By Yi-Wyn Yen

Google’s stock is on its steepest decline ever, a sign that investors who once believed in the search giant’s story of perpetual growth have started to lose faith.

There’s certainly some immediate cause for concern. Google’s revenue growth is rapidly decelerating — more rapidly than would be accounted for by its sheer size. Last year’s annual growth rate of 56.5% has now dropped to 28.27%, according to Thomson Financial. And its stock price, the best measure of investors’ perception of future growth, is taking a beating of historic proportions. Google’s shares slid from a 52-week high of $747 last November to $475 on Thursday’s close, lopping more than $85 billion off its market cap in the space of three months.

Analysts say it’s not yet time to freak out. Betting against Google, they say, is a bit like betting against Tiger Woods.

“Google is not falling off a cliff,” said Lehman Bros.’ Doug Anmuth. “For the past six months or so, the broad consensus is that Google would be somewhat impacted by a recession. It’s not immune, but Google would certainly hold up a lot better than most.”

To be sure, an economic slowdown — and a fall-off in advertising dollars — probably wouldn’t hurt Google (GOOG) as much as, say, newspapers and glossy magazines. But some are asking a more fundamental question. They want to know whether Google’s growth engine is running out of gas.

“Google hit the bull eye’s with search,” said Iggy Fanlo, CEO of AdBrite, referring to the business of selling ads for Hertz based on the auction of key search terms, such as “rental car.” “Google has this square peg that they’ve been fitting into this square hole.”

But there are signs that the market for search ads may be approaching saturation. Much of this week’s losses can be traced to a comScore report that found that clicks on Google’s ads in January were flat. Google had warned that it has been rooting out fraudulent and accidental clicks, which probably accounts for some of that weakness. But it may not account for all of it.

The deeper problem for Google is that many investors perceive it as a one-trick pony. Most of Google’s ancillary ventures — Google maps and docs and the like — are loss leaders. For real revenue growth, Google has been trying to build a business in display advertising — like the banner ads that appear in social networks and other venues. But they’re finding that it’s not as easy as it looks. “Some of the monetization work we were doing [on MySpace] didn’t pan out as well as we had hoped,” admitted Sergey Brin, Google’s cofounder, during the company’s fourth quarter earnings call.

The trick, experts say, is to put ads on the screen that reflect customers’ interests, something that goes beyond simply knowing what context they’re being viewed in.

“Contextual advertising isn’t the right thing for most of the Internet,” says AdBrite’s Fanlo. “It’s like selling Superbowl ads. They don’t sell me cleats, jerseys or helmets. They sell me cars, beer, and erectile dysfunction medication because they know I’m an old, fat guy.”

Fanlo says most advertisers are better off targeting customers based on where they live, who they are, and how they surf the web.

Another problem for Google is that although tech-savvy advertisers are eager to expand their marketing dollars beyond paid search, they’re not willing to spend those dollars blindly. They want tools and reporting systems that help them target display ads and accurately track their effectiveness.

In other words, advertisers now want the business of buying display ads to be as transparent as Google’s paid click system.

“Google is the leader of accountability. Consumers type in keywords into the search box. They click on ads, and clients are happy. But more and more, we’re seeing clients who want to know the relationship between advertising on Google and the brand messaging,” said Rob Norman, CEO of GroupM Interactive, a holding company of WPP. “There’s a perceived value and an actual value of online advertising, and our job is to help clients navigate that.”

It was to provide such tools that Google made its $3.1 billion bid for ad-service leader DoubleClick, a deal that has been approved but not yet consummated.

Meanwhile, Google’s search ad business, while not growing as fast as it was, continues to make money.

“A 4% drop in the stock based on the day’s news doesn’t show any fundamental problems in the ad model,” says Michael Ostrovsky, assistant professor of economics at Stanford. “This is a very sound model. Maybe some of the rules of how keywords are being auctioned will change, but the fundamental ideals of how Google sells ads is going to stay for a long time.”

