Microsoft the underdog

Yahoo is doomed in its deal with the ever-expanding Google. Somehow, Bill Gates' company is now the hero.

At long last, we have resolution: Microsoft will not, despite the efforts of activist financier Carl Icahn, be taking over Yahoo and going toe-to-toe with mighty Google in the brave new realm of search-based Web advertising. Instead, Yahoo, the definitive Web 1.0 company, will be casting its lot with ... Google, the definitive Web 2.0 company. Microsoft, the definitive Web 0.0 company -- the pre-Web leviathan, plying the increasingly dreary straits of operating systems and software -- is out in the cold.

This drama has been playing out since the mid-'90s, when the Internet first established itself as a business environment and as a compelling counterpoint to the era of Microsoft, which thanks to its monopoly on the operating system for PCs -- the mighty MS-DOS -- had dominated the dawn of personal computing.

Google and its emerging monopoly on search-based Web advertising is the new name of the game. And now that Microsoft is almost categorically excluded from that competition, we are witnessing the final days of Web 1.0. It may look as though Yahoo has somehow saved itself by rebuffing Microsoft and teaming up with the dark lords of Mountain View. But this is not the case. Microsoft will survive. Google will dominate. Yahoo is toast.

Web 1.0, whose heyday ran from about 1994 to the tech crash in 2000, was defined by a highly idealistic set of values and summarized by the "portal" that Yahoo created. For starters, Microsoft was the enemy. Everything about its rapacious culture of profitable emulation, as opposed to plucky innovation, was to be despised. To its credit, however, Microsoft realized that it had been an utter failure at the Web 1.0 game. And now, in the uncertain realm of Web 2.0, Microsoft has in Google a legitimate challenger for dominance of the techscape.

Google has set the tone for Web 2.0, and the tone is grim and thuggish. Microsoft, when it was the enemy, was at least an easy target: so corporate, so stiff, so slow on the uptake. So guilty about its inability to get down with the cool crowd. Google could care less about being cool, as long as it stays a juggernaut. It's guilt-free. It's like the Borg, the cybernetic aliens of "Star Trek." It's been said before, but I'll say it again: Resistance is futile.

Initially, Microsoft believed that by acquiring Yahoo, it could obtain enough search and advertising moxie to do battle with Google. That sounded nice. But pre-Web and Web 1.0 culture combined is still no match for Web 2.0, which is less about solving problems and offering an outlet for creativity and more about raking in gobs and gobs of money (or controlling the movement of everyone else's gobs and gobs of money).

In Web 2.0, where there are lots and lots of projects afoot but all that really matters is their relationship to the gravity well that is Google, we're seeing the reassertion of the state of nature. It's worth recalling Thomas Hobbes: In Web 2.0, if you don't render unto Google that which is Google's, your life will be solitary, poor, nasty, brutish and short.

Microsoft became the biggest fish in the pre-Web ocean because it was unencumbered by the need to be a hardware company; its business was code, the magic that made the machines run and that allowed people to word-process and manage their balance sheets. Yahoo moved this idea to the Web, engendering a space that was liberated from the need to sell anything but that ordered the chaos, thereby making Web 1.0 attractive to advertisers. Both companies, however, supplied content -- Microsoft in the form of software, and Yahoo in the form of original commentary and other elements, such as horoscopes and aggregated news, surrounding its search engine and free e-mail.

Google, of course, is anti-content. Content is for schmucks. Other people make content. Google yokes its search algorithm to its advertising products-- which are also content-free, involving none of the creative effort that people have traditionally associated with advertising -- and connects marketers to the lurching, undifferentiated Web audience running Microsoft's operating system and ignoring the snazzy display ads that Yahoo runs. Google is the most successful gangster that has ever existed, insisting on its cut, even though everything that makes it Google is supplied by somebody else.

