Week in review: Yahoo in Microsoft's sights

The two companies give us a few clues on their prospective deal; Washington takes on file swapping at colleges; and iPhone storage grows.

A week after Microsoft announced its bid for Yahoo, a clearer picture of the relationship between the pursuer and the pursued is emerging.

If its $44.6 billion bid for Yahoo goes through, Microsoft says it can find $1 billion in cost cuts by combining Yahoo's business with its own Internet services operation, however CEO Steve Ballmer says the Yahoo name isn't one of the items on the chopping block.

"Yahoo, the brand, will live," Ballmer told BusinessWeek.

Even if the brand lives, though, it is unclear which of Yahoo's technologies Microsoft will adopt. A merged company will need to choose among two e-mail systems, two ad platforms, and two instant-messaging systems, to name just a few of the many overlaps.

Ballmer spent plenty of time talking about Yahoo during a meeting with financial analysts on Monday. However, the CEO offered little news with regards to the takeover attempt. He reiterated many of the things he said when originally announcing the deal, talking about the need for scale in the business and the benefits of combining the two companies' research-and-development efforts.

Ballmer also echoed Microsoft general counsel Brad Smith's comments--that Microsoft buying Yahoo will increase competition by creating a stronger alternative to Google, whereas other potential options for Yahoo would ultimately reduce competition.

Monday's meeting with analysts came a day after a Google executive said the proposed Microsoft-Yahoo merger could threaten the openness on which the Internet is based. The offer "raises troubling questions," David Drummond, Google chief legal officer, wrote in a blog posted Sunday.

"Could Microsoft now attempt to exert the same sort of inappropriate and illegal influence over the Internet that it did with the PC? While the Internet rewards competitive innovation, Microsoft has frequently sought to establish proprietary monopolies--and then leverage its dominance into new, adjacent markets," he wrote.

CNET News.com readers focused on the changing landscape of the market.

"I bet Google is engaging in misdirection, that it really wants the takeover to succeed," wrote one reader to the News.com TalkBack forum. "It will weaken even Microsoft to spend that much money on the takeover and it will prove very difficult to effectively integrate the Yahoo and Microsoft search and ad efforts."

So how would Microsoft pay for the acquisition, if it went through? It might borrow some of the money. Microsoft Chief Financial Officer Chris Liddell said the software company may issue some debt to finance the cash portion of its 50-50 stock and cash offer for Yahoo, instead of drawing down its entire $21 billion cash pile.

"It's likely we're actually going to borrow for the first time," Liddell said.

Yahoo, meanwhile, said in a brief FAQ posted to its site that it is "undertaking a deliberate review process" of the offer and warns it could "take quite a bit of time." Yahoo said its process "will include evaluating all of the company's strategic alternatives--including maintaining Yahoo as an independent company." The alternatives could include pursuing bids from other companies, Yahoo said.

Jerry Yang, Yahoo's co-founder and chief executive, issued two rally calls to the troops this week, according to a filing with the Securities and Exchange Commission. The second companywide e-mail in three days included not only encouragement to employees, but touted the company's recent activities.

Just hours after word of the proposed deal emerged a week ago Friday, the U.S. House of Representatives Judiciary Committee's antitrust task force said it planned to hold a February 8 hearing to examine "The State of Competition on the Internet," including Microsoft's Yahoo plans.

But since then, "scheduling conflicts" have intervened, forcing the panel to cancel the hearing for the moment, a Democratic aide told CNET News.com on Thursday. A new date has not yet been set.

Meanwhile, a rival House committee recently announced plans to keep an eye on any merger activity, and a Senate antitrust panel said it will be prepared to hold a hearing if Yahoo accepts Redmond's offer.

Business in the Beltway
Even though lawmakers couldn't find time to focus on Microsoft-Yahoo, they did manage to get some other work done.

The U.S. House of Representatives overwhelmingly approved a higher-education funding bill that includes controversial new antipiracy obligations for universities.

The College Opportunity and Affordability Act leaves intact an entertainment industry-backed provision that says higher-education institutions participating in federal financial aid programs "shall" devise plans for "alternative" offerings to unlawful downloading--such as subscription-based services--or "technology-based deterrents to prevent such illegal activity."

