Microsoft and Yahoo are still dancing around the edges

SAN FRANCISCO - Just two weeks after breaking off merger talks, Microsoft Corp. and Yahoo Inc. have been pulled back to the bargaining table by their fears about what might happen if they don't work out a deal.

For now, Microsoft and Yahoo are still dancing around the edges as they explore possible business arrangements without melding the two companies.

The notion of a half-baked deal didn't excite investors Monday as they got their first chance to react to Sunday's news that Microsoft and Yahoo are talking again.

Yahoo shares rose a scant 0.7 percent, or 2 cents, to close at $27.68 on Monday, while Microsoft shares fell 1.8 percent, or 53 cents, to close at $29.46.

But most analysts remain convinced the preliminary talks will culminate in Microsoft buying Yahoo for somewhere between $33 to $37 per share, a price that translates to $47.5 billion to $53 billion.

Both Microsoft and Yahoo issued statements Sunday acknowledging they haven't ruled out the possibility of a merger even though they aren't discussing one now.

Although their discussions fell apart this month in a disagreement over price, both Yahoo and Microsoft have powerful incentives to reach a compromise within the next few weeks.

If Yahoo doesn't stop demanding $37 per share, its board could be overthrown in a shareholder mutiny led by activist investor Carl Icahn.

To pressure Yahoo into reviving the talks, he has nominated an alternate slate of 10 directors scheduled to stand for election at Yahoo's July 3 annual meeting. Icahn didn't respond to a request for comment Monday.

Meanwhile, Microsoft's unwillingness to pay more than $33 per share created an opportunity for its nemesis, Google Inc., to enter an advertising partnership with Yahoo.

"It's becoming pretty clear that Yahoo is either going to work something out with Microsoft or do a deal with Google," said Standard & Poor's equity analyst Scott Kessler. "If Yahoo winds up with Google after all this, it would be pretty damaging to Microsoft."

Microsoft began pursuing a Yahoo takeover in late January largely as a means to counter Google's dominance of the Internet search and advertising markets.

After Microsoft pounced, Yahoo became more receptive to an idea that it had resisted in the past — allowing Google to show some of the ads alongside Yahoo's search results.

A two-week trial last month demonstrated Google's technology could help boost Yahoo's profits, and the two sides began exploring a long-term alliance. But any partnership between Google and Yahoo likely would face antitrust obstacles because the two companies control more than 80 percent of the U.S. search advertising market.

A similar deal between Yahoo and Microsoft wouldn't pose the same antitrust problems because Google still would control more than half the market.

"We believe that a core issue for Microsoft is to acquire Yahoo on friendly terms," UBS analyst Benjamin Schachter wrote in a Monday research note. "A near-term deal (in search) could act as an intermediate step that would go a long way toward testing the waters."

Microsoft also might buy key pieces of Yahoo's online operations instead of doing a search advertising partnership or acquiring the entire company, Collins Stewart analyst Sanded Aggarwal said in a Monday research note. He values Yahoo's search technology at $21 billion, its display advertising service at $14 billion and its Internet holdings outside the United States at $9.25 billion.

Yahoo Chief Executive Jerry Yang believes the Sunnyvale-based company is on the verge of a turnaround that will prove it's worth more $50 billion. Starting next year, he has promised Yahoo's net revenue will increase by 25 percent annually — more than doubling its recent rate of growth.

But Icahn, who owns a 4.3 percent stake in Yahoo, so far has indicated he isn't willing to wait until next year. And many other major shareholders appear ready to back him.

Kessler doubts Yahoo will be able to placate its shareholders by entering a partnership with Google, particularly if the alliance could hurt Yahoo in the long run by subverting its own technology in the critical search advertising market.

"It's almost a no-win situation for Yahoo because they aren't going to get sufficient time to prove they are worth $33 per share or more," Kessler said

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Technology helps reinvent cell phone ads

SINGAPORE - Mobile phones are a potential gold mine for advertisers, the most
personal and intimate way to communicate and engage with subscribers — more than 2 billion of them and counting worldwide. Yet the advertisers' two-liner text pitches have largely fueled a growing hate club, with recipients quickly equating the messages with spam they abhor on desktops.
Now, thanks to improved technologies, advertisers believe they have struck upon the formula for getting their messages across without irking consumers. The development is important given the mobile handset's promise to be a "third screen" — after the television and the desktop computer.

