A Yahoo board meeting Friday authorized talks with both Microsoft and Time Warner (AOL) next week.

According to a New York Times report quoting sources, Yahoo’s board met to evaluate Microsoft’s takeover bid and other alternatives but did not make a formal decision on which option to pursue.

The fence sitting from Yahoo provides some solace to Microsoft after a week where an AOL-Yahoo deal was said to be close at hand.

The Times also quoted a “person briefed on the discussions” between News Corp and Microsoft for the former to join the bid for Yahoo as describing the discussions as being only “conceptual..suggesting that a joint bid was unlikely.”

(source img credit: RedBrick Blog)

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What a day. I can’t say neither side is throwing punches any longer in the epic fight over what’s left of Yahoo. Microsoft and Yahoo are done, for the most part, with sternly worded letters.

Yesterday Yahoo made two announcements/leaks. First, that they were very close to agreeing to terms that would combine Yahoo and AOL as an alternative to the Microsoft deal. And second, that they will run, ahem, a two week test of Google Adsense on 3% of their Yahoo search results page, instead of their own ads.

Microsoft responded that the Google deal is a precursor to handing over de facto monopoly power of the search advertising space. And they threw their own curve ball as well: News Corp. has switched teams and is now in Microsoft’s camp.

The formal entry of AOL into the discussions suggests Time Warner wants to offload the asset soon. If a Microsoft/Yahoo deal goes through, the only realistic suitor for AOL is Google, and that gives them little negotiating leverage.

The News Corp news is more interesting. In a move reminiscent of the Italians switching sides in World War II, they’ve abandoned their Yahoo soul mate for a more compliant Microsoft. They put in a bid for Yahoo in February (more), which was reportedly countered just a couple of weeks ago. My guess is the counter offer wasn’t very interesting, so they switched sides. You gotta love News Corp., they’re always there for you when they need you.

But by far the most interesting news is the Yahoo/Google alliance. Industry insiders still question whether regulators would allow the deal, but Yahoo’s been whispering around Silicon Valley that a business partnership with Google, as opposed to a merger, would stand a much higher likelihood of getting approved.

What Is Yahoo’s Strategy - Scorched Earth, Or Knife To The Nose?

Yahoo has put costly severance plans in place to both retain employees and make themselves a less attractive acquisition candidate. But top talent has left anyway, and just about everyone at Yahoo seems to be looking for a job (even execs I’ve spoken with). Meanwhile, the Google deal shows they would rather give up the search marketing game, their biggest asset, than become part of Microsoft.

Their actions, which appear to be based on destroying their market value as a counter to the Microsoft bid, benefit neither their stockholders nor their employees. And by setting up Google as the only real option in search marketing, they are disrupting what little market balance and competition exists in that space today.

I can’t decide if nose knifing or scorched earth is the best way of describing what they’re doing, but I have to ask: If Yahoo “wins” this epic battle with Microsoft, will there be anything left at the end to celebrate over?

It’s time to end this thing before Yahoo ends itself. I don’t care if they throw AOL, MySpace, and half the rest of the Internet into the deal along with Yahoo. But the health of the Internet demands a counter balance to Google. Yahoo-Microsoft, given the current state of things, is the only reasonable outcome.

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Things are moving fast in the Yahoo-Microsoft drama. All the different forces are aligning for an endgame. The latest twist: The WSJ is reporting that Yahoo is close to signing a deal to combine with AOL.

This at the same time that Yahoo is doing a limited test to place Google ads in its search results. Meanwhile, News Corp, which Yahoo once hoped would be its white knight, is said to be turning on Yahoo and talking to Microsoft about joining its bid. Obviously a lot of balls are up in the air right now, and anything is possible.

Here is how the AOL-Yahoo combination is shaping up, according to the WSJ:

Under the terms being discussed, Time Warner would fold its AOL unit into Yahoo and make a cash investment in return for about 20% of the combined entity, the people said. The deal, which wouldn’t include AOL’s dial-up access business, would value AOL at about $10 billion. As part of the deal, Yahoo would use the Time Warner cash and additional funds to buy back several billion dollars worth of its own stock at a price somewhere in the middle of the range between $30 and $40 a share

Tellingly, that $10 billion valuation is half of what AOL’s business was pegged at when Google invested $1 billion for its 5 percent stake in AOL a little over two years ago. (But that does not include the dial-up business). What we are witnessing is all sorts of contortions on both sides to make the numbers work. We’ve believed all along that Time Warner will put an offer on the table, but it will be difficult to make it pencil out, especially if an AOL-Yahoo combo is up against a three-way Microsoft-MySpace-Yahoo deal.