In the end, Yahoo believed that it was better to bond with Google, the big new thing, and continue to flip Microsoft the bird, as it has long done. And so, Yahoo has sealed its doom. Our only hope now, as we spy the gruesome Pax Googleannica of Web 3.0 on the horizon, is that renegade survivors of the Web 1.0 pioneer that took its name from Jonathan Swift's race of barbarians will say, "Enough," and join with their former sworn foe to give hope to those of us who see the Web as something better than a merciless "Matrix"-like monetized quantification of all we do and all we are. That's right, as Yahoo makes its Faustian pact with Google, Microsoft -- Microsoft! -- has finally become the heroic underdog.

Matthew DeBord is a writer in Los Angeles.

Google’s $83 Million Escape Clause: SEC Filing Spells Out Details Of Yahoo-Google Deal

In a new filing with the SEC, Yahoo spells out the terms of the search-advertising agreement it announced yesterday with Google. Most of the filing fleshes out known details about the agreement. But it also discloses something Jerry Yang and Sue Decker didn’t want to talk about yesterday. The deal includes an $83 million escape clause for Google:

Google may terminate the Services Agreement if, after ten months after the Services are first launched, and each month thereafter, the gross revenues recognized by Google under the Services Agreement are less than $83,333,333 for the four prior calendar months.

In other words, Google has a minimum guarantee of serving at least $83 million worth of ads through Yahoo on a rolling 4-month basis, or else it can walk away. That’s a pretty tiny threshold, considering that Yahoo’s quarterly U.S. revenues are $1.3 billion. The amount comes to about one percent of Yahoo’s total projected revenues for 2008. (When Yahoo president Sue Decker was asked about minimum guarantees yesterday during a conference call, she wouldn’t comment).

There is another clause that lets both companies out of the agreement without penalty to avoid antitrust lawsuits or other similar actions. But Google negotiated a $250 million kill fee if the agreement is terminated within two years because of a “change in control” of Yahoo (i.e., a sale). Update: A change in control is defined as occurring if more than 50 percent of Yahoo’s shares are purchased by another company (in the case of Microsoft, News Corp., or Time Warner, that threshold is lowered to 35 percent). Curiously, the agreement provides loopholes for a change of control “triggered by” Microsoft acquiring more than 15 percent of shares on the open market or more than 5 percent of shares acquired directly from Yahoo or buying any part of Yahoo representing more than one percent of its annual revenues. If any of this happens, Yahoo does not have to pay the fee If Yahoo is acquired by Microsoft, it doesn’t have to pay the fee. Thus, this single clause means that anyone other than Microsoft might have to pay up to $250 million more to buy Yahoo.

If the Services Agreement is terminated by either party within 24 months of the Effective Date as a result of a Change in Control of Yahoo! (other than a Change in Control triggered only by Microsoft …), Yahoo! is required to pay to Google the sum of $250,000,000

The agreement also explains Yahoo’s discretion in deciding how, when, and where to display Google ads. It also goes into how the deal is structured. There are two portions. Google is to pay Yahoo both a variable and fixed percentage of the gross revenues it generates through the deal. The variable percentage is based on monthly targets, presumably on top of a fixed percentage. The actual percentages of the revenue split was not disclosed:

Under the Services Agreement, Yahoo! has sole discretion to choose which search queries to send to Google and is not obligated to send any minimum number of search queries. Yahoo! also has sole discretion to decide on which pages to display ads provided by Google through its AFC Services. In addition, the Services Agreement is non-exclusive, and expressly provides that Yahoo! is not prevented from implementing any other advertising, promotion or marketing service or monetization method, including any that are the same as or substantially similar in nature to the Services or displaying comparable advertisements. Yahoo! also has sole discretion with respect to the placement and location of ads generated from the Services, the number of ads requested and the formatting of ads. Additionally, Yahoo! may serve its own ads or third-party ads alongside Google ads.