Several blue-chip brands like Nokia Corp. and McDonald's Corp. have been experimenting with interactive ads on cell phones, taking advantage of the device's ability to know where you are. Customers have the option of finding the nearest retail or restaurant outlet with the press of a key.

Others partner with search engines and e-mail services to slip in an ad or two, similar to how Google has mastered the use of e-mail and search keywords on the desktop to help determine which topics users find interesting and, in turn, what ads appear.

Better handsets and faster networks mean "more brands utilizing mobile devices for more advanced marketing and advertising initiatives," said Laura Marriott, executive director of the Denver-based industry trade group Mobile Marketing Association.

The search-based advertising model seems to be working in Japan — a mature mobile phone market where the bulk of the 98 million mobile phone users have phones with Internet capabilities.

Japan's mobile advertising expenditures is expected to reach $1 billion by 2011 — more than three times the $328 million last year, according to an April report from media and communication think tank Dentsu Communication Institute Inc.

Although subscribers had felt they were wasting their time and money going through ads while conducting searches on their phones, those concerns have diminished with faster speeds and flat-rate pricing for Web access, said Akira Miwa, the report's author.

Yahoo Inc. took the plunge in June with a mapping service that combines search and location-based mobile technology. All one has to do is to enter a keyword to search, and advertisers registered on Yahoo's database pop up on a digital map.

The advertising industry is mindful of earlier mistakes, including inundating consumers with pop-up ads on the desktop and text messages on the phone.

Many agree that preserving a good customer experience is critical.

"Push marketing and spam have a very short shelf life," said Frank Brown, director of the mobile marketing and technology firm Sydus.

People need to feel, Brown said, that they had specifically invited the pitch or are engaging with the brand in a relevant and entertaining way.

Rebecca Ye, a 22-year-old Singaporean, said she wouldn't mind having ads sent to her phone as long as she had subscribed for them, like "a notification on upcoming sales."

"Let's say you're on the train and you get a message telling you something's going on somewhere you can just drop by," she said. "So it's very targeted and purposeful."

MobileOne, Singapore's second largest mobile communications provider, promises to cater only to the "willing customer."

Subscribers can choose to receive offers, free news headlines and advanced functions with an interactive ad-based text messaging service, but if a customer declines, "he continues to send and receive (text messages) the way he does today," Chief Executive Neil Montefiore said. "It is completely under the control of the customer."

Wireless carriers, meanwhile, are starting to loosen restrictions on third-party ads, which they had resisted for fear annoyed customers might defect to competitors. Until now, most mobile ads are found on content producers' own Web sites, which are accessed through a mobile browser rather than through the carrier's cell phone menu.

Yum Brands Inc.'s Pizza Hut and KFC are among the first to advertise through a free, ad-based e-mail service from Southeast Asia's largest operator, SingTel.

"Our customers are fully aware that they will be receiving the ads, and from our initial findings, they aren't disturbed by them at all," SingTel spokeswoman Tricia Lee said. "We also found that a relatively large segment of customers are willing to try mobile advertising provided they receive something in return."

Analysts say slowing revenue growth and saturation in developed markets have forced wireless carriers to reconsider — good news for advertisers that want to target specific groups. After all, the carriers have the key to a treasure cove of customer demographics — where they live, their age and what games they play on their phone.

"Carriers today are now focusing on targeted advertising and personalization capabilities," said King Yew Foong, research director of Gartner Singapore. "The crucial point is whether carriers understand their customers well enough to execute this flawlessly. They will have to develop better customer intimacy."

The risks are high if they don't do it right.

"Consumer aversion to such advertisements in the past is due to the fact that they were irrelevant to the recipients," King said.

To mitigate the risks, Korean and Japanese companies that have allowed advertising have also put in place spam filters.

The Mobile Marketing Association has set up guidelines that include letting consumers decline to receive ads and ensuring that information advertisers obtain from customers be kept confidential.

"So because of that, spam will be less of an issue," MMA's Marriott said.

