By Yi-Wyn Yen

REDMOND, Wash. – Microsoft chairman Bill Gates on Wednesday unveiled a new game plan to compete with Google, a closely-watched move that comes more than two weeks after the software giant withdrew its blockbuster bid to acquire Yahoo.

Microsoft plans to pay consumers who search and buy products through Microsoft’s Live Search engine. Microsoft’s attempt to lure search users with “cold, hard cash” — in Microsoft’s own words — is the company’s attempt to convince advertisers that it has a viable strategy to combat Google’s ever-growing share of the online ad market.

“We want to deliver the best search results,” Gates told a gathering of online advertisers at the Microsoft Conference Center. “This is giving [consumers] a reason to use a particular kind of search and get value back.”

Whether Microsoft’s new “Live Search cashback” program will draw more users — and, in turn, more marketers – remains to be seen, but some advertising executives said they weren’t convinced that it will help Microsoft catch up to Google.

“This is a shopping comparison tool that’s being rebranded as search,” said Jay Jung, president of Adaptive Marketing, referring to sites like Fatwallet.com and Couponmountain.com that offer similar rebates to consumers.

Microsoft (MSFT) said it will pay a certain percentage of the cost of a product that a consumer buys using the company’s search engine. Users need to set up an online account and can receive their rebates via a check, direct deposit or PayPal, eBay Inc.’s (eBay) online payment system. Microsoft said it has signed up more than 700 merchants, including eBay, Sears, and Barnes & Noble (BKS) and offers rebates on 10 million products.

To be fair, the company has run similar cashback promotions before – with promising results. For three months in early 2006, the company offered $1 million in prizes for online users who entered keyword searches on Microsoft’s search engine and also ran a rewards program for search users last summer. Microsoft’s search market share rose both times during the promotions.

Microsoft rolled out the new cash-back strategy at its annual digital ad conference in Redmond. The two-day summit began Tuesday with Brian McAndrews, the senior vice president of Microsoft’s advertising group, focusing on the company’s organic growth strategies.

The company so far has done little to impress marketers that it has a breakthrough strategy to compete with Google (GOOG). One ad buyer attending Microsoft’s ad conference this week referred to the new plans as “same-old, same-old.”

“Yahoo’s trying to buy traffic and search share. This is one way to do it,” said Standard & Poor’s analyst Scott Kessler. “But to what extent are people going to game the system? Say someone conducts a search on Google or Yahoo for a product, and then replicates the search on MSN to get the cash benefit.”

Many Wall Street analysts predict that Microsoft will eventually buy Yahoo. The odds of that happening increased significantly last week when activist investor Carl Icahn disclosed he had acquired more than 4% of Yahoo and launched a proxy contest to oust Yahoo’s board of directors and engineer a sale to Microsoft. Microsoft’s top brass has in recent days signaled its interest in pursuing Yahoo (YHOO) again.

By Yi-Wyn Yen

Shares of Yahoo spiked more than 6% in afternoon trading Tuesday as a CNBC report said that billionaire activist Carl Icahn is “mulling” the idea of leading a shareholder revolt to oust the company’s board of directors.

“There’s every chance in the world that the stock is being influenced by the speculation of Carl Icahn,” said S&P Internet analyst Scott Kessler.

Yahoo’s board has come under fire from shareholders since Microsoft (MSFT) walked away from the $47.5 billion deal. Should Icahn lead an activist charge and convince enough shareholders that he can nominate a slate that would favor a sale to Microsoft, the move could signal Microsoft to resurrect its offer to buy Yahoo (YHOO).

A call placed to Icahn’s office was not immediately returned.

Icahn would need at least a 5% stake of Yahoo’s shares to run a proxy fight. Some major Yahoo shareholders have signaled they’d be willing to back a hedge fund activist to lead a campaign to bring Microsoft back. Microsoft raised its offer from $31 to $33 in the final days before walking away.

“If I were an activist, the first call I’d make would be to Microsoft and make sure that offer of $33 would still be available,” Kessler said.

During the three-month saga, Microsoft CEO Steve Ballmer threatened to go hostile and launch a proxy fight to remove Yahoo’s board if the company didn’t accept its offer of $33 a share. Then on May 3, Ballmer withdrew the offer and said the company planned to pursue alternatives to beef up its online advertising business. Last week, Microsoft also released the proxy firm it had hired to go after Yahoo.

The deadline for Icahn or any other activist to run an alternate slate of directors is May 15.

By Michael V. Copeland

The last time Microsoft walked away from a major acquisition was more than a decade ago. It was 1995 and a $2 billion bid to buy financial software company Intuit fell apart under scrutiny from the U.S. Department of Justice. While there are clear differences between Microsoft’s Intuit deal and its failed attempt to buy Yahoo, a look at what happened within Microsoft after the Intuit bid collapsed offers a preview how things might play out now.