Each of these potential deals would create integration nightmares, but a three-way tie between Microsoft, MySpace, and Yahoo would create an entity with so much traffic and advertising inventory that it might not matter. The chances of such a complicated deal going through, though, are small. The most likely outcome is still Microsoft buying Yahoo, and this is all just fodder for the negotiations.

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News Corp is said to be in talks with Microsoft about joining its bid for Yahoo, according to sources quoted by the New York Times.

News Corp entering the mix may allow Microsoft to raise its bid, putting even more pressure on Yahoo to accept it. It would also remove News Corp as a possible alternate bidder for Yahoo.

A combined Microsoft/ News Corp/ Yahoo would marry Fox Interactive Media and most notably MySpace with Yahoo’s web properties and Microsoft Live and MSN services, creating an even bigger challenger to Google.

According to the Times, the talks between Microsoft and News Corporation are at a sensitive stage, with their source stating that “there’s a long way to go before anything is definite.”

The news comes after another colorful day in the Microsoft/ Yahoo standoff with Yahoo announcing a trial of Google ads against its search results, and Microsoft responding by saying that any Yahoo/ Google tie-up lessened competition.

Update: The WSJ is reporting that Yahoo is close to signing a deal to combine with AOL.

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Amidst all the excitement over the MySpace Music announcement today is another story about the fate of parent company Fox Interactive Media, the division of News Corp. that controls MySpace, IGN, Scout Media, Photobucket, Fox Sports, AmericanIdol.com and other properties.

FIM, under President Peter Levinsohn, will miss their revenue target of $1 billion the current fiscal year ending June 30, multiple sources say. Rupert Murdoch, Chairman of News Corp., first gave revenue guidance for FIM in June 2007:

“…we are forecasting that MySpace alone will generate in excess of $800 million in revenue in fiscal ‘08. Overall, FIM in fiscal ‘07 generated revenues of $550 million and a profit of $10 million, even after absorbing $80 million in retention and amortization costs. We would be surprised if FIM revenues this fiscal year do not exceed $1 billion with margins well above 20%.”

Actual revenue is estimated to come in at around $900 million (2007 revenues were $550 million). And the $200 + million in expected operating margins is also likely an illusion. The division as a whole, with more than 2,500 employees, will be much closer to break even.

The impact could be far reaching for the organization. All employee stock option plan tied to profits. This includes MySpace CEO Chris DeWolfe and Co-founder Tom Anderson, whose compensation is heavily weighted towards the plan. If there are no profits, there are no payouts.

Some insiders say the projections were impossible to meet. Nevertheless, News Corp. has a fall guy: Chief Revenue Officer Michael Barrett, who was hired from Time Warner in 2006, has been either terminated or was offered an inferior position and resigned. Barrett was rumored to have had a very strained relationship with DeWolfe.

Barrett is at least the seventh senior executive to leave FIM in recent history. Former COO Mark Jung (now CEO of Vudu), Chief Strategy Officer Jim Heckman (now CSO at Zazzle), CEO Ross Levinsohn (now a Managing Partner at Velocity Interactive), SVP Heather Harde (now CEO of TechCrunch), EVP Sales John Trimble (now EVP, Sales at Glam), and EVP Corporate Development Mitchell Chun (now at Zazzle with Heckman).

In addition, FIM is moving some assets from MySpace and other properties into two new groups:

Platform: The group will control software and services to be sold internally and to third parties.

Monetization: To be led by Adam Bain (EVP of Technology and Production). The 250 person group has already moved out of FIM headquarters in Beverly Hills to a former Yahoo building in Santa Monica. The group, which is largely built on the 2007 SDC acquisition, will sell ads into FIM properties (after Google and each entity’s direct sales group) and will also sell advertising for third parties, including MySpace platform widget providers and other web services. The entity is reportedly also close to making another acquisition in the advertising space and may take the acquired company’s name as their brand. Revenue from this group is rumored to be about $150 million in the current fiscal year.

