By Yi-Wyn Yen

These days, getting a large handout from venture capitalists is rare. It’s even tougher when your startup needs a lot of cash to compete with Google.

Kosmix, however, has defied the odds. In late October, the plucky startup raised $20 million, led by Fortune’s parent company Time Warner (TWX), by assuring investors that Google is not the only way to search on the Web. Kosmix says it takes a new approach to searching by categorizing everything by broad topics for those times when you don’t know exactly what you’re looking for.

“This reflects the fact that Kosmix has a unique technology that’s working well,” said Jonathan Miller, the former chief executive of AOL who is on Kosmix’s board. “No question it’s a difficult period to raise significant amounts of money in a late-stage round.”

A powerhouse of investors are banking on a future where search will evolve beyond typing in specific keyword terms on Google. Former Motorola CEO Ed Zander, who launched the popular Razr mobile phone, recently joined as a private investor and advisor to the company. The Mountain View-based startup, which has raised a total of $55 million in three years, is also backed by Amazon (AMZN) cofounder Jeff Bezos and Legg Mason fund manager Bill Miller.

Miller recently made noise for reportedly raising money from private investors to buy Yahoo (YHOO). Miller, a one-time Yahoo board nominee, refused to talk about Yahoo. He discussed the need for companies like Kosmix to take search to a new level in a way that Google (GOOG) does not. As CEO at AOL, Miller had tried to acquire Kosmix, cofounded by veteran entrepreneurs Venky Harinarayan and Anand Rajaraman. “How do you create breadth and depth in content pages and make it a satisfying user experience is a big and hard problem,” Miller said. “Kosmix has firmly established the lead in how this is going to happen.”

Take the phrase Mount Everest as a topic. Without more search keywords, Google broadly targets what you may be looking for. Google’s first three links include an empty graphics box from Google Maps, a Wikipedia entry, and a well-regarded news site for mountain climbers. The same topic on Kosmix returns a rich summary from Web 2.0 sources. Kosmix includes a short paragraph from Wikipedia along with photos from Flickr, videos from YouTube and video search engine Truveo, forum posts from trekkers seeking climbing partners to Everest, and top mountaineers who’ve climbed Everest.

Rajaraman insists his startup is not another search engine trying to take on the search giant. Google’s competitors – from tiny startup Cuil to software maven Microsoft (MSFT) – are struggling to make a dent in Google’s growing dominance in search despite spending billions. The approach, Rajaraman says, is to deliver relevant results with blogs, videos, pictures and news on a single page.

“We consider ourselves an explore engine. When you don’t know what’s interesting or know enough about a topic, you come to us. We’ve built algorithms based on topics that lead to a very different end point,” he said. “Google’s algorithms are about finding the best Web pages out there. It’s really, really hard to mess with that.”

By Scott Moritz

With clouds of economic gloom darkening the tech horizon, mobile phone sales – a former bright spot in the gadget world – look to be slowing.

Tech buyers went away early this fall, and as recession fears intensified, orders have continued to dry up.

There have been a number of ominous signs. First Cisco (CSCO) slashed its outlook and froze hiring. Then Wall Street analysts slashed Google’s (GOOG) search ad sales estimates, predicting the first ever drop off in the company’s growth rate.

Now, market analysts at Gartner have peered ahead into future and declared cell phone sales will likely slow from 2008 levels by 1% to 4%. This would be the first year-over-year slowdown since 2001.

“It is too early to say how long the economic climate will impact the devices market, but we expect market conditions to remain challenging through at least the first half of 2009,” Gartner analyst Carolina Milanesi said in a statement Tuesday.

A low single digit drop in sales certainly isn’t a steep fall and hardly a surprise in light of recent downward adjustments from wireless phone giants Nokia (NOK) and Samsung. But no growth in 2009 would be a major milepost given how newer markets like Brazil, Russia and Asia have been providing plenty of worldwide demand. And in mature markets like Europe and the U.S., smartphone sales are surging, fueled by touchscreens like Apple’s iPhone and Research in Motion’s new BlackBerry Storm.