Intuit (INTU) makes Quicken, the leading personal financial software program. And before trying to buy Intuit, Microsoft had tried to beat it with its own software program, Microsoft Money. Microsoft (MSFT) launched Money in 1991 as a way to get a bigger chunk of the consumer software business (Microsoft Office was yet to come to market), and specifically to get a piece of computerized banking. Personal finance was one of the tasks that helped drive personal computer sales. Think back: in the pre-Internet era of the early ‘90s, a PC let you write documents, build a spreadsheet, and track your spending - that was about it.

Microsoft Money did not capture the hearts and checkbooks of anyone, and became a perennial also-ran (not unlike Microsoft’s web effort MSN). Quicken captured about 90% of the market, the rest was divided among three or four other players including Microsoft’s Money. By 1994, Microsoft was done playing around. Rather than try to beat Intuit, it would simply buy it. Here’s how it went down according to several former Money folks.

On a morning in October1994 everyone on the Money team received a phone call at around 7 a.m., telling them to be at a work by 8 a.m. No explanations. At 8 a.m. an unmarked bus rolls up to the Microsoft campus, and the money team is told to get in. No explanations. The team is deposited in a drab conference room at a Bellevue, Wash., hotel and told to wait. No explanations. About 45 minutes later Bill Gates walks in and explains that Microsoft is about to announce its intention to buy Intuit, and answers a few questions. The Money team waits at the hotel until the market closes.

But Gates and his team knew that there might be anti-competitive flags raised. The weirdest part of whole day was the explanation that not only did Gates want to replace the Money product with Quicken, but to do that Microsoft needed to sell off a new version of Money to Novell and therefore sidestep what were likely be complaints from the Justice Department. So the Money team had to get back to work on a product that Microsoft didn’t really want, to buy a company it did want. (Again, what are you thinking if you are hunkered down at MSN?)

Unlike Yahoo (YHOO), Intuit Chairman Scott Cook agreed to the purchase. (Though according to some on the Money team, it was implied that if had not he and Intuit would face the full Microsoft Death Star fury, that is, they would put everything they had smarts-wise and money-wise in to beating Quicken if he didn’t acquiesce.) It was left to the Department of Justice to raise enough questions that it became obvious to Gates and his team that fighting a protracted battle to buy Intuit might ultimately fail, and in the process kill off whatever audience Microsoft Money had. So Gates bailed on Intuit.

That didn’t mean he bailed on the space, and here is where you are likely to see a similar push post-Yahoo (if it is indeed over). Microsoft took all its focus and much of its money and doubled down on Money. The product improved dramatically. Money 1995 actually found an audience, and all the sudden it was a two-horse race with Intuit. Money grabbed about 35% to 40% of the market, Quicken the rest.

MSN in many ways is like Microsoft Money - it has never been on top. But the culture at Microsoft has always been one of intelligence if not arrogance. It doesn’t matter if MSN isn’t on top, there is a belief that Microsoft’s bench will figure out a way to put it there. “People at Microsoft still believe that they are smarter than everyone else,” says one former Money team member who asked not to be identified. “So just because the current team hasn’t unlocked the door to the Web, doesn’t mean another team won’t. And if they do, they’ll be heroes.”

If the Yahoo deal is indeed dead, you can bet that MSN will get the people and the resources it needs to make a run at Yahoo and in the grander scheme, Google (GOOG). Microsoft has already shown its commitment - $46 billion worth in the Yahoo bid - putting up a real contender in the fight for the web. As with Microsoft Money it’s likely to double, quadruple down it’s own efforts. But as one former Money team member points out, the question is, can Microsoft win or just put up a good fight?

“The epilogue is, as good as we all thought it was, as much progress as we made, Money never became the dominant player,” says Jan Miksovsky, the lead designer on Money 1995 and part of the Money team through 2000. “Intuit remained the market leader and has gotten stronger in other areas. When I look back I was personally gratified to see the Intuit deal fall apart, says Miksovsky, who went on to co-found online calendaring startup Cozi. “But my sense now is that Microsoft would have been in a much stronger position had the deal gone through and they acquired Intuit.”

The question for Microsoft now is, can MSN battle Google with the team and the audience it has or does it remain an also-ran. You will see Microsoft make a move within MSN to catch its competition - it has to. But it needs to be at a pace that will allow the software giant to catch up, and fast.

By Yi-Wyn Yen

Google may be getting cold feet. In a last-ditch effort to avoid a merger with Microsoft, Yahoo said it was considering teaming with Google in a search advertising deal. But some Google executives are now questioning whether that’s a good idea, the Wall Street Journal reported Thursday.