The main FIM properties, MySpace, IGN, Scout Media and Photobucket, will remain under their current heads, and will all have direct sales groups to sell primary advertising space. Also, AmericanIdol.com, currently under FIM, may move to Fox. DeWolfe named Jeff Berman, currently MySpace EVP of Marketing and Content and a former public affairs executive, as head of MySpace sales and marketing.

FIM declined to comment on this story.

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When it comes to market share gains in advertising dollars, Google outstripped every other media company in 2007, whether you look at the Web, TV, print, or radio. Earlier this morning, Henry Blodget compared the advertising revenues of 17 major media businesses (including News Corp, Time Warner Cable, Viacom, Google, Yahoo, Microsoft, AOL,, the New York Times, and CBS Radio). He left out Disney for some reason, but otherwise it’s a pretty good set of data (see the spreadsheet here). According to his calculations, total online ad revenues across these 17 companies grew 9% last year, online revenues grew 28% (versus 3% for offline ad revenues), and Google’s online ad revenues grew 44% (versus 15% for the combined online ad revenues of Yahoo, Microsoft, and AOL).

But let’s take a deeper dive into these numbers. Google added $2.6 billion in advertising revenues last year. Next in line and far behind was News Corp., which grew its ad revenues by $915 million. To better visualize how much Google is creaming every other media company, I put together the charts above and below (click on them to see a larger version). And here’s a table with each company’s ad-revenue gains (or declines), in descending order:

Now, what about absolute market share? Google does pretty well there too, with 14.9% of the total $58 billion represented by all 17 businesses. That is up from an 11.3% market share in 2006, and makes Google No. 2 behind News Corp’s 16.5% market share. (No.3, actually, behind Time Warner, but Blodget separated Time Warner Cable, Time Inc., and AOL, which combined would have a 15.2% market share).

Looking at the absolute numbers in the pie chart and table below really helps you put these businesses in perspective. For instance, check out Yahoo in the No. 4 spot, with $4.7 billion in ad revenues last year. It is right behind newspaper company Gannett, which is still a cash cow, but saw its advertising dollars decline by $338 million last year. Yahoo, in contrast gained $361 million in ad revenues. That’s still a fraction of Google’s growth, but looking at the absolute numbers let’s you see why Microsoft wants to buy it. A combined Yahoo-Microsoft would be No. 3 on this list.

And here are the underlying numbers:

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Rupert Murdoch is reported to have said that News Corp won’t fight Microsoft for Yahoo.

Talking to investors at the annual Bear Stearns Media Conference, Murchdoch said that “We’re not going to get into a fight with Microsoft, which has a lot more money than us.” Murdoch also gave support to Google as FIM’s ad provider: “We’re very happy to be in the Google camp. They sell our search advertising and pay us well for it.”

This comes in stark contrast to what we’ve heard behind the scenes - that News Corp submitted a formal big to Yahoo just a little over a week ago, and have been openly claiming to be negotiating with Microsoft to take over their Google advertising deal.

With News Corp not wanting to get in the way, Yahoo’s last chance of heading off Microsoft’s offer now rests with Time Warner. Murdoch did not rule out another type of deal with Yahoo, but given Microsoft’s increasingly hostile takeover offer, the chances of News Corp being involved in any deal with Yahoo given these comments looks slim.

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News Corp. has essentially planted four or five deal guys at Yahoo HQ, working directly with Yahoo business development to try to find a deal to combine MySpace and Yahoo that both sides can swallow. The News Corp. team is led by Jack Kennedy, Fox Interactive Media’s EVP Strategy and Corporate Development, says a source with knowledge of the discussions. According to another source, the team was as Yahoo again on Wednesday, and has been there most of the last two weeks.

We reported on what the bid might look like on February 12:

According to our source, the deal structure would spin off Fox Interactive Media (the primary asset is MySpace, but IGN, Scout Media, Photobucket, Fox Sports, AmericanIdol.com, Flektor, Ksolo; plus investments in Hulu, Simply Hired and Snocap are also assets of FIM) into Yahoo, along with a big cash injection from News Corp. and an unnamed private equity fund. The total investment would be valued at around $15 billion.