Brands themselves are also learning to be more subtle with its mobile campaigns, tapping on to a trend where youths in Asia are increasingly turning to their phones rather than an iPod for on-the-go entertainment.

Bacardi Ltd., the company best known for its top-selling rum, recently extended its yearlong partnership with Sydus to stream music to cell phones through a virtual radio "brand-channel." The company hopes to connect with a younger audience that way — without overt advertising.

It may take time, though, for mobile ads to gain better esteem among consumers. Some parts of Asia have yet to embrace the third-generation, or 3G, phones that can carry multimedia ads. Handset technology and network signals differ among mobile carriers and countries, forcing advertisers to cater only to the tech-savvy group.

But it's only a matter of time before mobile networks improve — and the mobile ads follow. The key is to avoid simply importing techniques from television and the desktop.

"We should all by now (know) that doing boring TV ads aren't much appreciated," Craig Davis, worldwide chief creative officer of New York-based advertising agency JWT, said during a recent visit to Singapore. "Doing annoying things is no way to seduce people that your brand is for them."

Consumers urged to pick new DVD format

LOS ANGELES - People who own an HD DVD player can forget about watching "Spider-Man 3" in high definition when it goes on sale during the holiday season. The movie from Sony Pictures will only be available in the Blu-ray DVD format. Likewise, people with Blu-ray players won't be able to enjoy the action-thriller "The Bourne Ultimatum," which Universal Pictures will release only in HD DVD.

These exclusive arrangements, plus aggressive price cuts for high-def DVD players, are designed to persuade consumers to finally embrace one format or the other.

But analysts wonder if the moves will anger consumers, just as the studios and consumer-electronics companies are hoping to boost high-def DVD sales as growth in standard DVDs stalls.

"The frustration for consumers is not knowing what format is going to win," said Chris Roden, an analyst at Parks Associates.

Consumers, many of whom are still smarting from the VCR format battle between VHS and Betamax, need to know their expensive equipment won't become obsolete if the competing format wins, said Steven J. Caldero, chief operating officer of Ken Crane's, specialty electronics chain in Southern California.

"People are still frustrated there is a format war to begin with," he said. "The studios are making people choose. What consumers want is something that will play everything so they don't have to choose."

Until recently, many consumers were able to defer the choice because players have been so expensive. But prices have been slashed by about half — Sony Corp.'s Blu-ray player now sells for $499 and Toshiba Corp.'s cheapest HD DVD player sells for $299, with both likely to include as many as five free movies as an incentive. (Players that read both formats remain expensive.)

Both sides are also releasing blockbuster titles such as the new "Pirates of the Caribbean" movie aimed squarely at the demographic most likely to upgrade to high-def.

The stakes couldn't be higher for Hollywood, which has seen sales of traditional DVDs, once a reliable profit engine, slow to a trickle. Direct digital delivery online, while promising, is still years away from profitability because current Internet capacity simply can't handle the enormous high-definition files.

Yet consumers remain profoundly confused by the two formats, both of which deliver crisp, clear pictures and sound but are completely incompatible with each other and do not play on older DVD players. Many haven't even heard of either format.

HD DVD, developed by Toshiba and backed by powerful companies like Microsoft, has the lead in standalone players sold because they are cheaper and hit the market first.

In the United States, standalone HD DVD players have 61 percent market share, while Blu-ray players have 36 percent share and the few dual-format players have a 3 percent share, according to market research company The NPD Group Inc.

But Blu-ray, backed by Sony and a majority of Hollywood studios, got a big boost when Sony introduced its PlayStation 3 game console, which comes standard with a Blu-ray drive. Counting those machines, there are more Blu-ray players out there.

Although Microsoft's Xbox 360 can play HD DVD movies, the drive has to be bought separately. Only 160,000 drives have been sold so far, compared with 1.5 million PS3 consoles, according to NPD.

In terms of discs sold, Blu-ray has always had the lead. Time Warner Inc.'s Warner Bros. and Viacom Inc.'s Paramount Pictures release movies in both formats, and in such cases Blu-ray has outsold HD DVD by nearly 2-to-1.

