Google or Microsoft: Yahoo Should Pick Both

Yahoo might well be able to have its Google cake and eat Microsoft’s market share, too.
Faced with the prospect that Yahoo might give some of its search advertising business to Google, Microsoft recovered from its “we’ve moved on” tantrum and proposed combining its search ad business with that of Yahoo.
On the face of it, Yahoo now has a real choice between two options that might well help it increase search revenue and still keep its independence.
The most attractive option for Yahoo, however, might be to do both. That’s right: it should merge its search advertising unit with that of Microsoft. And for the year or two (at best) it will take to combine those two systems, it can let Google sell ads on some of its search terms, bringing in many hundreds of millions of dollars in much-needed cash.
This is a wacky structure, but it is essentially the same deal Yahoo is discussing with Google now. Yahoo doesn’t want to give up on search ads, presumably on the theory that there is room in the market for a No. 2 player and because search ads are tied at least a bit to display ads, which are essentially its core business. So it wants to take money from Google, in effect, to build its own rival to Google.
Google had a few reasons for talking about a deal that would help its closest rival. Money, for one: each search it can put an ad on is more money in the bank. Moreover, I suspect that Google is so cocky, with at least some reason, that it figures Yahoo won’t be able to catch up, even with a cash boost.
Google also has legal reasons to keep any deal with Yahoo flexible. It has so much market share in search ads that antitrust regulators would look askance at a long-term restrictive contract with Yahoo. (The deal they are discussing would allow others, including Microsoft, to bid for Yahoo’s search ad business. But Google makes so much more money on each search that it presumably would wind up selling most of the ads.)
There are some soft motives for Google as well. Love: Yahoo gave Google its first big break, allowing it to power Yahoo’s search engine. And hate: Google sees Microsoft as its mortal enemy, so it wants to help keep Yahoo out of Microsoft’s hands.
So why would Google agree to a deal even if Yahoo merges its search business with Microsoft? I’m not saying it is likely. But most of Google’s reasons for doing it still apply. It will still make money and at least temporarily increase its share of the search market. It also doesn’t have that much to fear from even a combined Yahoo and Microsoft. And since it is partway down the road toward offering Yahoo this sort of arrangement, why back out now?
Microsoft may find this concept more than a little disturbing. It doesn’t seem to buy the open nature of the proposed arrangement between Yahoo and Google, and it suggested that the proposed deal was one reason it walked away from its acquisition negotiations.
But if Microsoft wants Yahoo to consider its alternative arrangement, it needs to give it all of what it wants: independence, cash now to assuage shareholders, and the ability to have at least a piece of a search advertising business that could rival Google in the future.
Microsoft could do that, without involving Google, with its checkbook. It could offer to pay Yahoo enough cash to cover the gap between what Yahoo would earn on its own search ads and what Google would pay for them.
That is probably the most likely scenario here. (That is on the assumption that Yahoo doesn’t just sell its search ad business to Microsoft.) But it would be very amusing if Yahoo and Microsoft found a way to get Google to put up some of the money they need to build the Google killer they both dream of.

Virgin Mobile USA sees telecom consolidation

The head of Virgin Mobile USA (VM.N) said on Tuesday he expects more consolidation in the U.S. telecommunications industry, including deals among providers who rent space on larger operator's networks.


Chief Executive Dan Schulman also reiterated that Virgin was in preliminary talks with SK Telecom Co (017670.KS) "about a number of different potential opportunities." SK controls Helio, another U.S. mobile operator, which like Virgin rents network space to target young customers.

Schulman told the Reuters Global Technology, Media and Telecoms Summit that along with deals among mobile virtual network operators (MVNOs) he also expects other operators of wireline, wireless and cable networks to consolidate.

"I do believe you're going to see continued consolidation in this industry," Dan Schulman said. "That should not be surprising to anybody. Over the long term networks are commodities ... what you need is more and more scale and more and more cost efficiencies."

Virgin Mobile USA is partly owned by Richard Branson's Virgin (VA.UL) and Sprint Nextel (S.N).