Gartner now predicts mobile phone sales will hit a growth rate of 8% this year, down from the 15% level in 2007.

By Scott Moritz

It was a tale of two techs Tuesday. Hewlett-Packard (HPQ) surprised Wall Street on Tuesday with a fourth-quarter earnings report that beat analysts’ profit and sales targets. HP shares soared nearly 14% in early trading.

Meanwhile, glass maker Corning (GLW) warned of a sales shortfall in the current quarter as demand for its flat-screen TV and computer panels drops faster than anticipated. Shares fell nearly 12%.

HP posted preliminary adjusted earnings of $1.03 a share, which compares with 84 cents in the year-ago quarter and beats analysts estimates by 3 cents. Sales for the quarter ended Oct. 31 were $33.6 billion, an 19% improvement from revenues of $28.3 billion in the same quarter last year. Analysts were looking for sales of $33 billion, according to Thomson First Call.

The recent acquisition of IT service shop EDS so far has helped HP dodge the full impact of the impending recession. “Our ability to execute in a challenging marketplace differentiates HP, enabling it to increase share, expand earnings and emerge from the current economic environment as a stronger force,” CEO Mark Hurd said in a statement.

Looking ahead, HP predicts pro forma profit of about 94 cents a share on sales of $32.25 billion in the first quarter ending in January. Analysts expected adjusted earnings of 93 cents a share on $33.7 billion in sales. HP says it will release its October quarter earnings Nov. 24.

Corning, however, continues to struggle with order cuts as flat-panels and big-screen TV inventories pile up. The company, the largest maker of liquid crystal display screens for televisions and computers, says fourth-quarter sales will fall below its guidance of $1.1 billion to $1.2 billion. It warned that profits will be at the low end or below its prior guidance of $0.20 to $0.28 a share. Corning did not offer revised financial targets.

By Yi-Wyn Yen

At the Web 2.0 Summit two weeks ago, Yahoo CEO Jerry Yang was asked if he was the right guy to lead the battered Internet portal. Yang dodged the question by defending his passion for the company he co-founded 13 years ago. “I didn’t make the decision of being the CEO lightly,” he said. “I wanted to make a change at Yahoo that I believe I can make….That’s a dream that I felt I could achieve by being CEO and that’s still the dream today.”

That dream came to an end Monday when Yahoo announced that Yang, 40, will step down as CEO and return to his former role as “Chief Yahoo.” The company’s board said it has hired headhunter Heidrick & Struggles to find a replacement.

Yang has come under fire for his inability to turnaround the company in his past 17 months as CEO. During his short tenure, Yahoo (YHOO) has had two major rounds of layoffs and has seen its search market share shrink significantly while a series of reorganizations led to the departure of senior executives. Yang was heavily criticized by Wall Street and shareholders for failing to reach an agreement to sell the company to Microsoft (MSFT). But the final straw for Yang came when Google (GOOG) pulled out of a controversial ad agreement earlier this month that would have boosted Yahoo’s revenues by hundreds of millions of dollars.

“When the board asked me to become CEO and lead the transformation of the company, I did so because it was important to re-envision the business for a different era to drive more effective growth,” said Yang in a statement. “Having set Yahoo! on a new, more open path, the time is right for me to transition the CEO role and our global talent to a new leader. I will continue to focus on global strategy and to do everything I can to help Yahoo realize its full potential and enhance its leading culture of technology and product excellence and innovation.”

When Yang took over, he was widely viewed as the right choice to replace Terry Semel, the previous CEO from Hollywood who spent six years molding Yahoo into a media company. Yang promised change in the first 100 days as CEO, declaring there would be “no sacred cows.” But 100 days came and went. So did the next 400 days. Frustrated investors have seen Yahoo’s shares drop 62% in value since Yang took over in mid-June 2007. While Semel never had Yang’s geek cred, he did manage to drive Yahoo’s stock price up to an eight-year peak of $43.21 in January 2006. Yahoo’s shares closed at $10.63 on Monday.