By Michal Lev-Ram

Sprint chief executive Dan Hesse faced investors for the first time Thursday as the company delivered a slew of bad news, including a fourth-quarter loss of $29.5 billion and a continued decline in subscriber numbers.

Hesse, a wireless veteran, was brought in last December to replace ousted CEO Gary Forsee. Since then he has made several cost-cutting changes at the company — including laying off about 4,000 employees and closing 125 retail locations.

But Hesse is first to admit that fixing Sprint’s (S) woes will take much more. And the thing that needs fixing most is the Sprint’s reputation for dreadful customer service.

“The number one priority is improving customer service across all touch points, including retail stores, billing and customer care calls,” Hesse told Fortune.

That may be an understatement. In customer care surveys, Sprint regularly ranks lowest. It came in behind rivals Verizon Wireless (VZ), AT&T (T), T-Mobile and Alltel on a recent customer service performance study by J.D. Power and Associates. Bad customer relations has contributed to its high level of “churn,” the rate at which customers defect to other carriers. Sprint says it lost nearly 700,000 subscribers in the fourth quarter alone.

“Not only are we not attracting enough new customers, but our existing customers are leaving us at too big a rate — that’s why the customer service issue is highest on our list,” Hesse said Thursday after a conference call with analysts.

To that end, Hesse says he has changed the way the company measures its call centers’ performance. Instead of focusing on “handle time” — how quickly a customer’s issue is resolved — he says the focus is now on finding the right solution the first time a customer calls in, even if that means the call takes longer.

“Call resolution,” said Hesse, “is becoming the number one performance metric.”

Hesse is taking other measures to try to stop customers from fleeing. Earlier that day he announced the launch of Sprint’s new $100-a-month unlimited calling and data plan. The other major carriers launched their own unlimited calling plans last week, but unlike Sprint theirs did not include services like “all-you-can-eat” mobile TV, Web browsing and e-mail.

Hesse says his number two priority is re-defining Sprint’s brand, which he hopes to build around the company’s data services and the high-speed broadband network that enables them.

But some in the industry are calling for even more dramatic bigger changes, such as breaking up the company and selling off its pricey WiMax project, a next-generation wireless network into which the company has poured billions of dollars.

Hesse said he is still evaluating all aspects of the company’s operations, but that any turnaround is unlikely to happen for many quarters.

By Michael V. Copeland

I was having lunch with Flixster CEO Joe Greenstein the other day when we came to the topic of how to monetize all these widgets that are cropping up like poppies in a Silicon Valley spring.

Flixster, for those of you who are not Web geeks or film-buffs, is an online community of more than 1 million people focused on movie recommendations and reviews. While it has its own Flixster.com site, where it has really grown over the last six months is as a Facebook application — so much so, that Barry Diller’s InterActive Corp. (IAC) was rumored to be interested in buying Flixster in a deal estimated to be worth $150 million.

Greenstein spends his waking hours thinking about ways not just to grow that user base, but also how to make money from it, and he’s got a novel idea.

One way his service — and vast numbers of other widgets out there — could monetize more easily, Greenstein says, is if there were a button embedded on a site to make small purchases. “If you want to charge for a virtual teddy bear, there’s the button, you charge 99 cents for it, and that’s it,” Greenstein says. “PayPal is too cumbersome for something like this, it needs to be really simple.”

If that 99-cent button did exist, all those Facebook and MySpace applications that now depend on online advertising would suddenly have another way of making money: by charging small amounts for small items.

Those items might be virtual goods — a digital photo of a favorite band, a simple game. The point is that it could enable an economy that has been mostly missing from the widget world. If you think charging 99 cents doesn’t add up to much, remember that the ringtone business grew to a multibillion dollar industry worldwide by charging similar amounts.

So who is best suited to introduce a simple, secure 99-cent button?