Yahoo would be valued at somewhere around $50 billion before the transaction, north of Microsoft’s $44.6 billion bid. That would leave News Corp., plus the private equity group, with more than 20% of the combined entity. They’d be the largest single stockholder and effectively in control of the combined Yahoo/FIM entity and their nearly 150 billion monthly page views (which would be second only to Google).

As far as we know the potential deal structure hasn’t changed, and they are still hung up on how to make the merger work without getting Google involved to take on search marketing. The team was expecting Microsoft to up its bid last week, forcing the Yahoo board to make a move. But Microsoft is taking things directly to shareholders, a time consuming move. That gives News Corp. more time to get their deal to pencil out.

It’s possible that at the end of this ordeal we’ll see a Yahoo/MySpace combined company, with News Corp. as the biggest shareholder. But to do that these guys need to pull the trigger on a bid. It’s time to make a move, or fly back to LA.

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At the start of the Microsoft/Yahoo saga we reported that News Corp. was scrambling to put together a bid to compete with Microsoft, but backed down because they were unable to find outside funding to make the deal lucrative enough (the sorry state of the debt markets contributed to the problem).

Yesterday Silicon Alley Insider reported that talks between the two were continuing. We’ve confirmed the rumor - Yahoo and News Corp. are in the middle of marathon discussions, and have more details.

According to our source, the deal structure would spin off Fox Interactive Media (the primary asset is MySpace, but IGN, Scout Media, Photobucket, Fox Sports, AmericanIdol.com, Flektor, Ksolo; plus investments in Hulu, Simply Hired and Snocap are also assets of FIM) into Yahoo, along with a big cash injection from News Corp. and an unnamed private equity fund. The total investment would be valued at around $15 billion.

Yahoo would be valued at somewhere around $50 billion before the transaction, north of Microsoft’s $44.6 billion bid. That would leave News Corp., plus the private equity group, with more than 20% of the combined entity. They’d be the largest single stockholder and effectively in control of the combined Yahoo/FIM entity and their nearly 150 billion monthly page views (which would be second only to Google).

The negotiating team is said to be trying to iron out the details in the next 48 hours, in time for Yahoo’s upcoming board meeting to review its options.

Microsoft is largely expected to increase their bid to the $35 range in the next couple of days based on Yahoo’s formal rejection of their first offer (effectively raising their bid to $50 billion). Any competing offer needs to be in that range or higher.

One major snag - it is widely believed that, even with a News Corp. deal, Yahoo would need to outsource search marketing to Google to make the numbers work. While Google is likely happy to do that deal, it’s unlikely U.S. regulatory agencies would approve it (we discuss this in detail here). Without the revenue boost and cost savings from outsourcing, the News Corp. bid may not pencil out.

Yahoo, of course, isn’t too worried about that right now. All they want is any kind of bona fide competing bid to at least get Microsoft to increase their offer. Yahoo execs are saying privately that they think a Microsoft acquisition is now fait accompli. Still, if News Corp. can somehow make a compelling offer (and getting a private equity group on board was a huge first step), Yahoo’s board may recommend the deal to stockholders.

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In case you missed the news, internet cables serving the Middle East have had a rough week, with anywhere up to five major cables being cut over the last week.

CrunchGear has been following the whole story, but we’ve not covered it until now because internet cables being cut isn’t as an irregular occurrence as you might think. Many of the companies behind these cables are essentially lazy, and simply drop them on the ocean floor, where ships can drop anchor and take them out at random. Five (or possibly less) cables were cut resulting in major outages in Iran (possibly the whole country, but possibly not) and other Middle Eastern countries. The cable cuts have resulted in more conspiracy theories than a Ron Paul meetup. The Economist has more on the theories.

What perked our interest was an article Wednesday from the Wall Street Journal covering the story that included the very funky image top right. Yes, that’s a Shark with laser beams on its head. There was much discussion about the Wall Street Journals editorial credibility post News Corp, and finally we are seeing the results. Personally I don’t mind the change that much, sharks with laser beams on their heads makes for a more lively and creative Wall Street Journal, but I’m betting I’m might be in the minority with that conclusion. What do you think?

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