Microsoft Appeals $1.4 Billion Fine by Europe

Microsoft asked Europe’s second-highest court to overturn or reduce a record fine of 899 million euros ($1.4 billion) from the European Union. The appeal was filed at the European Court of First Instance in Luxembourg, a Microsoft spokesman, Jesse Verstraete, said in an e-mailed statement. The European Commission, the E.U.’s antitrust authority, fined the company on Feb. 27 for failing to comply with a 2004 antitrust order. Under that decision, in which Microsoft was fined 497 million euros, the E.U. ordered the software maker to provide data to rivals to allow servers to connect to the Windows platform.

Microsoft and Bill Gates

SEATTLE - Microsoft Corp. is looking ahead to a strong fiscal 2009, with or without Yahoo.


The software maker gave Wall Street a first peek at guidance for next year indicating that strong worldwide sales would overpower hiccups in the U.S. economy that could depress information technology spending.

But investors disappointed with Microsoft's more immediate outlook for the current fourth quarter and with weaker-than-expected sales in the division responsible for Windows sent shares 4.6 percent, or $1.47, to $30.33 at the open of trade Friday.

Before diving into quarterly results Thursday, Microsoft Chief Financial Officer Chris Liddell spent a few minutes on a conference call with analysts reiterating the company's stance on its stalled bid to buy Yahoo Inc. In February, Yahoo's board rebuffed Microsoft's offer — worth $44.6 billion at the time — saying it undervalued the company. Since then, the value of the offer has fluctuated with Microsoft's share price; it was worth $44.06 billion Thursday.

"Unless we make progress with Yahoo towards an agreement by this weekend, we will reconsider our alternatives," he said. "These alternatives clearly include taking an offer to Yahoo shareholders or to withdraw our proposal and focus on other opportunities."

Microsoft CEO Steve Ballmer made similar comments in a speech in Italy on Wednesday, when he said his company is "prepared to move forward alone without Yahoo."

Liddell said Microsoft will issue an update on the Yahoo situation next week.

In the quarter ended March 31, Microsoft's profit fell 11 percent to 4.39 billion, or 47 cents per share, from $4.93 billion, or 50 cents per share, in the same period last year, when the software maker reported more than $1 billion in deferred revenue tied to delays in the launch of the Windows Vista operating system.

Revenue edged up to $14.45 billion from $14.4 billion in the year-ago quarter.

The results came in ahead of Wall Street's expectations on both measures. Analysts surveyed by Thomson Financial forecast a profit of 44 cents per share on $14.4 billion in sales.

Sales of Windows software were not as strong as Microsoft or analysts had predicted in the quarter, despite Microsoft's comments that sales of Vista licenses — now at 140 million, up from 100 million in January — are on track.

Revenue in that division fell 24 percent to $4.02 billion. While the miss wasn't quite that grand — that figure doesn't take into account a tough comparison with the year-ago quarter, when Microsoft booked $1.67 billion in deferred Vista revenue — analysts were disappointed.

"It just seems like people, including myself, everybody kind of got a little too comfortable with them being conservative," said Cowen and Co. analyst Walter Pritchard, who expected the company to sail past guidance as it has done in recent quarters.

Microsoft's miss was fueled by a few factors. Even though research groups like Framingham, Mass.-based IDC reported that PC shipments were better than expected in the quarter, Microsoft's independent calculation showed fewer PC shipments than expected.

The company has also seen increases in revenue in the last two quarters as people who once would have bought pirated software spent money on genuine Microsoft software instead. But in the third quarter, Microsoft wasn't able to get the bump it had expected. Liddell said a rash of unlicensed software in China kept Microsoft from meeting its targets.

Finally, Microsoft said inventory levels were high among some computer sellers at the end of the second quarter, which may have kept them from restocking as much as expected in the third quarter.

Sales in the segment that sells the Office productivity suite and other business applications edged down 2 percent to $4.75 billion from a year ago. Liddell said weak sales of Office to consumers and in Japan overall hurt the segment.

Server and tools sales rose 18 percent to $3.3 billion, helped by the launch of new versions of Windows Server and other major software franchises.

Revenue from the division responsible for the Xbox 360 video game system ballooned 68 percent to $1.58 billion, which Microsoft attributed to robust demand for game consoles.

Microsoft's online services business, which makes money primarily by selling advertising online, saw sales rise 40 percent to $843 million, but the division widened its operating loss in the quarter.