Leading university groups and fair-use advocates oppose those requirements, arguing they are overly burdensome, potentially expensive, and, at least by their interpretation, leave the implication that schools risk losing their financial aid for failure to comply. The bill's sponsors, for their part, insist it's a "myth" that schools will lose financial aid funding if they fail to come up with the requisite plans.

Congress also gave its final approval to a bill that would prohibit "automatic" removal of phone numbers from the national Do-Not-Call registry, which is designed to allow consumers to opt out of receiving unsolicited sales calls. The bill, called the Do-Not-Call Improvement Act, now goes to the White House for the president's signature.

The latest action is a direct response to concerns from consumer advocates and politicians that under rules established in June 2003 by the Federal Trade Commission, Americans would have been forced to re-register their digits every five years.

The Do-Not-Call Improvement Act effectively overturns that rule. It says numbers can only be removed from the registry under two conditions: with permission from the individual assigned it, or if the FTC determines, based on periodic checks, that the numbers have been disconnected, reassigned, or are otherwise "invalid."

On the greener side of D.C., Dell chief Michael Dell and other high-profile technology company CEOs descended on the nation's capital with a message for policymakers: do more to encourage energy-efficient practices, but don't spell out specific standards for the products that companies like theirs build.

On behalf of a lobby group known as the Technology CEO Council, Dell, EMC chief Joe Tucci, and Applied Materials head Mike Splinter suggested the government should do more to "lead by example." They said it can do that by re-evaluating its own power consumption, setting "high goals" for energy efficiency, awarding presidential medals to companies that excel in using information technology to boost their energy efficiency, and minimizing trade and tariff barriers and maximizing tax incentives for companies with a track record of efficient energy use.

Pump up the iPhone
The iPhone is getting bigger, but at least one observer thinks we will soon be seeing a pullback.

Apple has doubled the capacity of its iPhone and iPod Touch for an additional $100.

The iPhone now comes in 8GB for $399 and 16GB for $499. And the iPod Touch can also store more music and videos now, with an 8GB model for $299, a 16GB version for $399, and a 32GB device for $499.

The new iPhone and iPod Touch appear to be otherwise unchanged from their previous incarnations, though they ship with the new software unveiled at Macworld, which provides the ability to edit the home screen and triangulate your position using maps.

Apple has also managed to develop the third-best-selling smartphone in the world, according to a new report from Canalys. The market researcher's latest tally of the "smart mobile device" market found that Apple's iPhone had 6.5 percent of the worldwide market in the fourth quarter.

That might not sound like a lot, but it's good enough for third place behind Nokia, which has a whopping 53 percent of the market, and Research In Motion, which has 11.4 percent. And last year, of course, Apple had 0 percent of this market.

Canalys doesn't provide an exact definition of what exactly constitutes a "smart mobile device" in the press release touting the research, but said it's talking about smartphones, handhelds, and wireless handhelds.

However, Apple does not appear to be very bullish about its business in the first quarter, according to a financial analyst. Craig Berger of FBR Research tracks chip companies like Broadcom and Marvell that supply chips for Apple's iPods and iPhones, among others. Berger issued a report saying that Apple is reducing the number of iPods, iPhones, and Macbooks it plans to build in the first quarter.

Consumer electronics and PC companies know the first quarter is always a downer compared with the fourth quarter, which is chock full of holiday shopping goodness. Berger is saying, however, that Apple now plans to cut production by an even larger amount than originally planned. Based on "channel checks," Berger says, Apple is cutting iPod and iPhone production by 60 percent compared with the fourth quarter, when it had originally planned to cut production by 50 percent compared with the fourth quarter.

Also of note
ARM plans to demonstrate prototype phones based on ARM processors and Google's Android operating system, possibly paving the way for the chip designer to join Google's Open Handset Alliance...AT&T said it's expanding its third-generation wireless broadband footprint and completing the upgrade of its network to the fastest 3G technology available...and in a move to curtail retaliation by vengeful sellers in its feedback system, eBay plans to prohibit sellers from posting negative feedback about their customers.

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