In many ways Facebook is the logical choice, and one of the worst-kept secrets in the Valley is that Mark Zuckerberg and crew are working on a Facebook “wallet.” It makes perfect sense that a next step for the Facebook platform would be to introduce a simple, universal payment scheme. Facebook has already collected credit card information on some portion of its users, so it wouldn’t take much to turn something like the 99-cent button on.

I’ll bet almost a buck on Facebook doing it, and soon. The larger question is whether Facebook’s wallet becomes the standard for the rest of the Web, or if some other, more enterprising gang swoops in with a better version of PayPal for the widget world.

What are you waiting for? Get on it.

By Michal Lev-Ram

Sprint announced early Thursday that it would offer an unlimited voice and data plan, one week after rivals Verizon Wireless, AT&T and T-Mobile launched plans that let users make as many calls as they want for $100.

Dubbed “Simply Everything,” Sprint’s (S) new service will also cost $100 a month, but unlike its competitors’ plans, the third-largest carrier is offering unlimited data services in addition to unlimited calls. Analysts had speculated that Sprint would try to compete with other carriers by offering a lower-priced plan for about $60. Instead, the company is offering more features for the same rate.

“This is not so much about price, it’s about differentiating our company,” Sprint chief executive officer Dan Hesse said Thursday morning during a conference call with analysts. “We’ve let our business get too complex, and we’re trying to make it simpler.”

In addition to unlimited nationwide calling, Sprint’s new plan will give users unlimited access to data services like text messaging, e-mail and Web surfing in addition to the company’s mobile TV, music and navigation services. It will be available on all the company’s networks — both CDMA and iDEN — starting Friday.

Verizon was the first to announce its service last week, but AT&T and T-Mobile followed just hours later. T-Mobile’s unlimited plan includes “all-you-can-eat” text and picture messaging, while AT&T (T) and Verizon (VZ) are offering unlimited domestic calls only. The unlimited plans were a first among major carriers, as wireless consumers typically pick rate plans based on how many minutes they think they’ll use per month and are stuck with paying steep fees (as much as 45 cents per minute) if they go over their allotted airtime.

Sprint, which posted a fourth-quarter loss of $29.5 billion Thursday, says it is hoping its new voice and data plan will help differentiate the company.

But even CEO Hesse admitted that “Simply Everything” won’t be enough to turn things around. Sprint faces significant challenges, including integrating Nextel’s network and repairing its poor customer service image. What’s more, it is bleeding customers — the company reported that it lost 683,000 subscribers in the fourth quarter.

“Our business is not performing well right now because we have not provided the right customer experience,” Hesse said Thursday. According to the CEO, a turnaround will not happen “for many quarters.”

By Yi-Wyn Yen

It appears you can blame Microsoft if Yahoo’s employees start slacking off and business partners flee.

Late Wednesday afternoon, Yahoo (YHOO) submitted a Securities and Exchange report that called Microsoft’s attempt to buy the company a “significant distraction for our management and employees.”

Yahoo says the chaos surrounding the unsolicited bid could result in its losing key advertisers, publishers, clients and talent. It also noted that as a result of the bid it’s  facing seven costly lawsuits from shareholders who want the deal to go through.

Two weeks ago, Yahoo’s ten-member board of directors rejected Microsoft’s nearly $45 billion offer, saying it was too low.

That hasn’t stopped Microsoft (MSFT), with its very deep pockets, from trying to arm twist Yahoo into a deal. Last week Wall Street learned that the software giant was preparing a bitter proxy fight to try to oust Yahoo’s board. Hours later, Yahoo began erecting a defense, notifying the SEC that it would offer its full-time employees enhanced severance packages if a change in ownership resulted in layoffs.

