them," he says.

Mr. Schmidt, Google's CEO, said earlier this year that "it's taken longer than I thought for us to find the right combinations" of YouTube advertising formats. He added that he believed it "will ultimately be very, very successful for us and the industry."

The Viacom suit has complicated matters. Fearful of fueling allegations that it is profiting from copyright infringement, Google will only sell ads against YouTube clips that have been posted or approved by media companies and other partners -- roughly 4% of the total, says one person familiar with the matter. A Google spokeswoman declined to comment on how the litigation has affected where ads are placed. Last week, the federal judge overseeing the Viacom case ordered Google to turn over some data about YouTube users and viewing records, stirring privacy concerns.

Google plans to begin accepting "preroll" and "postroll" ads, which will run before and after some YouTube video clips, according to one person familiar with the matter. The plan under consideration, this person says, would give companies that post video clips the option to sell such ads, and share the revenue with Google. YouTube has long forsworn such ads because consumers don't like them. But advertisers consider them highly effective.

Google began offering Internet display ads several years ago, but they haven't gained as much traction as many at Google had expected. The display ads bring in a few hundred million dollars annually, according to one person familiar with the matter.

Acquiring DoubleClick

Google is hoping that its recent $3.2 billion acquisition of Internet ad services company DoubleClick Inc. will boost display-ad sales. Internet publishers pay DoubleClick to insert ads onto their Web sites as users visit the sites. DoubleClick also offers a system to ad agencies for managing and tracking online ads. Google wants to leverage DoubleClick's relationships with Web publishers and ad agencies to sell more display ads.

In radio and TV, where Google collects commissions for brokering ad sales, the company still doesn't reach enough top markets and consumers, some advertisers say. Sales of TV ads generated around $25 million in revenue for Google last year, while sales of radio and newspaper ads brought in even less, says one person familiar with the results.

Others in the ad industry are skeptical about whether Google's forays into these advertising categories will ever be as profitable as the company's stronghold, search ads, where it holds a major lead over rivals.

"They will do some good business, but not at the [profit] margins" the company has with search ads, said Maurice Lévy, chairman and chief executive of advertising giant Publicis Groupe SA, late last year.

Mr. Armstrong says it will take Google another five or 10 years to realize its advertising vision. He says advertisers are getting on board, but he acknowledges that the company's main rivals have adopted similar approaches. "The next five years of the Internet is about execution," he says.

By: Kevin Delaney
Wall Street Journal; July 9, 2008
Google's Net Income Climbs Less Than Expected, and Shares Tumble

Google Inc.'s second-quarter net income rose 35%, but the results disappointed investors and shares fell nearly 10% in after-hours trading.

"Strong international growth as well as sustained traffic increases on Google's Web properties propelled us to another strong quarter, despite a more challenging economic environment," said Chief Executive Eric Schmidt.

What to expect from other major companies -- including analyst forecasts for profit and revenue -- as they report quarterly earnings
The search-engine giant reported net income of $1.25 billion, or $3.92 a share, compared with $925.1 million, or $2.93 a share, a year earlier. Net income fell from $1.31 billion, or $4.12 a share, in the first quarter.

Excluding stock-option costs, the company said per-share earnings were $4.63.

Revenue jumped 39% from a year earlier to $5.37 billion. Traffic-acquisition costs totaled $1.47 billion. Revenue was up 3% from the first quarter.

A Thomson Reuters analyst survey projected earnings of $4.74 a share, excluding stock-based compensation, on revenue of $3.87 billion, excluding traffic-acquisition costs.

Google's U.S. paid clicks for the second quarter rose 19% from a year earlier, but fell 1% from the first quarter.

Google's U.S. paid clicks for the first quarter grew 20% over the year ago period, a sharp deceleration from the company's 30% growth rate in its 2007 fourth quarter and 45% growth in the 2007 third quarter. However, some analysts have argued that the slower click growth is a result of steps Google has taken to weed out less lucrative advertisers.

One of the company's major efforts to grow advertising sales -- at YouTube - has hit snags as some companies have been reluctant to advertise next to amateur videos. Copyright litigation has also complicated matters.

Earlier this week, Google went to Washington in an effort to sell lawmakers on its advertising partnership with Yahoo Inc. The deal, seen by many as a lifeline for Yahoo as it fends off unwanted suitors, has faced antitrust concerns. Microsoft Corp., one of those suitors, opposes the deal, saying it would create a monopoly in search advertising.

There were signs that Google has slowed its spending: The company added 448 employees in the quarter – relatively low by Google standards – bringing its total to 19,604.

In after-hours trading, the company's shares fell 9.9% to $479.70. The shares ended the regular session at $532.15, down 0.6%.