Microsoft upped its fiscal fourth-quarter guidance to a profit of 45 cents to 48 cents per share, barely meeting Wall Street's current view for 48 cents per share. The software maker forecast $15.5 billion to $15.8 billion in sales. Analysts were expecting revenue of $15.56 billion.

Microsoft also gave its first guidance for next fiscal year, which ends in June 2009. The company predicts a profit of $2.13 to $2.19 per share, on sales from $66.9 billion to $68.0 billion. Wall Street is currently looking for a profit of $2.10 per share on $66.52 billion in sales.

Investors sent shares down $1.60 to $30.33 in after-hours trading. Earlier in the day, the stock had gained 35 cents, or 1.1 percent, to close at $31.80.

Apple 2Q profit jumps 36 percent

SAN JOSE, Calif. - Apple Inc.'s fiscal second-quarter profit jumped 36 percent on blistering sales of Macintosh computers, but the company forecast lower-than-expected earnings and its stock price tumbled as much as 5 percent.


The Mac and iPod maker is believed to be especially vulnerable to slowing consumer spending in the United States because of its strong presence here versus overseas.

Apple shares fell $2.31, or about 1 percent, to $160.58, in after-hours trading. The stock had fallen nearly 5 percent earlier. It had closed up $2.69, or 1.7 percent, at $162.89 before its earnings were reported.

But the latest results showed that it was firing on all cylinders during the first three months of the year.

The Cupertino-based company earned $1.05 billion, or $1.16 per share, in its second quarter, which ended March 29. That's 9 cents per share better than what analysts surveyed by Thomson Financial were expecting.

During the same period last year, Apple earned $770 million, or 87 cents per share.

Revenue jumped 43 percent in the period to $7.51 billion — also beating Wall Street's expectations. Analysts were predicting Apple would rake in $6.96 billion in revenue.

Apple said it was the strongest sales and earnings performance during the March quarter in Apple's history.

Apple's chief financial officer, Peter Oppenheimer, declined in an interview to discuss how the company might be affected by slowing domestic consumer spending. Management is aware of the economic pressures but is focused on running the company, which performed "exceptionally well" and turned in an "awesome" quarter, he said.

The company forecast profits for the fiscal third quarter of $1 per share, short of the $1.10 per share in the average analyst estimate and at the low end of what all analysts polled were expecting.

Sales are expected to be about $7.2 billion, slightly above the $7.16 billion Wall Street was expecting.

Netflix forecasts disappoints investors

Netflix stock, up 49% this year, was hammered after the closing bell Monday when the company said it merely matched financial expectations in the first quarter, and then said it didn't expect to add many subscribers in the current period.

Netflix earned $13.4 million in the first quarter, up from $9.9 million a year ago on revenue that rose 7% to $326.2 million. The company ended the quarter with 8.2 million subscribers, 21% more than in the same quarter a year ago.

But while the company added a net 764,000 subscribers in the first quarter, it said it expects to end the current quarter with 8.3 million-8.5 million subscribers, translating -- at the low end -- to a gain of 60,000 this quarter.

Netflix, however, raised year-end guidance to 9.1 million-9.7 million subscribers, up 200,000 at both ends, but investors weren't impressed, and the stock was off as much as 15% in after-hours trading after rising 2% to $39.32 during the regular session.

Netflix CEO Reed Hastings also said Monday that he has struck three more partnerships for delivering movies over the Internet to TV screens, like one announced in January with LG Electronics.

Hastings declined to name the companies, but said one is small, and two are large. His intent is to get the Netflix watch-instantly system into Blu-ray Disc players, set-top boxes, game consoles and TV sets so that movies can be easily viewed on-demand by Netflix customers on TV screens and not just computers, as is the case now.

The large partners should introduce products in the fourth quarter, while the small partner's product is expected sooner, Hastings said.

Hastings said Netflix's subscription growth should be strong enough to "aggressively fund" the watch-instantly service, which today boasts 9,000 movie and TV titles.

EBay Profit Increases on New Selling Fees, PayPal

EBay Inc., the world's largest Internet auctioneer, posted first-quarter profit that rose more than analysts estimated on higher selling fees and increased revenue from its PayPal payment service.