Yahoo’s latest signal flare to the SEC was tacked on at the end of a 10K filing under the section, Risk Factors. Here’s the report:

On February 11, 2008, our Board of Directors announced that, after carefully reviewing the proposal, it unanimously concluded that the proposal is not in the best interests of Yahoo! and its stockholders. The Board further indicated that it is continually evaluating all of the Company’s strategic options. The review and consideration of the Microsoft proposal (and any alternate proposals that may be made by other parties) have been, and may continue to be, a significant distraction for our management and employees and have required, and may continue to require, the expenditure of significant time and resources by us. Microsoft’s unsolicited acquisition proposal has also created uncertainty for our employees and this uncertainty may adversely affect our ability to retain key employees and to hire new talent. Microsoft’s unsolicited acquisition proposal may also create uncertainty for current and potential publishers, advertisers and other business partners, which may cause them to terminate, or not to renew or enter into, arrangements with us. Additionally, we and members of our Board of Directors have been named in seven purported stockholder class action complaints relating to the Microsoft proposal as more fully described in Part I, Item 3 “Legal Proceedings” of this Annual Report on Form 10-K. These lawsuits or any future lawsuits may become time consuming and expensive. These consequences, alone or in combination, may harm our business.

By Michal Lev-Ram

Yahoo may be playing hard to get, but that hasn’t stopped Microsoft from forging ahead with its online ad strategy.

On Wednesday Microsoft announced it is buying YaData, an Israeli startup that has makes behavioral targeting tools for marketers and whose founding team consists of data mining experts from the Israeli Defense Forces.

In a statement detailing the acquisition, Microsoft (MSFT) said the smaller company will enable it to “provide its advertisers with richer targeting capabilities so they can connect with their audience in more efficient and engaging ways, at the same time providing its customers more relevant and focused ads.”

The release also said that the YaData team will join Microsoft’s R&D center in Herzliya, Israel. Terms of the deal weren’t disclosed, but Israeli business newspaper Globes is reporting that Microsoft is paying between $20 million and $30 million for the small company.

That’s nowhere near the $44.6 billion hostile bid the company has made for Yahoo (YHOO).

It appears buying YaData was a much easier process.

Microsoft says the YaData acquisition will help it provide “better ROI for advertisers, higher yield for publishers and more relevant advertising for consumers through advanced targeting and optimization.”

Also Wednesday, the European Commission fined the software giant a record $1.3 billion for “failure to comply with anti-trust decision.”

By Yi-Wyn Yen

PHOENIX – In the Broadway hit “Spamalot,” a group of knights cart off a man who sings, “I am not dead yet.” AOL chief executive Randy Falco spent some time singing a similar tune Tuesday at the Interactive Advertising Bureau conference, Ecosystem 2.0.

Falco was defending AOL’s digital ad business after a Microsoft executive marginalized the company’s relevance in the ultra competitive market a day earlier. Brian McAndrews, the senior vice president who leads Microsoft’s advertising efforts, said the online ad market has only room for two serious competitors, Microsoft (MSFT) and Google (GOOG).

“Microsoft and Google can ignore us and leave us off the charts, but they will do it at their own peril,” Falco said.

Microsoft has been vocal about its plans to catch up with Google, which dominates the search advertising business. Microsoft is banking that a $44.6 billion hostile takeover of Yahoo (YHOO) will do the trick. Meanwhile, AOL (TWX), which had been in talks with Yahoo after the company rejected Microsoft’s bid two weeks ago, is more than happy to sit on the sidelines and watch the tech giants duke it out. (AOL, Fortune and CNNMoney.com share a corporate parent, Time Warner.)

“What I’m hoping is that [Microsoft and Google] beat each other’s brains out in search and leave the display side open to us,” Falco said. “I think this deal is about search. I think it’s a mistake. Napoleon said to never interrupt your enemies when they’re making a mistake.”

He added: “The people who go out and create solutions for partners will win out this game. You can accuse me of whistling past the graveyard, but I think we’re competitively well-positioned.”

An AOL executive, who requested anonymity, confirmed to Fortune that the company talked with Yahoo but said it never had any serious intention to bid or enter into a partnership with the Internet portal.