Yang has admitted his legacy may forever linked to the debacle with the Microsoft takeover. Yahoo’s board and management team quickly turned down Microsoft’s original offer to acquire Yahoo for $31-a-share in February. The two parties spent six months trying to negotiate a deal. “As a CEO, my job is to find the right path for Yahoo,” Yang said at the Web 2.0 conference. Not getting the deal done “is something that I’ll be labeled with.”

By Michal Lev-Ram

SAN JOSE – On the same day that Intel (INTC) slashed more than $1 billion from its sales forecast and more analysts cut sales estimates for Google (GOOG), Silicon Valley luminaries momentarily put the downturn aside and celebrated a happier cause — using technology to benefit the world.

Nearly 1,500 guests on Wednesday night attended the annual Tech Awards, which recognize innovations used to alleviate poverty around the world. ”Tonight is a reminder of all the things that are going right,” said Mike Splinter, CEO of Applied Materials (AMAT), a Tech Awards sponsor. The speech came just hours after the chip equipment maker announced earlier Wednesday that it will cut nearly 2,000 jobs.

The international awards program honored 25 organizations, five of which received a $50,000 cash prize, including Digital StudyHall, an India-based organization that was recognized for bringing instructional DVDs to underpriveledged classrooms.

Other award recipients included the Full Belly Project, a North Carolina-based non-profit that has developed a $50 nut sheller that can shell 125 pounds of peanuts per hour and requires no electricity, which helps subsistence farmers in countries like Mali and Haiti.

The Portable Light Project, another Tech Award recipient, manufactures flexible solar panels that can be woven into clothing or handbags. The wearable photovoltaics harvest sunlight to charge cell phones and other devices. According to the Massachusetts-based nonprofit organization, it is already distributing its portable solar panels in countries like Mexico and South Africa.

“People who are poor are often on the move,” said Sheila Kennedy, who heads up the project. “They don’t have a roof, so you can’t put solar panels up.”

The star of the evening was Muhammad Yunus, who received the Nobel Peace Prize in 2006 for his Grameen Bank, which gives out small loans to some of the world’s poorest people. The father of the so-called microcredit movement spoke about his creative approach to financing and efforts to bring cell phones and solar power to impoverished regions. According to Yunus, his Grameen Bank has doled out more than $700,000 in housing loans (that kind of money won’t get you much in the Silicon Valley, but in Bangladesh a tin-roofed house costs just $300 to build).

Yunus said that when he initially approached banks about lending to the poor, they refused and said poor people are not credit worthy.

“The poor turned out to be more credit worthy,” said Yunus, whose Grameen Bank is self-reliant (it no longer relies on donor funds) and claims to have a loan repayment rate of more than 95% “We never had a subprime housing crisis.”

By Yi-Wyn Yen

Microsoft is trying its luck at social networking – again.

After a failed attempt four years ago, Microsoft (MSFT) is ripping a page from Facebook’s playbook, introducing on Thursday new profile and photo-sharing features to its web-based Windows Live services. The software giant allows users with Windows Live Hotmail or Messenger accounts to create online profiles that highlight what a person is doing through a Facebook-like newsfeed.

Microsoft hopes that giving Windows Live a new facelift will encourage more people to spend more time on its web properties. Checking e-mail or instant messaging accounts for up a third of the time people spend on the Internet, according to research firm comScore. Microsoft has 375 million Hotmail users and 325 million Messenger users worldwide. “If we can gain a whole 60 minutes per user, we would grow a whole Facebook in [time spent],” says Brian Hall, general manager for Windows Live.

Though Hall admits that Microsoft’s new strategy could shift some attention from Facebook – in which Microsoft holds a minor stake – to Windows Live, the real concern is longtime rival, Google (GOOG). The search giant already has a commanding lead in the search advertising business, and Microsoft worries about Gmail’s growing share in the e-mail market. “According to comScore, Google has a 6% share of email [in the U.S.] But they’re growing fast,” Hall said.

Like Google, Microsoft has struggled to make inroads in social networking. Four years ago, Microsoft launched Spaces, a blogging tool to build a social networking site within Windows Live. Though Microsoft added 100 million people in it first year, less than 1% of social networking users use Spaces today. “The blogging approach [to social networking] is not the right approach. People are too busy to make that investment,” Hall said.

