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Week in review: Tough times ahead for tech?

The crisis in the banking sector is likely to have a chilling effect on technology deals, but Google is bullish on its prospects. Also: video games render digital divide nonexistent.

The credit crunch is spreading from banks to Wall Street and industries beyond--and Silicon Valley may not be immune.

Troubles at two major Wall Street securities firms will have ripple effects that could stifle mergers and acquisitions in the technology industry and further dampen the market for initial public offerings. Or so say financial pundits who are examining the potential fallout of Lehman Brothers' bankruptcy, the $50 billion sale of Merrill Lynch to Bank of America, and the $85 billion loan to insurance giant American International Group in order to avoid its own financial crisis.

Venture capital and finance experts compared the news to the late 1990s, when the Big Eight accounting firms shrunk to the Big Four. Consolidation and financial uncertainty at the nation's largest securities firms will close some doors to tech companies aiming to go public, slow the process for M&A deals, and generally add more worry lines to tech investing.

Consolidation in the tech arena is already pretty rough, as Hewlett-Packard employees learned this week. Hewlett-Packard announced plans to eliminate nearly 25,000 jobs over the next three years as it digests its recent purchase of EDS. The company expects to replace roughly half of these positions over the next three years to create a global workforce that has the right blend of service delivery capabilities to address the diversity of its markets and customers worldwide.

HP announced plans in May to acquire the computer services firm for $13.9 billion. The deal closed in August. The company said that, once it has finished with the cuts, it expects the moves to save $1.8 billion in costs annually.

But not all merger proposals go so "smoothly." Samsung Electronics, the world's biggest supplier of flash storage cards, confirmed earlier rumors and disclosed that it had made an unsolicited $5.8 billion cash offer to buy SanDisk after what it said were four months of inconclusive talks. SanDisk was quick to rebuff the offer as inadequate.

In a statement, SanDisk said the offer undervalues the company and charged Samsung with "an opportunistic attempt" to exploit a depressed stock price, as well as "the uncertainty resulting from the unresolved patent cross-license agreement renewal with Samsung, and general equity market conditions."

Meanwhile, Electronic Arts abandoned its $2 billion bid to acquire rival game maker Take-Two Interactive Software, ending a seven-month takeover effort that turned hostile before the two companies entered private talks last month.

Google: What, me worry?
The national and global economy is suffering something between a setback and a meltdown, but Google's top executives said they're bullish about Silicon Valley's economic prospects. Google CEO Eric Schmidt specifically said the venture capital community is more sophisticated and that a Northern California start-up can reach scale more easily.

"Young people out of Stanford and Berkeley--they're able to get money early. Google is one of a long procession," he said. "I think it's completely due to the weather," he quipped, saying people get hooked on Silicon Valley's nice climate.

And despite increasing scrutiny from regulators, Schmidt showed no signs of being deterred from its plan to put into effect its search advertising deal with Yahoo less than a month from now.

"Time is money in our business," Schmidt said in a meeting with reporters at company headquarters, and in the absence of an opinion from regulators, the company plans to go ahead with the deal. "We do not know their position," whether it's a great deal, a poor deal, or whether regulators will want changes, he said.

He reiterated Google's position that the partnership with Yahoo, signed in August, doesn't require approval--though, of course, regulators could raise objections after the fact. Some are concerned that the partnership, under which Yahoo will show some Google search ads, could undermine Yahoo's independence and give even more of market power to Google.

Google's chief economist, Hal Varian, said "flawed assumptions" and "questionable methodology" undermine a SearchIgnite study that predicted a 22 percent ad price increase resulting from the Yahoo-Google deal.

Varian took issue with several elements of the study, but he led off with this one: "ad prices are not set by Yahoo or Google, but by advertisers themselves," through the search advertising keyword-bidding process. Varian also said the study assumed that Yahoo will show Google ads for as many searches as possible, which indeed Yahoo has said isn't its intent.

Meanwhile, Google's search market share experienced yet another increase. Internet users performed 11.7 billion searches in the United States in August, choosing Google 63 percent of the time, according to ComScore's monthly analysis, released Thursday. That's an increase of 1.1 percentage points from 61.9 percent in July.

The teen beat
If teens aren't your target audience, chances are that they soon will be. So here are some tech tidbits about teens:

Virtually all American teens play video games, regardless of race, income, or ethnicity. That's the verdict of a new study from the Pew Internet and American Life Project that renders the digital divide almost nonexistent when it comes to video games, including computer, console, and mobile games.

In one of the first nationally representative studies of its kind, Pew's research also asked whether teens are being spoiled for community engagement and politics with video game play, something educators have feared as gaming's popularity has skyrocketed. The short answer: not any more than they already were.

Cell phones have become almost as important to American teens as the clothes they wear, according to a nationwide survey of teenagers. The survey found that teens feel that cell phones have become a vital part of their identities. They also believe that they can gauge a peer's popularity or status by the phone he or she uses.

According to the survey, about 28 percent of all teens and 34 percent of kids 13 to 15 years old said that having the latest cool cell phone is absolutely essential. A mother of a 14-year-old boy said the social pressure to have a "cool" phone is intense.

Barry Diller's InterActiveCorp is so interested in this demographic that it is thinking even younger. The company launched a new Web site for "tweens"--the age group of 6- to 12-year-old girls--that allows users to dress up avatars, decorate virtual bedrooms, and shop in virtual malls. is a spin-off of IAC's teen Web site for kids 13 years old and older called, a 2-year-old Web site the company says has more than 16 million registered users globally and 6 million unique visitors per month. It's clear from the Zwinky Cuties launch that the company is gunning for another big media company, Disney. Zwinky Cuties will compete head to head with Disney's Club Penguin, another virtual world designed for kids in a similar age range.

Also of note
Republican vice presidential candidate Sarah Palin's Yahoo Mail account was hacked this week, using little more than social engineering, the process of acquiring personal information through social manipulation...The Electronic Frontier Foundation filed a lawsuit against the Bush administration to halt what it called the "massively illegal" warrantless surveillance of Americans' Internet and telephone communications...The Wall Street Journal's Web site got a makeover, borrowing a page from social networking.