Philosophically, the two are at opposite ends of the spectrum. Yahoo, which said Monday that it was building an all-purpose ad platform called Apex to integrate all types of digital advertising (including paid search), believes that technology drives the ad business. AOL is focused on keeping it old school by fostering its relationships with its advertisers and 8,000 publishers through its ad network, Platform A.

“The best technology means nothing unless you have the best people with a customer-centric focus, and that’s what we do with AOL,” Falco said. “We work hard to find solutions for our publishers because this business is about the people.”

AOL has been trying to transform its image from an increasingly irrelevant dialup Internet service to a top-tier online ad company. AOL’s strategy is to build the ad empire around graphical, or display, advertising. It already owns one of the largest arbitrage networks, advertising.com. Last year, it spent about $600 million to snap up behavioral targeting firm Tacoda and ad network Quigo.

AOL has a revenue-sharing deal with Google to deliver search results. The search game may be over, but for AOL, the display ad business is far from dead.

By Yi-Wyn Yen

PHOENIX – In the burgeoning world of online advertising, a top Microsoft executive believes just two competitors will win out — Microsoft and Google.

Brian McAndrews, the senior vice president who leads Microsoft’s advertising and publisher division, says to build a sophisticated ad platform requires enormous resources and capital that only two tech superpowers possess.

“This is incredibly expensive,” McAndrews said during a speech Monday afternoon at the Interactive Advertising Bureau conference. “To constantly scale the network and scale the data warehouse and grow this platform is very significant. There are really only two players who are going to compete long term.”

Microsoft (MSFT) acquired aQuantive last year in a $6 billion deal in an effort to bolster their digital advertising presence, and had made a $44.6 billion hostile bid for Yahoo to catapult its way into the Internet advertising big leagues. Google (GOOG) is waiting for European regulators to approve its $3.1 billion purchase of ad-serving company DoubleClick.

The thought of a duopoly rubbed some IAB attendees the wrong way. “This is a very search-centric notion,” said Bill Gossman, president and CEO of Revenue Science, a behaviorial targeting ad network. “That’s not true in the targeting world. There’s a real unique opportunity for those who don’t want to get sucked into the axis of the two players.”

McAndrews, who was the CEO of aQuantive before his company was acquired by Microsoft, defended the idea of two big online ad players. “It’s better than a monopoly,” he said. ”We’re not saying there can’t be other players. We’re just saying it’s very hard. If you’re making a bet on your website that this is the partner you want to work with, you need to be thinking is this the partner that can succeed long term. Two is better than one.”

McAndrews, who unveiled a new ad management tool for advertisers to track consumers called “Engagement Mapping”, spoke just a few hours after Yahoo (YHOO) CEO Jerry Yang and president Susan Decker gave speeches. Asked to address the elephant in the room, McAndrew replied, “We continue to believe [a Yahoo-Microsoft deal] will be a great combination. Combined we’ll be able to compete much better with Google. That’s the real elephant in the room.”

By Michal Lev-Ram

Want to know what the cell phone of the future will look like? Nokia offered a glimpse Monday when it unveiled its new “Morph” concept phone, a solar-powered, self-cleaning and shape-shifting mobile device.

Based on the company’s research in nanotechnology — the science of building electronics at the subatomic level — the phone will be made out of material that can change into different shapes. In a video illustrating what Morph might someday be able to do, Nokia (NOK) shows the flexible device transforming from a traditional mobile phone with a detachable ear piece to a flat, paper-thin gadget and a wearable watch. It also shows the transparent, green device tapping solar energy, sensing chemical compounds in the air and repelling dirt particles.

According to Tapani Ryhanen, head of Nokia’s multimedia devices research, the company developed the Morph concept in collaboration with the University of Cambridge and has 18 of its own researchers working full-time on nanotechnology-based solutions.

But don’t put off buying a new phone just yet — Ryhanen says a Morph-like device is still at least 11 years away. What’s more, even when it does get out of the lab, it’s not clear exactly what it will look like.