Windows Live lets its new newsfeed feature do the heavy lifting to give people’s friends updates on what they’re up to. Microsoft has partnered with more than 50 web companies, including Amazon.com (AMZN), Twitter, Flickr,and iLike, a music discovery site. Anytime you blog on WordPress, write a restaurant review on Yelp, or watch videos on Veoh, your status is updated through your Windows Live profile.

Analysts say the new Windows Live makeover is a preview of Microsoft’s newest operating system, Windows 7. The latest version of Windows is expected to integrate tools like photo-sharing, videos, and messaging more seamless between PCs and mobile devices. “All these built-in applications with a blend of Google, Apple, and Facebook is Microsoft’s view of an integrated world,” said Rob Enderle, president of the Enderle Group. “Windows Live comes out first. This is designed for Windows 7.”

Microsoft’s had success with operating systems, but the company still struggles to make a profit from its Internet businesses. Microsoft is banking that more time spent on Windows Live will translate into more web searches on Live and more ads viewed on its portal, MSN. For its fiscal first quarter, which ended in September, Microsoft lost $480 million from its online unit. “We have to get great at the advertising business,”  Hall said.

By Scott Moritz

What was a little fuzzy last month has become clearer of late: The sagging economy is weighing on Google (GOOG).

Goldman Sachs analyst James Mitchell cited signs of weakness in search advertising – Google’s biggest moneymaker by far — in cutting his revenue growth target for the current fourth quarter from 4% to 1%.

Mitchell is the second analyst this week to lower estimates for Google. On Monday Barclays analyst Doug Anmuth called for fourth-quarter sales to be flat with third quarter’s $4.05 billion. If so, it would be the first time in Google’s history that revenue has not grown from one quarter to the next.

The prospects of little or no growth sent Google shares to a three-year low of $300 Tuesday amid a broad market selloff. The stock has dropped 55% this year. And the news was not particularly good for the rest of the Internet sector with Yahoo (YHOO) dropping 5% to a 52-week low of $11.25.

Why the sudden chill? Google thermometer readers apparently saw a change in tone between the company’s discussions on the earnings call Oct. 16 and the comments in the quarterly filing on Nov.7.

In October, when asked on a conference call how search traffic patterns were going, CEO Eric Schmidt couldn’t draw any conclusions. “We see fluctuations and they are more complex than they may appear; some things go up, some things go down.”

By Friday, when Google filed its 10Q, the complexity had simplified in a not-so-positive way.

“The current general economic downturn will likely affect these seasonal trends, especially the increase in commercial queries that we typically experience in the fourth quarter of each year,” Google said in the filing.

In October, Google executives were partially blinded by the huge increase in search traffic as people swarmed online for news on the financial crisis after Lehman Brothers collapsed Sept. 14. But as search traffic fell back after the initial panic subsided, consumers didn’t revert to their normal behavior and spend their time searching topics like holiday electronics. Ominously for Google, the rate of click-throughs on the sponsored ads that appear to the right of search results also fell, according to some analysts. Marketers pay Google only when someone clicks on their ads.

Goldman’s Mitchell writes that a poor economy is leading to declines in paid search and he noted that the size of purchases at sites like eBay (EBAY) and Amazon (AMZN) are shrinking. Given the lack of pay off, advertisers are likely to resist price increases or even cut spending, according to Mitchell.

In other words: A not-so-happy holidays ahead for the online economy.

By Yi-Wyn Yen

SAN FRANCISCO – In the past ten months, Yahoo CEO Jerry Yang has faced a hostile takeover attempt by Microsoft, shareholder lawsuits, a proxy fight led by Carl Icahn and, on Wednesday, watched a much-needed partnership with Google (GOOG) go up in flames.  Yet the embattled Yahoo chief says he has no regrets that he took on the job.

“I didn’t make the decision of being the CEO lightly,” Yang told a packed crowd of 800 at the Web 2.0 Summit late Wednesday afternoon, hours after Google announced it was pulling out of an ad partnership with Yahoo to avoid a federal antitrust suit.