Blu-Ray is getting an even bigger boost as Blockbuster Inc. announced it would stock only Blu-ray titles when it expands its high-def DVD offerings this year. Target Inc., the nation's second-largest retailer, said it will only sell Blu-ray DVD players in its stores in the fourth quarter.

Sony Pictures, News Corp.'s Twentieth Century Fox, The Walt Disney Co., and Metro-Goldwyn-Mayer are releasing only in Blu-ray. Universal, owned by General Electric Co., is the only major studio to back HD DVD exclusively.

Nonetheless, Warner Bros. believes both formats can coexist and has been urging Blu-ray backers to begin supporting HD DVD as well. The studio has developed a dual-format disc and has said it would license the technology to other studios willing to back both.

"The fourth quarter is critical for the formats to show growth and momentum," said Steve Nickerson, Warner Home Video's senior vice president of marketing. "It's more than about winning or losing. If you can continue to show growth (in both formats), that's a positive in a situation where standard DVD sales aren't growing."

To counter Blu-ray's recent gains, the HD DVD camp is planning an advertising campaign touting the interactive elements of the format, which allow users to connect to the Internet to download special features.

"This is not about a high-def movie on a disc," said Craig Kornblau, president of Universal Studios Home Entertainment. "It's about a fully immersive experience, connected interactivity. That's what is going to separate these high-def formats."

Kornblau said he isn't worried about Blu-ray's momentum and doesn't believe there's a need for one to knockout the other.

"To call this market nascent is to a degree to pay it a complement," he said. "The people who have bought so far aren't early adopters, they are early, early adopters."

Analysts said even lower prices for players could be the key to determining a format winner. Some believe that until prices hit the $200 range, consumers simply won't upgrade from their current machines, many of which cost less than $100.

Chinese-made HD DVD players selling for $199 are expected to hit store shelves by December, while Sony is widely expected to cut the cost of its Blu-ray machine to as low as $299 by year's end.

"When that occurs, the studios and Sony are going to pull out the big guns," said Phillip Swann, president of the technology-oriented Web site TVpredictions.com. "They are going to release more titles, big titles, and really go for the kill this holiday season."

Move the train with your brain

HATOYAMA, Japan - Forget the clicker: A new technology in Japan could let you control electronic devices without lifting a finger simply by reading brain activity.
The "brain-machine interface" developed by Hitachi Inc. analyzes slight changes in the brain's blood flow and translates brain motion into electric signals.

A cap connects by optical fibers to a mapping device, which links, in turn, to a toy train set via a control computer and motor during one recent demonstration at Hitachi's Advanced Research Laboratory in Hatoyama, just outside Tokyo.

"Take a deep breath and relax," said Kei Utsugi, a researcher, while demonstrating the device on Wednesday.

At his prompting, a reporter did simple calculations in her head, and the train sprang forward — apparently indicating activity in the brain's frontal cortex, which handles problem solving.

Activating that region of the brain — by doing sums or singing a song — is what makes the train run, according to Utsugi. When one stops the calculations, the train stops, too.

Underlying Hitachi's brain-machine interface is a technology called optical topography, which sends a small amount of infrared light through the brain's surface to map out changes in blood flow.

Although brain-machine interface technology has traditionally focused on medical uses, makers like Hitachi and Japanese automaker Honda Motor Co. have been racing to refine the technology for commercial application.

Hitachi's scientists are set to develop a brain TV remote controller letting users turn a TV on and off or switch channels by only thinking.

Honda, whose interface monitors the brain with an MRI machine like those used in hospitals, is keen to apply the interface to intelligent, next-generation automobiles.

The technology could one day replace remote controls and keyboards and perhaps help disabled people operate electric wheelchairs, beds or artificial limbs.

Initial uses would be helping people with paralyzing diseases communicate even after they have lost all control of their muscles.

Since 2005, Hitachi has sold a device based on optical topography that monitors brain activity in paralyzed patients so they can answer simple questions — for example, by doing mental calculations to indicate "yes" or thinking of nothing in particular to indicate "no."

"We are thinking of various kinds of applications," project leader Hideaki Koizumi said. "Locked-in patients can speak to other people by using this kind of brain machine interface."

A key advantage to Hitachi's technology is that sensors don't have to physically enter the brain. Earlier technologies developed by U.S. companies like Neural Signals Inc. required implanting a chip under the skull.