“Our concept device is just to illustrate what this technology could mean, but most likely it is not exactly the device we will develop based on our work,” Ryhanen told Fortune.

Nokia’s not the only phonemaker turning to nanotechnology for future phones. Other companies, including Motorola (MOT), are also looking into the technology to help shape next-generation devices.

“In some way or another, many phone companies are involved in nanomaterials research,” says Pulickel Ajayan, a professor of engineering at Rice University and a pioneer in nanotechnology. Ajayan says nanomaterials can enable better screen resolution, increase processing power of memory devices like phones and enhance battery life. “I think that if all of these pieces are put together nanotechnology will be quite significant for mobile devices, as these are the basic components of phones — things like power, display and memory.”

Ajayan says we could see nanotechnology used in phone displays and energy storage in the next two to three years. But you’ll likely have to wait a lot longer for the luxury of turning your phone into a watch simply by placing it on your wrist and locking in its shape.

For now, you can check out the Morph concept phone on display at New York’s Museum of Modern Art on view until May 12 as part of the museum’s “Design and the Elastic Mind” exhibition.

By Yi-Wyn Yen

PHOENIX — Yahoo chief executive Jerry Yang knew exactly what was on everyone’s minds at the Interactive Advertising Bureau conference on Monday.

In their first public appearance since Microsoft’s hostile $44.6 billion bid for Yahoo, Yang and Yahoo (YHOO) president Susan Decker each gave a 15-minute speech about Yahoo’s online ad strategy to a crowd of 400 industry players. Yang then kicked off a brief Q&A session with a joke.

“Before you start, let me guess what your first question is. Does it start with an M and end with a T?” Yang said with a smile. Unsurprisingly, Yang, dressed in drab charcoal gray, brown, and black, offered little insight into Yahoo’s take on Microsoft’s (MSFT) move to acquire the struggling Internet portal.

“We can’t say a whole lot about the process that we’re going through,” Yang said. “We’re very focused. We’re taking the proposal that Microsoft has given to us seriously… It’s been a galvanizing event for everyone at Yahoo. Our board is spending a lot of time thinking about all the alternatives. It’s something that we need to think through carefully.” Borrowing from the same, carefully-worded key points, Decker also referred to the Microsoft deal as a “galvanizing force internally and externally.”

Yahoo rejected Microsoft’s offer two weeks ago because the board felt Yahoo was undervalued at $31 a share. Since then, Microsoft has ramped up its plans to takeover the company and has hired a proxy firm to help oust Yahoo’s board. And late Friday, Microsoft released an internal memo from Kevin Johnson, the president of Microsoft’s platform and services division, about how the company plans to integrate Yahoo.

Yang remained confident about the situation. “The number of people who talk to us about the industry and what it could mean, in either direction or either outcome, it gives me a lot of encouragement that Yahoo goes to the right place,” he said.

Yang reiterated his plan to turn Yahoo into a starting point on the web, a concept he promoted during a speech he gave at last month’s Consumer Electronic Show. Decker said that Yahoo would soon release a new feature that highlights “the best content from the web” to drive more traffic to the homepage as well as to its alliance of 500 newspaper websites. Social news aggregators like Digg.com and StumbleUpon (EBAY) already provide similar services where users vote on popular content and news of the day.

Both Yang and Decker tried to drum up excitement for a new ad platform Yahoo is working on that will allow marketers to buy display, search, video, or mobile advertising in a convenient one-stop shop. “We’re trying to revolutionize the online advertising industry,” Decker said. She did not say when the new platform would be available.

The only prediction Yang offered was that spending for online advertising will be bigger than television in five years. Marketers spent $21 billion in online advertising in the United States in 2007, according to the IAB and PricewaterhouseCoopers. TV ad spending was $162 billion in the U.S., and is expected to rise 3% in 2008, according to marketing firm GroupM.