“I wanted to make a change at Yahoo that I believe I can make,” he said. “That’s a dream that I felt I could achieve by being CEO, and that’s still the dream today. And that’s something that gets lost underneath all these external issues.”

He added, “I don’t regret any minute of it. It might not be the most fun thing, but I feel like I only know how to operate by caring and being passionate about Yahoo.  I just feel that’s the reason that I’m here.”

Yang appeared relaxed while facing tough questions from Web 2.0 impresario John Battelle, who conducted the 45-minute interview at San Francisco’s Palace Hotel. Dressed in a purple-checkered dress shirt, Yang smiled and joked with Battelle who asked him to justify his job and why he rejected Microsoft’s offer to buy the company.

“What happened?” Battelle asked.

“Which part?” Yang said with a smile.

“Thirty-three dollars a share, Jerry. What happened?”

Since Microsoft (MSFT) and Yahoo (YHOO) ended talks in June, Yang has said that the company was willing to sell to Microsoft for the right price. He reiterated his position that he’s still willing to sell the entire company or Yahoo’s search business at the Web 2.0 Summit.

Not convinced, Battelle blamed Yang for failing to get the deal done. “You didn’t want it to happen,” Battelle said.

“I don’t have an ego,” Yang replied. “At the end of the day, we believed the deal was going to be done, and that a deal was not that far apart and they walked away…I know [the failure of the deal] is something that I’ll be labeled with.”

It was the failure of that other deal that seemed to stun Yang. After four months of negotiating with the feds, Google on Wednesday pulled out of a search ad deal that would have generated hundreds of millions of dollars in additional cash flow for Yahoo.

Yang mentioned several times that he was “disappointed” by Google’s decision. “We were working with the Department of Justice to get this deal done,” he said. “We also felt that Google clearly did not want to stay in the deal, and we were disappointed with that.”

Yang had no answer for why Google withdrew. He said, “You’d have to ask them because we are certainly disappointed.”

In a blog post, Google’s chief legal officer David Drummond referred to the deal as too “risky.” The feds threatened to sue Google and Yahoo if they went through with the ad agreement that would allow Yahoo to run some Google search ads on Yahoo’s web properties. The Justice Department believed combining the No. 1 and No. 2 search engines was anticompetitive. Yahoo signaled it was willing to go to court over the deal.

Said Yang, “I really thought the government in this case does not understand this industry. Their thinking is too narrow. I clearly don’t agree with their point of view.”

Yang stressed that the company had “no news” with regards to reviving talks with Microsoft. He also stayed mum on reported talks to buy AOL, which is owned by Fortune’s parent company Time Warner (TWX).

“Are you buying AOL,” Battelle pressed.

Yang laughed and then smiled. “I can’t talk about that. If I tell you, I’d have to kill you.”

Said Battelle, “I think I’ll take the bullet for this audience.”

By Yi-Wyn Yen

The implosion of Yahoo’s ad partnership with Google may or may not lure Microsoft back to bid on Yahoo, but one thing is clear: Making a deal with Yahoo will be a lot less expensive that it was six months ago.

Yahoo (YHOO) is back on the market after Google (GOOG) on Wednesday bailed on the controversial search ad agreement. Investors signaled their approval of the breakup by sending Yahoo’s shares up 5% to $14.02 in mid-day trading.

Microsoft (MSFT) had no comment on the possibility of opening up renegotiations with Yahoo. But the software giant was pleased with the Justice Department’s decision to nix the Google-Yahoo deal, which would have allowed Yahoo to run some of Google’s search ads on its Web properties.

“The Department of Justice’s finding is significant for advertisers, publishers and consumers, who voiced overwhelming concern about this illegal deal to law enforcement and policymakers,” said Brad Smith, Microsoft’s general counsel in a statement.

Microsoft may have won a victory over Google, its bitter rival, but the real loser here is Yahoo. Wrote Jefferies analyst Youssef Squali in a client note, “In our view the GOOG withdrawal is another black eye for [Yahoo CEO] Jerry Yang and Co.”

Analysts say they expect Yahoo’s best option is to go back to Microsoft for a search deal. Summed up Jefferies’ Squali, “YHOO is left with 3 options: 1) go it alone, 2) merge with AOL, or 3) do a deal with Microsoft.”