Still, major stumbling blocks remain.

Size is one issue, though Hitachi has developed a prototype compact headband and mapping machine that together weigh only about two pounds.

Another would be to tweak the interface to more accurately pick up on the correct signals while ignoring background brain activity.

Any brain-machine interface device for widespread use would be "a little further down the road," Koizumi said.

He added, however, that the technology is entertaining in itself and could easily be applied to toys.

"It's really fun to move a model train just by thinking," he said.

Sony's U.S. video-game unit cuts jobs

TOKYO - Sony's U.S. video-game unit is cutting jobs to become more competitive, the company said Thursday, as the PlayStation 3 machine struggles against rival offerings from Microsoft and Nintendo.


Numbers and other details aren't being disclosed about the employee reductions at Sony Computer Entertainment Inc. in the U.S., which began Wednesday, said spokeswoman Sayoka Henmi in Tokyo.

The job cuts in the U.S. follow those in Europe in April, but no cuts are planned for Japan, she said.

"The goal is to reform the organization," she said.

Sony Corp (NYSE:SNE - news). officials have said that changes are in order to adjust to the needs of the industry, as people increasingly use their machines for linking to the Internet, watching video, listening to music or looking at photos, not just playing games.

The PlayStation 3, which competes against Microsoft Corp.'s
Xbox 360 and Nintendo Co.'s Wii, went on sale in November in Japan and the U.S., and in March in Europe.

Tokyo-based Sony shipped 5.5 million PS3 machines in the fiscal year through March 31, fewer than the 6 million the company had targeted.

Nintendo, the Kyoto-based maker of Super Mario and Pokemon games and Game Boy Advance machines, shipped 5.84 million Wii consoles worldwide during the same period. The Wii, which went on sale late last year worldwide, has done very well, winning over the elderly and other newcomers to games with a wandlike remote-control that can be used for fishing, tennis and other easy-to-play games.

Sony isn't expecting to post a profit in its game business until the fiscal year ending March 2009.

U.S. software company Microsoft is expecting to have sold 12 million Xbox 360 consoles by June. The machine went on sale in 2005.

In recent years, Sony has been restructuring and playing catch-up to improve profit in its core electronics division. But the hefty startup costs for the PS3 are weighing heavily on its revival efforts.

Sony develops film-thin, bending display

TOKYO - In the race for ever-thinner displays for TVs, cell phones and other gadgets, Sony may have developed one to beat them all — a razor-thin display that bends like paper while showing full-color video.

Sony Corp (NYSE:SNE - news). released video of the new 2.5-inch display Friday. In it, a hand squeezes a display that is 0.3 millimeters, or 0.01 inch, thick. The display shows color images of a bicyclist stuntman and a picturesque lake.

Although flat-panel TVs are getting slimmer, a display that's so thin it bends in a human hand marks a breakthrough.

Sony said it has yet to decide on commercial products using the technology.

"In the future, it could get wrapped around a lamppost or a person's wrist, even worn as clothing," said Sony spokesman Chisato Kitsukawa. "Perhaps it can be put up like wallpaper."





Tatsuo Mori, an engineering and computer science professor at Nagoya University, said some hurdles remained, including making the display bigger, ensuring durability and cutting costs.

But he said the display's pliancy is extremely difficult to imitate with liquid crystal displays and plasma display panels — the two main display technologies now on the market.

"To come up with a flexible screen at that image quality is groundbreaking," Mori said. "You can drop it, and it won't break because it's as thin as paper."

The new display combines two technologies: Sony's organic thin film transistor, which is required to make flexible displays, and organic electroluminescent display.

Other companies, including LG. Philips LCD Co. and Seiko Epson Corp., are also working on a different kind of "electronic paper" technology, but Sony said the organic electroluminescent display delivers better color images and is more suited for video.

Sony President Ryoji Chubachi has said a film-like display is a major technology his company is working on to boost its status as a technological powerhouse.

In a meeting with reporters more than a year ago, Chubachi boasted Sony was working on a technology for displays so thin it could be rolled up like paper. He had predicted that the world would stand up and take notice.