By: Jay Miller
Wall Street Journal; July 17, 2008

Thursday, July 17, 2008

Google Search Ads Rile Its Big Customers

Google System Encrouages Trademark Infringement

As Google Inc. pushes to sell ads crucial to its revenue growth, some of its largest advertisers are growing angry with the way the company oversees its sponsored searches.

The problem is a tactic known as “piggybacking,” in which smaller advertisers use major players’ brand names, slogans or other trademarked words in the text of search ads to lure Web surfers to their own sites.

While Google and other search engines have policies against this maneuver, some marketers say the practice often goes unchecked. The brick-and-mortar world has long-established laws in this area, but the legal situation is less clear for the Internet and has only recently started to be tested in the courts.

Tensions over piggybacking have been simmering for a couple of years. Companies such as Marriott International Inc., InterContinental Hotels Group PLC, AMR Corp.’s American Airlines and Northwest AirlinesCorp. say the use of their names and slogans in the text of other companies’ search ads confuses potential customers and increases their cost of doing business. They are particularly upset with Google, which is the dominant player in the search business. It controlled 71.2% of the search market last year, according to research firm eMarketer Inc.

As a result, Google could face a backlash as it attempts to grab a bigger share of other advertising niches, including display advertising and video ads. Big advertisers say they may punish Google if they aren’t satisfied with the way the piggybacking dispute is dealt with. “This does play into our decision of overall spending — it has to,” says Michael Menis, vice president of global marketing services at InterContinental.

Adds John Gustafson, director of distribution and Internet strategy at Northwest Airlines: “If Google has an inability to help us resolve issues about abuses of our brand, that would impact our decision to participate in future forms of advertising.”

Last August, American Airlines filed a suit against Google in federal court in Fort Worth, Texas, seeking restitution for damages caused by trademark infringement on the search engine. The airline is asking Google to stop selling its trademarked terms to other advertisers. This practice is “utilizing our brand that we’ve built for more than 80 years for the benefit of someone else,” says American Airlines spokesman Billy Sanez.

Google says it is disappointed that the court denied its motion to dismiss the lawsuit. It believes the suit lacks merit. “Google’s trademark policy strikes a proper balance between trademark owners’ interests and consumer choice and has been validated by prior court decisions,” a Google spokeswoman says.

Google acknowledges that piggybacking occurs and says that when it gets complaints, it investigates the claims and tries to stop the practice. “We have a long-running policy where we don’t allow advertisers to use trademarked terms in ad text to avoid creating any user confusion,” says Richard Holden, a product-management director at Google.

The other main players in the search-advertising market are Yahoo Inc. and Microsoft Corp. Both say they have policies similar to Google’s.

The way search-engine advertising works, marketers bid on key words in a continuous auction. InterContinental, for example, bids on millions of key words a day from Google in 11 different languages. Among them are its own brand names, such as “Holiday Inn Express” and “Crowne Plaza Los Angeles.” When a consumer searches for any of the words, the company’s ad appears above or next to the results, depending on the amount the company bids and an algorithm Google uses to determine an ad’s relevance to a search.

Companies only pay Google for the key words if someone clicks on their search ad.

For large companies, the frustration comes when their names and other well-known phrases are used in the text of a search ad leading to an unrelated site. A recent Google search using the words “Marriott Atlanta,” for instance, brought up an advertiser-paid link labeled “Marriott Atlanta.” That led to, a discount hotel-reservations site. But a link on the site for a Marriott hotel room in Atlanta ultimately led to an error page. Marriott says the site isn’t authorized to use the Marriott name in its online text. didn’t respond to requests for a comment. The link on Google has since disappeared.

The piggybacking that Marriott, American and others are complaining about is not to be confused with another practice known as “conquest buys,” in which marketers buy a competitor’s term so that an ad for their own product appears when a consumer searches for the other brand. The difference is, the text of the ad doesn’t contain the competitors’ name or slogan. While companies have also protested this practice, Google’s policies allow it, unlike piggybacking.

Piggybacking is a big problem for marketers that do a significant amount of business online, experts say. If it is allowed to continue, companies seeking online visitors will be forced to pay more to advertise in search engines because rising demand will force up the cost of key words, says Eric Clemons, a professor at the University of Pennsylvania’s Wharton School who follows the search-ad business.

The companies interviewed for this article say they aren’t able to put a dollar amount on their claims of lost business as a result of the piggybacking. But concerns like InterContinental, which spends more than half of its online marketing budget on search ads, say they depend on these ads to generate sales. “Any research will tell you search is the place where people research travel,” Mr. Menis says.

