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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 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 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'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."

Of course, not everyone is happy with Vista. Frustrated with the operating system's sluggishness, some people have been turning to a utility called vLite, which strips out components of the operating system deemed unessential. Although the move does offer frustrated Vista users an option other than going back to XP or switching to a Mac, Microsoft said Wednesday that it doesn't endorse such changes to Vista's setup.

Plenty of others had their say on Vista. While some were cutting cake, others were saying the "chrome is off the turd."

It should be noted that also celebrating a birthday was Microsoft's Office 2007, which first hit the retail shelves a year ago this week. Office 2007 sales were credited this week with helping the software market hit its highest level since 1999, according to a report by the NPD Group.

And Microsoft may have thought Vista would buy some goodwill with the courts, but a federal judge ruled that company will have to put up with another two years of court antitrust oversight. In her ruling, Judge Colleen Kollar-Kotelly cited the length of time it has taken Microsoft to get its protocol licensing program up and running as the primary reason she is extending the consent decree, which was due to expire at the end of last year.

Gadget gazette
Gadgets, or at least makers of such consumer electronic goods, also made some headlines this week. Motorola, for its part--a company that practically invented the cell phone market in the 1980s--said it is considering spinning off its beleaguered handset business in an effort to revive the business. But is that the right move?

Wall Street reacted positively to the news of a possible split in the company and boosted Motorola's share price 10 percent to $12.65 in after-hours trading. But some industry analysts say that simply selling the handset division could be a bad idea for the company, which has spent billions of dollars over the past several years building its consumer brand.

On the chip front, the PC industry is wasting little time getting in line behind Apple to use Intel's spiffy new notebook chip. CNET learned this week that Lenovo and Fujitsu are in the process of putting together systems based on the special Core 2 Duo chip that Apple is using in the MacBook Air. The new laptops should be out shortly, according to sources familiar with the companies' plans, and will give customers a chance to see what the rest of the PC industry can do with the power-thrifty chips.

Back to Apple, the company has no doubt taken iPhone unlocking very seriously. Even so, it appears despite significant roadblocks, the unlockers are winning.

Each of the three times Apple and AT&T have reported their iPhone numbers since July, there has been a gap between the number of iPhones sold by Apple and the number of iPhones activated for AT&T's network. During the first weekend of iPhone sales, the gap was 124,000 units. At the end of the third quarter of the calendar year, it had grown to 300,000 iPhones. And last week, Apple and AT&T revealed that gap had increased five times over in the fourth quarter, to 1.7 million units.

In camera news, CNET's Stephen Shankland offered thorough coverage of the Photo Marketing Association trade show in Las Vegas, where among the biggest news, Sony showed off its new flagship SLR. The camera features an unusually large sensor--it's the size of a full frame of 35mm film.

Readers weighed in on a related poll about the megapixel race, which camera companies maintain isn't over. Which would you rather have, more megapixels or better sensitivity?

Also from a show floor this week, CNET's Webware offered complete coverage of the Demo 2008 conference in Palm Desert, Calif. Editor Rafe Needleman said the show didn't offer "any new products to capture the hearts and minds of the general public or even a majority of the tech elite." But it did showcase several very strong new ideas and products.

Under a blood red piracy fight
Paul McGuinness, the manager of Irish rock band U2 rattled more than a few people during a speech in which he suggested that Internet service providers need to be taking more proactive steps to keep copyright-infringing content from being swapped on their networks. He added that the days of legal "safe harbors" restricting such responsibilities are over.

U2, one of the world's most beloved bands for more than two decades, is as a result under attack in the blogosphere.

"U2's manager tells us why we are bad," "U2's crazy manager wants to go after tech firms," and "U2 McGu's ISP rant" are just a few of the headlines coming from outraged bloggers.

McGuinness' comments also got people discussing the idea in other arenas.

Recording Industry Association of America President Cary Sherman despises piracy and he's a vocal fan of proposed laws that would beef up penalties for copyright infringers. But he doesn't want to see the government force ISPs to be more proactive in curbing pirated content on their networks.

"I don't think anyone here is trying to re-legislate this issue," Sherman, said at an Internet policy conference in Washington, D.C., on Wednesday. "We're much more interested in finding a marketplace way of going about this."

Sherman did, however, say he was encouraged to see that some companies, such as AT&T, are already experimenting with network filters. But those are business decisions best made outside the framework of regulation, he said.

Also of note
Netscape wins one month from executioner...The golden anniversary of the United States' .........Dell to cut almost 900 jobs...Congress approves brief extension of wiretap law...eBay lowers listing fees...Green-tech investing to outpace Internet in 2008...Amazon acquires Audible for $300 million...A minimum bid was hit in the FCC's spectrum auction, triggering open access.