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 Scott Moritz

U.S. regulators on Monday charged Dallas Maverick owner and outspoken blogger Mark Cuban with using confidential information in 2004 to sell his stake in Mamma.com, a Montreal search engine now known as Copernic (CNIC). His sale of all 600,000 shares helped Cuban avoid a 10% dive in the stock, or about $750,000 in losses, the government contends.

The Securities and Exchange Commission filed a civil lawsuit against Cuban on Monday. No criminal charges were filed.

Cuban, the biggest shareholder in Mamma.com, was allegedly angered by plans for a private sale of discounted Mamma.com stock, according to the lawsuit filed in U.S. District Court for the Northern District of Texas.

Mamma’s CEO had contacted Cuban to see if he was interested in participating in the so-called PIPE, or private investment in public equity, according to the SEC complaint. Selling the stock at a discount effectively dilutes the stakes held by existing shareholders. Cuban allegedly responded: ”Well, now I’m screwed. I can’t sell,” according to information provided by the Mamma CEO to regulators.

But sell he did, according to the SEC. One minute after hearing the full details of the private investment offer for Mamma.com shares, Cuban allegedly called his Dallas broker and said: “Sell what you can tonight and just get me out the next day.”

The SEC wants Cuban to pay back the $750,000 he avoided in losses after Mamma.com’s shares fell as well as a potential fine of $2.25 million.

Cuban issued a statement Monday saying the charges had no merit. “The government’s claims are false and they will be proven to be so,” he said.

Cuban’s net worth has been estimated to be $2.8 billion. His big jackpot came in 1999 when he sold Broadcast.com to Yahoo (YHOO) for nearly $6 billion, one of the largest cash-outs of the Internet boom.

As the owner of the Mavericks and Internet soapbox Blog Maverick, Cuban has displayed a fiery temperament at times. After a few shouting matches with Mavericks head coach Avery Johnson earlier this year, Cuban fired Johnson, the most successful coach in franchise history, at the end of the NBA season in April.

If skirting securities laws to avoid losing a relatively insignificant amount of money sounds strange, it isn’t, says Scott Friestad, deputy director of enforcement for the SEC.

“It’s not uncommon that the amount of the transaction is not correlated to a person’s financial wherewithal,” said Friestad. “We’ve seen sales worth $15,000 by people with $1 million-a-year salaries.”

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 Michael V. Copeland and Yi-Wyn Yen

SAN FRANCISCO – Al Gore didn’t take credit for inventing the Internet at the Web 2.0 Summit Friday, but he did credit it with enabling the victory of President-elect Barack Obama and helping restore faith in the principles upon which the United States was founded.

“The electrifying redemption of America’s revolutionary declaration, that all human beings are created equal,” Gore said to a cheering crowd, “would not have been possible without the addition of the empowerment of individuals to use knowledge as a source of power that has come with the Internet.”

In a speech that ranged from the foundations of printing, computing and other disruptive technologies, to the subject of the dampening effects of television and the need to tackle climate change, Gore returned to the Internet and Web 2.0 as tools to bring about huge leaps forward in society. He highlighted the way in which people organized and spread information using web-based databases of names, numbers, and ideas to support the Obama campaign.

“What happened in the election opens up a whole new range of possibilities, Gore said. “Now is the time to really move swiftly, to seize these new possibilities and to exploit them…Web 2.0 has to have a purpose. The purpose I would urge as many of you as can take it on, is to repair our relationship with this planet and the imminent danger we face.”

“We have everything we need to save it and in the process create millions of new jobs, create energy security,” he continued. “But the only way this is going to be solved, is by addressing the democracy crisis   – a great blow was landed during the election – and taking this issue and raise it to the awareness of everyone.”

Gore advocated for  the construction of a $400 billion “smart-grid” to tap renewable energy sources like wind, geothermal and solar and bring green power. He said a smart-grid infrastructure would pay for itself within three-and-a-half years. He urged Obama to set a goal of generating all of the nation’s power from renewable sources within a decade.