Some analysts have said Sony, which makes Walkman portable players and PlayStation 3 video game machines, had fallen behind rivals in flat-panel technology, including Samsung Electronics Co. of
South Korea and Sharp Corp. of Japan.

But Sony has been marking a turnaround under Chubachi and Chief Executive Howard Stringer, the first foreigner to head Sony, by reducing jobs, shuttering unprofitable businesses and strengthening its flat TV offerings.

Analysts cynical of Microsoft-Yahoo deal

NEW YORK - Speculation about a possible Microsoft-Yahoo tie-up met with skepticism Friday from analysts as reports that the deal was already dead began to surface. The reported takeover talks that sent shares of Yahoo Inc. (Nasdaq:YHOO - news) up by 10 percent Friday were no longer taking place, the Wall Street Journal said in an online article citing sources familiar with the negotiations.

Yahoo Inc. shares surged following published reports Friday that Microsoft Corp. had resumed its pursuit of Yahoo to better compete with Web search and advertising leader Google Inc.

Both companies declined comment on the reports.

David Hallerman, a senior analyst at the research group eMarketer, said he saw many cultural problems and few strategic benefits with a Microsoft-Yahoo combination.

"There's too much overlap between Microsoft and Yahoo, and to try to merge the company cultures of two large companies like that in general is hard," Hallerman said.

Hallerman said Microsoft would be better off buying an ad network to beef up its own operations, the same way Time Warner Inc.'s AOL has seen its advertising revenue grow following the acquisition of Advertising.com's technology and sales force.

Yahoo, meanwhile, would have lost the flexibility it needs to compete if it became one division within a larger company like Microsoft, he said.

Industry analyst Matt Rosoff with Directions on Microsoft in Kirkland, Wash., said the huge takeover was unlikely, noting that Yahoo would duplicate services Microsoft's MSN already provides, such as instant messaging and e-mail.

It is possible, Rosoff added, that Microsoft and Yahoo might pursue a deal involving only online search advertising. Hallerman said he could see at most a spinoff of Microsoft's MSN online division to be run by Yahoo.

Microsoft clearly needs to make some kind of bold move because it remains a distant third in the lucrative online search market despite investing heavily in an attempt to gain ground on Google and Yahoo, said Ryan Jacob, who runs an Internet fund specializing in Internet stocks.

To make matters worse for Microsoft, the personal computer software empire that accounts for most of its profits is being increasingly threatened by so-called "open source" alternatives as well as free online programs being offered by Google and others.

"Microsoft is at a crossroads," Jacob said.

Yahoo also has reached a critical juncture after sputtering through much of 2006 while Google's search engine continued to fire on all cylinders. The troubles weighed on its stock, price which plunged 35 percent last year to wipe out about $20 billion in shareholder wealth.

An improved advertising format, dubbed "Panama," raised hopes for a quick turnaround earlier this year, but those evaporated last month when Yahoo reported an 11 percent decline in its first-quarter profit. Analysts say Yahoo's earnings better pick up in the second half of this year or Chairman Terry Semel might lose his job as chief executive.

A combined Microsoft-Yahoo still wouldn't be as large as Google. In March, Google commanded a 48 percent share of the U.S. search market, trailed by Yahoo at 27.5 percent and Microsoft at 11 percent, according to the latest data from comScore Media Metrix.

Microsoft is feeling increasing pressure to compete with Google, which plans to beef up its portfolio with a $3.1 billion purchase of online advertising company DoubleClick Inc. Both Microsoft and Yahoo also expressed interest in buying DoubleClick before being trumped by Google.

Microsoft currently trails both Yahoo and Google in the lucrative and growing business of Web search, even as Google increases its development of Web-based software that directly competes with Microsoft's lucrative Office suite.

Microsoft and Yahoo each considered buying a stake in AOL in late 2005, but Google ultimately won a search advertising deal and agreed to pay $1 billion for a 5 percent stake in AOL.

Earlier this week, Yahoo said it would buy 80 percent of advertising exchange Right Media for $680 million, increasing its stake in that company to full control.

Yahoo shares surged $2.80, or 9.9 percent, to $30.98 on Friday, while shares of Microsoft fell 41 cents to $30.56.