“Option #1 is not optimal,” he continued, “as shareholders would need to ride out the current recession to get paid. Also having Icahn on the board should make status quo difficult. Option #2 is possible but not to our liking since YHOO would double-down on Display (the weaker segment) with no material benefit to search. Option #3 is the most likely,in our view.”

Google’s ditching of the deal is a humiliating blow for Yahoo. Google announced in a company blog post – a blog post! – that battling the feds in court to save the Yahoo deal was too risky. Three minutes after the Google blog was published, Yahoo released a statement that the company was “disappointed that Google has elected to withdraw from the agreement rather than defend it in court.”

The Justice Department notified Google and Yahoo Wednesday that it would sue both companies if the pair went through with the ad agreement.  Wrote Google’s chief legal officer David Drummond in the blog post, “Pressing ahead risked not only a protracted legal battle but also damage to relationships with valued partners. That wouldn’t have been in the long-term interests of Google or our users.”

Yahoo scrambled to keep the deal afloat. Earlier this week, Yahoo proposed a drastically-scaled version to Google and the government. Yahoo offered to reduce the terms from ten years to two years and only run a quarter of Google’s search ads on Yahoo’s sites.

Analyst Jeffrey Lindsay with Bernstein Research argues that Yahoo was desperate to keep the Google deal going to stay independent. He also says that without the extra cash generated from Google, Yahoo’s attempts to buy Time Warner’s AOL (TWX) business outright is unlikely. Reports have suggested that Time Warner, Fortune’s parent company, would be willing to sell AOL for $6 billion to $8 billion. Lindsay says that at most, Yahoo can only pay between $4 billion to $4.5 billion without diluting its own shares. “Without the Google deal, Yahoo can’t afford to buy AOL,” Lindsay said.

Yahoo brushes off claims that the Google deal is a major loss to the company. Yahoo had originally said that it could make as much as $800 million in annual revenue from the deal. But in its release Wednesday, the company argues that the deal was only “incremental” to its turnaround strategy. “The fundamental building blocks of a stronger Yahoo in both sponsored and algorithmic search were put in place independent of the agreement,” the company said in its statement.

Yahoo struck the search deal with Google four months ago after it ended talks with Microsoft. The move was widely seen as a way for Yahoo to appease shareholders, who were upset that Yahoo turned down Microsoft’s $33-per-share bid. Microsoft had also offered to buy just Yahoo’s search business for a reported $2 billion in June.

Microsoft is still struggling to make a dent with Google’s dominance in paid search advertising. Analysts say that’s all the more reason for Microsoft to come back. “We can’t see why Microsoft wants Yahoo any less than it did nearly a year ago,” Bernstein’s Lindsay said. “All the same reasons still hold true for why Microsoft needs Yahoo. And now they can offer considerably less.”

By Scott Moritz

Yahoo (YHOO) moves back to the deal market as its controversial advertising partnership with Google (GOOG) is now dead.

As Fortune’s Legal Pad blogger Roger Parloff outlined last month, the legal footing was never very solid as the No.1 and No.2 Internet advertisers explored plans to work together on search advertising efforts.

The plan was first introduced in June as Yahoo was trying to fend off an unsolicited takeover bid from Microsoft (MSFT). Yahoo stubbornly resisted Microsoft’s early offers, including a $33-a-share bid in May. Microsoft then walked away and in July, activist investors like Carl Icahn started pushing for a shakeup of the Yahoo board and a more deal-friendly line up.

Yahoo shares, which had fallen to a five-year low of $11.25 last month, surge up 9% on Wednesday after news that the Google partnership was killed.

Investors apparently like Yahoo’s options a lot better without the antitrust battle that seemed to be looming with its Google ad plan. Microsoft and Time Warner’s (TWX) AOL unit – Time Warner is the parent of Fortune and CNNMoney – are among the potential deal partners.

On a conference call with analysts, Time Warner executives said that the news was positive for AOL. “The opportunity remains open for this business to rebuild itself,” the executives said.