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.

By Scott Moritz

With touchscreen phones all the rage, and U.S. telcos following AT&T’s (T) lead of cutting the price of Apple’s (AAPL) iPhone, it would seem Nokia (NOK) will be left out of the smartphone party this year.

The Finnish phone giant won’t have its closely-watched 5800 phone – Nokia’s music-loaded take on the iPhone – available here until sometime in the first half of next year, according to people familiar with the phone. Nokia wasn’t immediately available for comment.

And even when it arrives, Nokia has lacked a big U.S. phone partner that would provide the subsidy necessary to put it under the $200 range. At full price, it will have a hard time making a big splash.

“You could look at it as having a 100% upside,” says Nielson IAG analyst Roger Entner, referring to Nokia’s measly share of the U.S. market. Make that a potential upside of 95.5% since Nokia’s slice of the U.S. market has now fallen a percentage point from year-ago levels to 4.5%.

These numbers were part of Nokia’s overall solid third-quarter performance reported Thursday. Nokia posted an adjusted profit of 44 cents a share, down from the 55 cents it netted last year, but in line with analysts estimates. Sales fell 5% to $16.4 billion from $17.3 billion in the year-ago quarter and below the $17.2 billion street estimate.

After hitting a new four-year low, Nokia shares rebounded a bit Thursday up 4% as investors took some confidence from the fact that it met estimates.

As Nokia predicted, its worldwide market share fell to 38% in the third quarter from 40% in the prior period. The decline, according to Nokia, reflects the company’s unwillingness to cut phone prices amid a heated price war in some regions.

Nokia has managed to grab and hold onto the No.1 phone supplier position by honing its skills at making low- and medium-priced phones for a global audience. This focus on the mainstream has caused Nokia to be consistently late to fashion trends like flip phones, ultrathin designs and now touchscreens.

After a strong start in the smartphone wars with over half the global market in 2007, Nokia has dropped to a 35% slice in the third quarter from 48% of the market in the second quarter, according to Morgan Stanley analyst Jim Dawson. The alarming sequential drop is a reflection of how strong rivals like Apple and Research in Motion (RIMM) have grown. The smartphone market will get a new challenger later this month with the arrival of Google’s (GOOG) Android-powered G1 phone at T-Mobile.

But while 2008 is not going to be a big year here for Nokia, the trends – aside from the slumping global economy – are promising overall.

Each player comes from with a different specialty to the smartphone market, says Entner. Apple and Google aim for a strong Internet experience and RIM’s BlackBerry Storm hopes to capitalizes on its successful e-mail background with a touchscreen design. “Nokia comes from a mobile phone approach,” says Entner.

“Nokia sees the phone as an integrated device.” says Entner. In the past three years, Nokia has acquired mobile e-mail shop Intellisync, GPS mapper Navteq and digital media delivery system Loudeye in an effort to control the delivery of services like e-mail, navigation, photography, music, videos, games and the Internet. 

Of course, all this will matter more in the U.S. when Nokia can deliver the device.

By Scott Moritz

Three of tech investors’ favorite horses - Google (GOOG), Research in Motion (RIMM) and Apple (AAPL) - which led the stampede out of the Nasdaq Monday, came rushing back a bit Tuesday.

Panic sellers who sent the Nasdaq down 9%, its steepest one-day drop since the Internet bubble burst in 2000, were replaced by bargain hunters Tuesday. In mid-day trading Google shares were up 8% and RIM’s stock bounced 10%. Apple was up 5%, while the Nasdaq as a whole rose 3%.

Apple was one of the biggest losers Monday, falling18% after two analysts downgraded the stock on fears that Mac sales were going the way of the rest of the PC market. FORTUNE’s Philip Elmer-Dewitt, however, pointed out that some of the gloomy predictions were based on a survey of business IT buyers, not quite Apple’s core market.