A recent Google search with the words “Holiday Inn Orlando” brought up a sponsored link labeled “Holiday Inn Orlando.” It led to, an online travel comparison-shopping site. InterContinental Hotels, which owns Holiday Inn, says is not authorized to advertise using the Holiday Inn name. says it bids on millions of search terms at any given time and often uses Google’s automatic system to generate its advertising copy. “What we rely on Google to do is to essentially stay within its own policies so that if a given key word or a search term that we are bidding on should not show up in the search ad, it doesn’t,” says Steve Yi, senior vice president of Oversee Marketing Services, which owns says if it is notified of a violation, it immediately takes down the ad.

Some advertisers are demanding that Google and other search engines create an automatic system that will only allow advertisers to use other companies’ names and slogans in the text of search ads if they have permission.

But Google says its system works. “We are trying to balance advertisers and trademark owners and user interests,” Mr. Holden says.

Tuesday, July 15, 2008

Microsoft and Yahoo The Merger Drama Continues

Icahn, Ballmer pair up, talk Microhoo; Push to boot Yang and Yahoo’s board

Updated: Activist investor Carl Icahn and Microsoft are now in cahoots to toss Yahoo CEO Jerry Yang and the company’s board of directors.

Icahn says in a letter that he has been chatting up Microsoft CEO Steve Ballmer along with other key executives about how the two companies can “do a transaction together.” In the letter, Icahn claims that Ballmer “made it clear to me that if a new board were elected, he would be interested in discussing a major transaction with Yahoo.”

For its part Microsoft confirms Icahn’s account and says in a statement that “it would be premature to discuss at this time important details such as the price or other terms of a possible transaction.”

The message is clear: Boot Yahoo’s board at the company’s shareholder meeting on Aug. 1 and Icahn can pull off a deal with Yahoo. And Microsoft is interested.

The letter and Microsoft’s confirmation–timed to coincide with one another on the wires by the way–are notable because it puts all the cards on the table. Icahn and Microsoft are teaming up against Yahoo’s current management and aren’t being shy about it. To date, the biggest question about Icahn’s bid is whether Microsoft would actually step up to the plate if the billionaire managed to grab control of Yahoo’s board. Yahoo launched a few strikes last week to fend off Icahn’s upcoming assault. Meanwhile, Microsoft dropped hints that it was still interested in Yahoo.


The opening paragraph of Icahn’s letter says it all:

During the past week I have spoken frequently with Steve Ballmer, CEO of Microsoft. Several of our conversations have lasted as long as an hour. Also, a few of our discussions have taken place while other top executives, such as Kevin Johnson, participated. Our talks centered on the industry in general but, more importantly, on how Yahoo! and Microsoft can do a transaction together. Steve made it abundantly clear that, due to his experiences with Yahoo! during the past several months, he cannot negotiate any transaction with the current board. His logic is simple. If and when a transaction was consummated, Microsoft would be guaranteeing a great deal of capital at closing. However, a transaction could take at least nine months and perhaps longer to obtain regulatory clearance in the U.S., Europe, and elsewhere. During that period, if the current board and management team of Yahoo! mismanage the company (and their recent track record is far from reassuring), Microsoft would be putting its money at risk and a great deal could be lost.

Microsoft bolsters Icahn’s letter with:

Despite working since January 31 of this year, as well as in the early part of last year, we have never been able to reach an agreement in a timely way on acceptable terms with the current management and Board of Directors at Yahoo!. We have concluded that we cannot reach an agreement with them. We confirm, however, that after the shareholder election Microsoft would be interested in discussing with a new board a major transaction with Yahoo!, such as either a transaction to purchase the “Search” function with large financial guarantees or, in the alternative, purchasing the whole company.

The bottom line: If Icahn wins, Microsoft will “enter into discussions immediately after Yahoo!’s shareholder meeting if a new board is elected.”

There’s some good old fashioned hard ball for you.

Now the big question is whether Yahoo’s shareholders will toss the entire board, some of it or just enough to put Icahn in control.

Icahn indirectly panned Yahoo’s latest restructuring effort adding in his letter that:

Our company is now moving toward a precipice. It is currently losing market share in its “Search” function; our current Board has failed to bring in a talented and experienced CEO to replace Jerry Yang (right) and return Jerry to his role as Chief Yahoo!, and currently it is witnessing a meaningful exodus of talent. It is no secret that Google (which hired a great operator as CEO) continues to dramatically outperform Yahoo!. According to publicly available information, Google’s income from operations grew 59% per year over the last two years while Yahoo!’s shrank 21% per year. However, none of the above has caused the Yahoo! board to hesitate in paying themselves $10,000 per week. IT IS TIME FOR A CHANGE.

Icahn says that voting with his slate of directors will ensure that Yang and Yahoo’s board “will not be able to ‘botch up’ a negotiation with Microsoft again, simply because they will not have the opportunity.”