Google will pay Yahoo! a percentage of the gross revenues generated from AFS Services on the Yahoo! Properties, with such percentage adjusting based on specified monthly gross revenue thresholds, and with respect to the Yahoo! Partner Properties will pay a similar percentage of gross revenues less a separate specified percentage. Google will also pay Yahoo! a fixed percentage of gross revenues generated from AFC Services on the Yahoo! Properties and a fixed percentage of gross revenues for AFC Services on Yahoo! Partner Properties.

The full text of the agreement follows:

Item 1.01. Entry into a Material Definitive Agreement.

Services Agreement
On June 12, 2008 (the “Effective Date”), Yahoo! Inc., a Delaware corporation (“Yahoo!”), and Google Inc., a Delaware corporation (“Google”), entered into a Services Agreement (the “Services Agreement”), pursuant to which Google will provide Yahoo! with advertisements through Google’s AdSense for Search service (the “AFS Services”) and AdSense for Content service (the “AFC Services” and together with the “AFS Services,” the “Services”) for display on web sites and other applications owned and operated by Yahoo! and its subsidiaries (the “Yahoo! Properties”) and certain of Yahoo!’s business partners/affiliates (the “Yahoo! Partner Properties”). The Services Agreement applies to properties within the United States and Canada.

Under the Services Agreement, Yahoo! has sole discretion to choose which search queries to send to Google and is not obligated to send any minimum number of search queries. Yahoo! also has sole discretion to decide on which pages to display ads provided by Google through its AFC Services. In addition, the Services Agreement is non-exclusive, and expressly provides that Yahoo! is not prevented from implementing any other advertising, promotion or marketing service or monetization method, including any that are the same as or substantially similar in nature to the Services or displaying comparable advertisements. Yahoo! also has sole discretion with respect to the placement and location of ads generated from the Services, the number of ads requested and the formatting of ads. Additionally, Yahoo! may serve its own ads or third-party ads alongside Google ads.

Google will pay Yahoo! a percentage of the gross revenues generated from AFS Services on the Yahoo! Properties, with such percentage adjusting based on specified monthly gross revenue thresholds, and with respect to the Yahoo! Partner Properties will pay a similar percentage of gross revenues less a separate specified percentage. Google will also pay Yahoo! a fixed percentage of gross revenues generated from AFC Services on the Yahoo! Properties and a fixed percentage of gross revenues for AFC Services on Yahoo! Partner Properties.

The initial term of the Services Agreement commenced on the Effective Date and will continue for a period of four years thereafter. Yahoo! may, at its option, extend the term of the Services Agreement for up to two additional periods of three years each. Either party may terminate the Services Agreement upon notice to the other party (i) in the event of an uncured material breach of the Services Agreement by the other party, subject to dispute resolution procedures and certain limitations; (ii) in the event of a Change in Control (as defined below) involving either party; (iii) 120 days after the Effective Date in order to avoid or end a lawsuit or similar action filed on competition law grounds if the terminating party has taken all actions required under the Services Agreement with respect to regulatory matters and defending such action is not commercially reasonable for that party (taking all factors into account); or (iv) if a court of competent jurisdiction has entered an order enjoining the implementation of the Services Agreement. In addition, Google may terminate the Services Agreement if, after ten months after the Services are first launched, and each month thereafter, the gross revenues recognized by Google under the Services Agreement are less than $83,333,333 for the four prior calendar months.

