Week in review: Teaming up against Google

Microsoft offers to buy struggling Yahoo for $44.6 billion to better compete against Google. Also: Vista's one-year anniversary.

The fight for Internet dominance heated up this week with Microsoft offering to buy Yahoo for $44.6 billion in an effort to better compete with chief rival Google.

"Today, the market is increasingly dominated by one player, who is consolidating its dominance through acquisition," Microsoft said in a statement Friday. "Together, Microsoft and Yahoo can offer a credible alternative."

Microsoft's offer, which was contained in the letter to Yahoo's board, amounts to $31 a share and represents a 62 percent premium over Yahoo's closing price on Thursday. Microsoft said it will offer shareholders the option of cash or stock.

Yahoo said in a responding statement that its board "will evaluate this proposal carefully and promptly, in the context of Yahoo's strategic plans, and pursue the best course of action to maximize long-term value for shareholders."

At press time, industry watchers were busy chewing on the news and analyzing such a merger's potential impacts. How problematic would the huge cultural differences at the two companies be? Also, could an open-source offspring be the result?

The deal followed what's been a tough week for Yahoo in its own efforts to stay afloat against competitors. After posting higher fourth-quarter revenue than a year ago but a lower net profit, the troubled Web giant confirmed expected plans to lay off 1,000 of its 14,300 workers in February to help focus on its search and advertising businesses.

Yahoo had long been known for its innovativeness. But somewhere along the way, it has become mired in bureaucracy and what some see as an inability to respond to more nimble (though considerably larger) Google.

Following the earnings and layoffs news, Yahoo also announced that former CEO Terry Semel, who left his post last summer but remained as non-executive chairman of the board, is now out of the company altogether. All eyes are now on CEO Jerry Yang, as some are still waiting for him to come up with a remedy for what's perceived as the company's eroding culture.

CNET News.com readers, many of whom responded to a related poll, seem split on whether Microsoft should be allowed to buy Yahoo, and whether Google is a monopolistic threat.

To at least one reader, a merger makes "good business sense."

"Google watch out...Yahoo (is) making a comeback and (it's) gonna eat you up whole," the reader wrote in Talkback to a story.

Relative to Yahoo, of course, things are looking up for Google, which reported fourth-quarter revenue rose more than 50 percent and profit was up 17 percent. But the figures were just short of Wall Street expectations. That caused shares to take a dive in after-hours trading.

Those missed expectations were partly due to a rise in traffic acquisition costs that cut into revenue. But executives acknowledged in a conference call with analysts that the company made less money than expected serving up ads on social networks, a sign that social networks may not be the easy holy grail for advertisers they were once believed to be.

"When you have the largest online advertising player with the most advanced monetization tool set out there talking about challenges monetizing certain types of pages, yeah, it would seem to be an indication of a broader industry issue," said Derek Brown, an analyst at Cantor Fitzgerald.

And Microsoft, for its part, isn't seeing the same thing as its chief rival. A Microsoft executive told CNET News.com on Thursday that monetization rates are good and have been steadily rising since the company first began feeding ads to Facebook in mid-2006.

Vista's one-year checkup
Microsoft's Windows Vista operating system turned one this week, which meant it was time for a thorough examination of its strengths and ailments.

A one-year security checkup came back with, if not a completely clean bill of health, at least signs that the infant is healthier than most babies.

According to the report, Microsoft issued 17 security updates fixing 36 vulnerabilities in Vista in the 12 months following its commercial launch in November 2006. By comparison, the company issued 30 security updates encompassing 65 vulnerabilities in XP's first year.

The report's author, Microsoft's Jeffrey Jones, says those numbers compare with more than 100 vulnerabilities fixed in Mac OS X Tiger's first year, more than 220 flaws in Ubuntu version 6.06 in its first year, and 360 flaws fixed for Red Hat enterprise Linux 4 in its first year.

There are lots more ways to look at how Windows Vista did in the first year, and CNET News.com's Ina Fried examines the plusses and minuses of Vista, looking at topics like the "downgrade to XP" movement, sales numbers, and compatibility with hardware and other software. Fried also took an unorthodox approach to assessing Vista by applying what she calls the "Mom test."

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