Other analysts came to Apple’s defense Tuesday. Goldman Sachs’ David Bailey reiterated his buy rating  saying the stock was oversold.

“We think yesterday’s 18% decline more than captures the concerns over Mac growth in a weakening spending environment, making Apple shares attractive at current levels,” Bailey wrote.

Monday’s broad selloff, and in particular the Nasdaq’s plunge, kicked into high gear after lawmakers failed to pass a Wall Street bailout bill. Amid fears that the current credit crunch could push the economy into a deep recession, not even the tech sector’s lack of debt and strong cash position were enough to keep panicky investors from bailing.

Tuesday’s rebound offered some solace, but as Monday’s collapse showed, tech is along for Wall Street’s ride, like it or not.

By Yi-Wyn Yen

The Google-Yahoo search advertising pact will get approval from the Department of Justice in the next few weeks, but not without some serious scaling back of the deal, according to one analyst.

Thomas Weisel Partners managing director Christa Quarles expects the Justice Department to put limits on how often Yahoo will be allowed to run Google’s (GOOG) ads on Yahoo’s web properties. Yahoo’s revenue-sharing agreement gives the Internet portal flexibility on the number and the type of Google ads it can show. Quarles predicts that the Justice Department will not trust Yahoo enough to give it that much freedom.

“The DOJ will put some caps on how much Yahoo can move over to Google,” Quarles says in an interview.

Google and Yahoo (YHOO) plan to start the partnership in October. The pair gave the Justice Department 3.5 months to review the agreement for antitrust concerns after striking a deal on June 12. Any restrictions on the deal that the government wanted could either be accepted by the companies or not, in which case the feds would have to decide whether to pursue court action. The department has reportedly hired Sanford Litvak, a top litigator, to head up any case.

The agreement the companies struck allows Yahoo to use Google’s technology to display Google’s ads alongside Yahoo’s search results. The search giant will pay Yahoo a portion of the revenues it gets over four years. Yahoo will have the option to renew the deal in two straight three-year terms. Industry analysts estimate Google gives its AdSense partners 80% of search revenue, and that Yahoo will get a similar arrangement.

For the month of August, Google controlled 63% of the search traffic in the U.S and Yahoo owned 20%,  according to comScore.

Yahoo is vague about exactly how often it will turn to Google’s search-ad engine to supply results on a Yahoo page. But executives insist they plan to run Google’s ads only when Yahoo has low ad inventory, especially in “long-tail” searches such as “red roses in Birmingham, Ala.”  Yahoo says that the Google partnership can increase annual revenue by $800 million, or 11%.

Quarles argues that the feds will want to put more limits on the deal to keep Yahoo from becoming addicted to Google. “Let’s say Yahoo starts with long-tail queries. Then they start turning up the dial to include the retail segment. And then it’s, ‘Ooh, my. We can double monetization.’ There’s a very high temptation for Yahoo to shift over to Google,” Quarles says.

The ad partnership has received criticism from powerful interest groups such as the Association of National Advertisers and the World Association of Newspapers. Advertisers say they fear the combination of the top two search engines will drive up the prices they pay for search keywords. Newspaper publishers worry that the combined forces of Google and Yahoo will reduce competition and ultimately lead to less revenue and higher fees for them.

Both Google and Yahoo insist that competition will get better as the tarnished Internet portal invests the additional money to improve its search ad system.

Quarles predicts that Yahoo will make far less than the $800 million the company says it can.

That’s not good news for investors who saw a buyout from Microsoft (MSFT) as a better alternative to the Google pact. In a June note to clients, Quarles wrote that Yahoo’s revenue opportunity for the first year will be between $313 million and $563 million. She speculates that Yahoo will outsource no more than 15% of its search ads to Google.

She says now that based on her market research and conversations with Yahoo insiders, the feds will likely limit the agreement in a way that keeps Yahoo’s take to her estimates.