As defined in the Services Agreement, the term “Change in Control” means (a) a merger, consolidation, statutory share exchange, recapitalization, restructuring or business combination involving directly or indirectly a party or a subsidiary of a party in which voting securities of the party outstanding immediately prior to such transaction do not continue to represent more than 50% (or 65% in the case of a transaction involving Microsoft Corporation (“Microsoft”), Time Warner Inc. (“Time Warner”) or News Corporation (“News Corp”), in each case together with their respective affiliates) of the voting power represented by the outstanding voting securities of the surviving entity immediately following the transaction; (b) any “person” or “group” becoming the “beneficial owner” (as such terms are used or defined in Sections 13(d) and 14(d) under the Securities Exchange Act of 1934, as amended) of more than 50% of the voting power of the then outstanding voting securities of the party, except that, in the case of Time Warner and News Corp, the percentage will be 35% instead of 50% and, in the case of Microsoft, the percentage will be 15% instead of 50% and a Change in Control will also be deemed to occur if Microsoft (i) beneficially owns 15% of the voting power of the party or (ii) acquires directly from a party any equity or voting securities of that party representing (or having a right to receive in the aggregate) 5% or more of the total equity value of the party or 1% or more of the party’s annual revenues on a consolidated basis); (c) approval by the stockholders of a party of a plan of liquidation or dissolution; (d) the sale or disposition of all or substantially all the consolidated assets of a party; or (e) at any point in time, Yahoo! no longer owns and, with respect to the U.S. and Canada, controls a majority portion of Yahoo!’s technology and intellectual property assets that in the 12-month period prior to that time had been owned by Yahoo! and used by Yahoo! to provide services in the U.S. and Canada for either its algorithmic search or search advertising business. The Services Agreement also permits Google to suspend performance of the Services under certain circumstances, including a pending Change in Control of Yahoo! involving Microsoft, Time Warner or News Corp and a change in a majority of the board of directors of Yahoo! following an annual or special meeting of stockholders if a majority of the new directors did not serve on Yahoo!’s board immediately prior to such stockholder meeting and were nominated or solicited for by Microsoft, Time Warner or News Corp or, solely with respect to Yahoo!’s first two annual or special meetings held after the Effective Date where the election of a majority of directors is before Yahoo! stockholders (but not later than September 1, 2009), by any other person or group.

If the Services Agreement is terminated by either party within 24 months of the Effective Date as a result of a Change in Control of Yahoo! (other than a Change in Control triggered only by Microsoft either (x) acquiring beneficial ownership of voting securities representing more than 15% of the voting power of outstanding Yahoo! voting securities or (y) acquiring directly from Yahoo! equity or voting securities representing 5% or more of Yahoo!’s total equity value or 1% or more of Yahoo!’s consolidated annual revenues, unless Microsoft becomes the beneficial owner of more than 35% of the voting power of such securities within such 24 month period), Yahoo! is required to pay to Google the sum of $250,000,000, which payment will be reduced by one-half of an amount equal to (a) all gross revenues received by Google pursuant to the Services Agreement through the date of termination less (b) the amount equal to Yahoo!’s share of such gross revenues during the same period.

Spurned by Microsoft, Yahoo embraces online ad deal with Google

The agreement comes shortly after the Web firm and software giant end talks for a merger or partnership.

Microsoft Corp. turned to Internet pioneer Yahoo Inc. for help in fighting its biggest-ever competitive threat, then only made that threat stronger.

Yahoo and Microsoft on Thursday said they had ended nearly five months of merger and partnership talks born of the software giant's frustration with falling far behind Google Inc. in online advertising.

Yahoo shares plunged more than 10% to $23.52.

But after the stock market closed, the Sunnyvale, Calif., company turned around and struck an online advertising alliance with rival Google. Yahoo said it would get a financial boost by using Google's superior system for placing text ads next to its search results and on some of its Web pages.

The deal between the top two search engines triggered objections from antitrust groups, which said advertisers in effect would lose a major alternative for touting their wares. Consumer groups warned of an increased risk to privacy, and an influential senator pledged to investigate.

Yahoo and Google said they would delay the start of their partnership by as much as 3 1/2 months to give the Justice Department a chance to scrutinize the deal.

For Microsoft, analysts said, the tie-up was the worst possible outcome of the unsolicited, $44.6-billion bid it made to buy Yahoo more than four months ago.

Advertisers pay Google each time someone clicks on one of the text ads it brokers. With Yahoo, Google will get its ads on one of the world's most-visited network of websites, while denying Microsoft the chance to do the same.

"There is no hope for Microsoft in the search space," said Brian Bolan, an analyst with Jackson Securities.