Yahoo responded to the Icahn letter in a statement noting that the Icahn-Ballmer plan is off the mark.

Yahoo!’s Board of Directors continues to stand ready to enter into negotiations with Microsoft Corporation for an acquisition of Yahoo!. Indeed, as recently as June, Yahoo!’s independent directors and management approached Steve Ballmer about just such a transaction, only to be told that Microsoft was no longer interested even in the price range which they had previously proposed. Now Mr. Ballmer and Mr. Icahn have teamed up in an apparent effort to force Yahoo! into selling to Microsoft its Search business at a price to be determined in a future “negotiation” between Mr. Icahn’s directors and Microsoft’s management. We feel very strongly that this would not lead to an outcome that would be in the best interests of Yahoo!’s stockholders. If Microsoft and Mr. Ballmer really want to purchase Yahoo!, we again invite them to make a proposal immediately. And if Mr. Icahn has an actual plan for Yahoo! beyond hoping that Microsoft might actually consummate a deal which they have repeatedly walked away from, we would be very interested in hearing it.

For shareholders, this latest turn of events has really clarified the Yahoo decision. If you want Yahoo–or a part of it–to be acquired by Microsoft vote Icahn. There are no mysteries anymore. If you want Yahoo to stay independent in some fashion stick with your current management.

Full text of the Icahn letter:

Carl C. Icahn
767 Fifth Avenue, 47th Floor
New York, NY 10153

July 7, 2008

Dear Yahoo! Shareholders:

During the past week I have spoken frequently with Steve Ballmer, CEO of Microsoft. Several of our conversations have lasted as long as an hour. Also, a few of our discussions have taken place while other top executives, such as Kevin Johnson, participated. Our talks centered on the industry in general but, more importantly, on how Yahoo! and Microsoft can do a transaction together. Steve made it abundantly clear that, due to his experiences with Yahoo! during the past several months, he cannot negotiate any transaction with the current board. His logic is simple. If and when a transaction was consummated, Microsoft would be guaranteeing a great deal of capital at closing. However, a transaction could take at least nine months and perhaps longer to obtain regulatory clearance in the U.S., Europe, and elsewhere. During that period, if the current board and management team of Yahoo! mismanage the company (and their recent track record is far from reassuring), Microsoft would be putting its money at risk and a great deal could be lost.

For example, in a transaction to purchase the whole company, a very large amount of capital would be due at closing. Even in an “alternate” transaction, where just the “Search” assets were purchased, large guarantees would have to be made and, again, large sums could be lost if the company was mismanaged. Microsoft perceives this risk may be quite high with the current board and management in place. However, Steve made it clear to me that if a new board were elected, he would be interested in discussing a major transaction with Yahoo!, such as either a transaction to purchase the “Search” function with large financial guarantees or, in the alternative, purchasing the whole company. He stated that Microsoft would be willing to enter into discussion immediately if the new board that has been nominated were elected. While there can be no assurance of a future transaction, as many of you know, I have negotiated successfully a large number of transactions over the past years. If and when elected, I strongly believe that in very short order the new board would, subject to its fiduciary duties, be presenting to shareholders either a purchase offer for the whole company or a very attractive offer to purchase “Search” with large guarantees. I hope to continue to be speaking to Steve over the next few weeks; however, since I do not as yet represent the Yahoo! board, both Steve and I do not wish to get into details over price, or even which of these transactions makes the most sense.

Much has been said about how badly the Yahoo! board has “botched up” negotiations with Microsoft over the past months. There is no need to keep pointing out the mistakes I believe Yahoo! made by not immediately taking a $33 offer made by Microsoft. But one thing is clear — Jerry Yang and the current board of Yahoo! will not be able to “botch up” a negotiation with Microsoft again, simply because they will not have the opportunity.

Our company is now moving toward a precipice. It is currently losing market share in its “Search” function; our current Board has failed to bring in a talented and experienced CEO to replace Jerry Yang and return Jerry to his role as Chief Yahoo!, and currently it is witnessing a meaningful exodus of talent. It is no secret that Google (which hired a great operator as CEO) continues to dramatically outperform Yahoo!. According to publicly available information, Google’s income from operations grew 59% per year over the last two years while Yahoo!’s shrank 21% per year. However, none of the above has caused the Yahoo! board to hesitate in paying themselves $10,000 per week. IT IS TIME FOR A CHANGE.

If elected, I have little doubt that the new board, subject to its fiduciary duties, will do what the current board will not do, i.e.,

– Immediately start negotiation with Microsoft to sell the whole company or, in the alternative, sell “Search” with large guarantees.

– Move expeditiously to replace Jerry Yang with a new CEO with operating

Sincerely yours,