The online retailer forecast annual sales and profit that were more than its projection in January.

International revenue rose 32 percent, helped by the dollar's decline and Europeans buying goods from the U.S. EBay raised fees for completed sales and lowered the price of listing items to attract a better selection of merchandise. Chief Executive Officer John Donahoe, who replaced Meg Whitman on March 31, is trying to improve buyers' experiences to compete with Amazon.com Inc. as an all-purpose online store.

``Essentially, they're doing the small things right and sticking to their knitting,'' Jeffrey Lindsay, an analyst with Sanford C. Bernstein & Co. in New York who recommends buying the shares, said yesterday. Donahoe ``has pushed forward things for the benefit of the buyer, which is essential to EBay's future, by addressing issues of fraud and buyer discomfort.''

Net income climbed 22 percent to $459.7 million, or 34 cents a share, the online retailer said yesterday in a statement. Revenue climbed 24 percent to $2.19 billion for the three months ended March 31.

Excluding some costs, EBay exceeded estimates by 3 cents.

Shares Rise

EBay, based in San Jose, California, rose 28 cents, or 0.9 percent, to $32.40 in Frankfurt trading as of 11:21 a.m. German time. The online retailer has fallen 3.2 percent this year before today, compared with a 19 percent decline by Amazon.com, the world's largest online retailer.

Twenty-two analysts surveyed by Bloomberg estimated average earnings of 39 cents a share. They predicted sales of $2.07 billion. In January, EBay projected so-called adjusted first- quarter earnings of 37 cents to 39 cents a share on sales of as much as $2.05 billion.

``They set the bar very low for the new CEO, and they had to set the bar low because of the uncertainty of the new fee changes,'' Tim Boyd, an analyst with American Technology Research, said in a Bloomberg Television interview from Greenwich, Connecticut. He recommends buying the shares.

EBay projected second-quarter earnings of 39 to 41 cents a share, excluding some costs, in line with analysts' estimates of 40 cents. The retailer projected revenue of as much as $2.15 billion.

Annual profit excluding costs will be $1.70 to $1.75 a share, an increase from EBay's January forecast of $1.63 to $1.67. Revenue may be as much as $9 billion, EBay said, higher than its previous prediction of as much as $8.75 billion.

Slowing Growth

The forecast reflects concern that EBay may be affected by a slowing of growth in electronic commerce, Chief Financial Officer Robert Swan said.

``We do not believe that we are immune,'' Swan said in a phone interview. ``Our sense is that our initiatives are driving the desired benefits, but the underlying economy is slowing.''

Donahoe, 47, joined EBay in 2005 from Bain & Co. He's said his three priorities for the company are improving its fixed- price business, which competes with Amazon.com, growing PayPal and bolstering customer safety and trust.

EBay bought Israeli software company Fraud Sciences Ltd. in January for $169 million to improve PayPal security. In March, EBay said it would fire 125 of its 15,500 employees as part of a global reorganization.

Completed Sale

While slashing listing costs, Donahoe boosted the cost of a completed sale. Customers who sell a $20 baseball card must now pay a fee of $1.75, compared with $1.05 previously, for example. Sellers rated highly by buyers for fast shipping can receive discounts.

The online company is also linking search results to seller ratings and experimenting in Australia with making PayPal a required channel for payment.

Previous changes have angered sellers, some of whom have attempted to organize boycotts of EBay.

``We may have sellers that make some noise and pull some items, but we're absolutely confident we'll improve the buyer experience, and that will make a better and more vibrant EBay,'' Donahoe said in a conference call with analysts and investors.

New listings rose 10 percent to 647.4 million from a year earlier, the second quarterly increase in a row, EBay said.

International revenue climbed at twice the pace in the U.S. Overseas sales make up 53 percent of EBay's revenue and cross- border buying made up 18 percent of merchandise volume.

PayPal revenue climbed 32 percent to $581.6 million as the payment unit signed agreements with JetBlue Airlines and Italy's Ferrari Store.

Revenue from Skype, Ebay's Internet-telephone unit, climbed 61 percent to $126.3 million in the quarter.

Profit was $377.2 million, or 27 cents a share, a year earlier.