Still, investors were relieved that Microsoft wouldn't have to shell out so much money to acquire an Internet company that is also struggling to keep up. Its shares rose more than 4%, to $28.24, after Yahoo said talks had ended.

Microsoft, based in Redmond, Wash., continues to dominate the markets for operating system software that runs personal computers and productivity tools such as word-processing and presentation programs.

But Google, of Mountain View, Calif., controls the lucrative search-advertising market. The company is bumping up against Microsoft in an increasing number of fields, which already include Internet banner ads, e-mail and software for advanced cellphones.

On Feb. 1, Microsoft announced an offer of $31 a share in cash and stock for Yahoo, more than 60% above where Yahoo's stock was trading. It later offered $33. Yahoo resisted as it held discussions with Google and other parties. When it began talking in earnest with Microsoft, Yahoo co-founder and Chief Executive Jerry Yang asked for $37.

Microsoft Chief Executive Steve Ballmer walked away in frustration May 3 and has since refused to reconsider a full takeover, not even at the price levels he had floated earlier. He instead wanted to acquire only Yahoo's search business.

On May 30, Microsoft proposed doing that, plus taking a 16% stake in Yahoo at $35 a share and paying Yahoo a slice of future search profit that it believed could have reached $1 billion over the course of the deal, according to two people familiar with the talks. Yahoo said Thursday that it didn't want to sell its search business.

Two Yahoo investors, speaking on the condition that they not be named, said the matter wasn't over. They said Yahoo stockholders might still want to oust the company's board and resume talks with Microsoft.

"I'm so irritated it's almost beyond verbalization," said one investor who requested anonymity so he could keep talking to the companies.

Yahoo and prospective partner Google share Stanford University roots, Silicon Valley location and Internet metabolisms.

"We are very excited . . . to be working with Yahoo and that Yahoo remains a very strong independent company," Google co-founder Sergey Brin said in a conference call with analysts and investors.

Executives from the two companies started meeting about a possible deal as far back as February, shortly after Microsoft made its bid, and accelerated talks in recent days. An all-nighter produced the final document signed Thursday.

Microsoft offered $9 billion for Yahoo

SEATTLE/SAN FRANCISCO (Reuters) - When Yahoo Inc turned down the latest offer from Microsoft Corp this week, it walked away from $9 billion in cash and $1 billion a year in additional operating profit, Microsoft said on Friday.

In an e-mail to employees, Microsoft platforms and services division president Kevin Johnson said it had offered $8 billion for a 16 percent stake in Yahoo and $1 billion to buy Yahoo's search business and assume its operations.

The proposal also included a revenue-sharing partnership that would have delivered $1 billion a year in additional operating income to Yahoo due in part to a three-year guarantee of better rates for advertisements tied to its search results than Yahoo's current Panama advertising system.

Microsoft's most recent offer was an alternative to its previous full acquisition proposal. Instead, Yahoo entered an advertising agreement with Google Inc on Thursday.

Microsoft, a dominant force in desktop software but a laggard in online search advertising, is still open to discussing its alternative proposal despite Yahoo's partnership with Google, a source familiar with Microsoft's thinking said.

Yahoo had no comment. Microsoft spokesman Jeff O'Mara declined to comment.

Another source familiar with the matter said Microsoft had proposed a 10-year exclusive deal to handle Yahoo's search advertising and only guaranteed higher advertising rates for three of those years. Johnson's e-mail did not mention the duration of the deal, only saying it was "long term."

By contrast, Yahoo's deal with Google, which will pit the two companies' ads against each other in an auction, is non-exclusive. It means other companies can join in the auction to bid to place ads next to Yahoo's search results.

"Unfortunately Yahoo has chosen a different course, and yesterday announced an agreement that would start to consolidate over 90% of the paid search advertising market in Google's hands," said Johnson in the e-mail.

"This will make the market far less competitive."

The deal with Google would boost Yahoo's cash flow by $250 million to $450 million in the first 12 months, according to Yahoo. It would be less than half of Microsoft's forecast for $1 billion in additional operating income, the source familiar with Microsoft's thinking said.

A BETTER DEAL?

Microsoft said its proposal would have delivered $1 billion of incremental operating income to Yahoo because it would reduce Yahoo's operating costs for running search and the company would receive large payments in the form of so-called traffic acquisition costs (TAC) from Microsoft.

Yahoo would also not have to make hefty research and development investments for search, Microsoft said.

"On the surface, it looks like a better deal," Gartner analyst David Mitchell Smith said of Microsoft's search deal proposal for Yahoo.

Smith cautioned, however, that there may have been issues not revealed publicly that made the Google deal a better option.

Microsoft abandoned its offer to buy all of Yahoo in May as negotiations dragged on, making it unlikely that a deal could complete regulatory review during the Bush administration, the source said.

If the full acquisition could not get approval by year-end, the review process could have carried on until as late as October 2009, meaning that Microsoft would have to carry the capital risk of a $40-billion-plus acquisition for 18 months.

It also became less interested in a full acquisition after Yahoo's search share continued to deteriorate more than Microsoft had forecast, the source said. A lucrative severance agreement put in place by Yahoo's management also made a full acquisition less appealing, the source said.

Microsoft structured its alternate proposal to focus solely on search to take into account Yahoo's concerns that combining the two companies' e-mail and instant messaging users would not gain regulatory approval, the source said.

Shares of Microsoft closed up 83 cents, or 2.94 percent, at $29.07 on the Nasdaq, while Yahoo closed down 5 cents, or 0.21 percent, at $23.47.

(Additional reporting by Michele Gershberg in New York, Editing by Gerald E. McCormick, Carol Bishopric, Gary Hill)

Daisuke Wakabayashi and Anupreeta Das
Fri Jun 13, 7:37 PM ET

Yahoo fallout - Google grows stronger in Microsoft

SAN FRANCISCO - Microsoft Corp.'s abandoned takeover bid for Yahoo Inc. appears to have culminated with a disheartening thud for those two companies but amounted to yet another coup for online search leader Google Inc.

What began in January as Microsoft's most audacious attack yet on Google instead paved the way for the Internet's most powerful company to gain even more clout through a deal that gives Google access to a large chunk of Yahoo's advertising space.

By submitting to a partnership that endorses Google's search advertising technology as a better choice than its own, Yahoo is giving online marketers even more incentive to spend most of their money with its biggest rival, according to industry analysts.

It looks like such a sweet deal for Google that the U.S. Justice Department and lawmakers are expected to take a hard look at the arrangement to make sure it doesn't give Google too much control over the Internet's search advertising market.

Google currently has about 75 percent of the U.S. search advertising market followed by Yahoo at 9 percent, according to the research firm eMarketer Inc.

Although they contend their alliance won't lessen competition, Google and Yahoo have agreed to wait until late September to begin working together so the U.S. government has more time to assess the potential impact.

Even more importantly to Google, the Yahoo partnership keeps a potentially valuable weapon out of Microsoft's control.

Without Yahoo's renowned franchise, Microsoft once again is scrambling to find a way to fix its unprofitable online operations and narrow Google's commanding lead in the Internet's rapidly growing ad market.

Google shares gained $18.56 to close Friday at $571.51 while Microsoft shares added 83 cents to close at $29.07 — an indication that some investors were relieved the world's largest software maker concluded it would be too expensive and troublesome to buy Yahoo.

On the other side of the fence, Yahoo shareholders had been clinging to the possibility that Microsoft would revive its last offer of $47.5 billion, or $33 per share, to buy the Internet pioneer. But those hopes evaporated late Thursday after Yahoo disclosed Microsoft had "unequivocally" rebuffed an attempt to renew the negotiations.

In a sign of investors' frustration, Yahoo shares dropped as much as $1.77, or 7.5 percent, Friday before rallying late in the session to finish at $23.47, down five cents. The downturn marked Yahoo's lowest stock price since it closed at $19.18 at the end of January, just before Microsoft launched its takeover attempt.

That leaves Yahoo's market value 29 percent below Microsoft's last offer, which was withdrawn May 3 after Yahoo asked for $37 per share. Yahoo's stock hasn't reached that price since January 2006.

At least Microsoft still has a strong, highly profitable backbone — a suite of software products that run most computers around the world.

Yahoo, though, may have made a Faustian bargain by hiring Google to show ad links next to a significant portion of the ad links appearing alongside search results on its Web site in the United States and Canada. The Sunnyvale-based company also will pluck Google ads to show on other Web sites in its marketing network.

Yahoo expects its annual revenue to get an $800 million lift from the arrangement with Google while still showing show the majority of its own ads alongside its own search results. But most analysts viewed it as an act of desperation, asserting it's only a matter of time before advertisers shift all their business to Google because they know their messages will show up on Yahoo either way.

Deutsche Bank analyst Jeetil Patel described Yahoo's decision to farm out advertising to Google as "one of the worst strategic maneuvers seen in the Internet industry."

Google will get such great access to Yahoo's highly trafficked Web site that it should be able to gather more insights about the correlation between search requests and advertising, ThinkPanmure analyst William Morrison wrote in a Friday research note titled "Giving Away The Store (To Google)."

And that additional data could help Google further improve its advertising formula to become an even more compelling marketing magnet.

The partnership also cast doubt on a turnaround plan Yahoo co-founder Jerry Yang began drawing up year ago after he replaced Terry Semel as the Sunnyvale-based company's chief executive.

A big part of that strategy hinged on Yahoo becoming a "must-buy" for advertisers — a strategy that the Google deal appears to contradict.

"This raises very important questions about the long-term vision for (Yahoo) and its place in the industry," said Cantor Fitzgerald analyst Derek Brown.

Yahoo shareholders will get a chance to vent their frustration at the company's annual meeting Aug. 1 when activist investor Carl Icahn will seek to replace the board with nine alternate candidates.

Icahn was primarily interested in selling Yahoo to Microsoft, so his campaign to replace the board may be hurt if he can't persuade shareholders he has other viable ideas on how to boost Yahoo's stock price. He didn't return a call seeking comment Friday.

Yang and his top lieutenant, Susan Decker, defended the Google deal as a profitable move that will better position the company to capitalize on the Internet advertising market's growth from roughly $40 billion worldwide this year to a projected $75 billion to $80 billion market in 2011.

Microsoft contends it offered Yahoo a better alternative even after losing interest in buying the entire company.

When the latest talks broke off June 8, Microsoft was prepared to buy Yahoo's search operations for $1 billion and pay $35 per share to accumulate $8 billion worth of Yahoo's stock, according to an internal note sent Friday by Kevin Johnson, who oversees Microsoft's online operations.

Microsoft also would have offered guarantees that could have boosted Yahoo's operating cash flow by an estimated $1 billion annually, Johnson wrote.

Yahoo estimates the Google partnership will increase its operating cash flow by $250 million to $450 million annually.

"Regardless of Yahoo's decision, we will continue to move forward on our strategy in online services and advertising," Johnson assured Microsoft employees.

Microsoft left the door open to renewing talks about buying Yahoo's search operations. Yahoo also gave itself some wiggle room by including a clause in the Google partnership that would end the alliance for a termination fee of up to $250 million.

Some analysts and investors still think Microsoft eventually might try to buy Yahoo in its entirety, although at a price well below $47.5 billion.

"Yahoo seems to have backed itself into a corner pretty effectively here so it would appear Microsoft has a lot of leverage," said Dan Davidowitz, a portfolio manager for Polen Capital Management, which owns about 750,000 shares of Microsoft and 37,000 shares of Google.

Davidowitz said he isn't interested in owning Yahoo's stock.

MICHAEL LIEDTKE, AP Business Writer
Sat Jun 14, 2:05 AM ET