One major hurdle: A Google-Yahoo tieup could face tough scrutiny from regulators in Washington and the European Union. Last month Yahoo (YHOO) ran a two-week test displaying some of Google’s (GOOG) search ads on Yahoo’s homepage. Both Yahoo and Google executives said the experiment went well. The two are reportedly in talks to outsource Google’s search technology in a non-exclusive arrangement.

Spokespeople from both Google and Yahoo declined to comment.

Google may have wedged its way into the mix in order to break up Microsoft (MSFT) and Yahoo. Microsoft CEO Steve Ballmer admitted that Google was a factor when the software giant walked away from its $47.5 billion offer last Saturday. In a letter to Yahoo CEO Jerry Yang, Ballmer said his company would not be willing to deal with the “host of regulatory and legal problems” that it would inevitably inherit if Yahoo partnered with Google.

Last month Microsoft’s general counsel Brad Smith lashed out at the two big Internet sites for partnering even in a limited test. He argued that a Google-Yahoo combo would give Google a 90% share of online search advertising and that “this would make the market far less competitive. It would be fair to say that Microsoft would aggressively lobby against a long-term partnership between Google and Yahoo.

Microsoft was one of Google’s biggest detractors when the search giant said it was going to buy DoubleClick, the top firm in online display advertising. Google got approval from both the Federal Trade Commission and the European Committee to acquire DoubleClick, but the approval took the big G nearly a whole year.

Both the FTC and the European Committee ruled that text-based search advertising and display advertising, which is the preferred way that big brands like to advertise, are two different markets, and therefore the merger was not anticompetitive. But regulators may be more wary if the two biggest players in search want to team up.

“Google has incredible chutzpa,” said Jeffrey Chester, the executive director of the Center for Digital Democracy. The public interest group had opposed Google’s DoubleClick deal because it would give Google an overwhelming lead in online advertising.

Chester said both Microsoft and Google have approached him to support their political message on the Hill. He has not yet endorsed either party, and is waiting for a deal - whether it’s Microsoft and Yahoo or Google and Yahoo - to be announced.

However, Chester said he is wary of a Google-Yahoo tieup. “Whatever happens, we don’t want Google to operate Yahoo out of its back pocket,” Chester said. “Whether or not regulators do something about it, we’ll do something.”

By Yi-Wyn Yen

In the aftermath of the Yahoo and Microsoft dust up, News Corp. says it is staying out of the mess.

News Corp. (NWS) had previously been linked to Yahoo (YHOO) and then switched camps to join Microsoft (MSFT) in its pursuit to acquire Yahoo. Microsoft eventually went it alone and four days ago, the behemoth walked away from its $47.5 billion offer with plans to look into alternatives to beef up its online ad unit. News Corp., which owns social networking site MySpace, shot down any rumors that it will partner with Microsoft.

“We’re not in discussions with Microsoft. There are no discussions,” said Peter Chernin, chief operating officer of News Corp. during an earnings call Wednesday with shareholders.

Chernin said that the company holds “regular conversations with everyone in the space,” but has not held any talks with Yahoo or Time Warner’s AOL (TWX) in the last “couple weeks.” Added CEO Rupert Murdoch, “Nor have I.”

In an effort to stave off Microsoft’s unsolicited bid, Yahoo said it was pursuing other deals like partnering with AOL or Google (GOOG). At one point, Yahoo also considered a tie-up with News Corp.’s MySpace. With its massive and highly-engaged audience, a MySpace partnership was seen as way to attract advertisers and help bring economies of scale for either Microsoft and Yahoo. Though Microsoft has a minor stake in Facebook, neither have developed a major social networking presence.

MySpace may generate millions of page views and visitors to its site, but it continues to struggle with growing its sales. News Corp’s Fox Interactive Media, which includes MySpace and other online properties like gaming site IGN and photo-sharing site Photobucket, will miss its $1 billion revenue target for its 2008 fiscal year that ends June 30. Chernin said the company will fall short of its projections by 10%.

Fox Interactive relies on online advertising to generate revenue. MySpace, which makes up the bulk of Fox Interactive’s revenues, generated $66 million in its fiscal third quarter from an ad-sharing deal with Google.

Chernin explained that there’s a learning curve to make money off of social networking sites. “Social media has only been around for a few years,” he said. “It’s still difficult to quantify the economic value of a friend. We’re working with major brands and agencies to educate and experiment with social media.”

Fox Interactive is still in its growing phase, Chernin said. “We will continue to invest. We’re already invested in [third-party] applications, MySpace Music, and new development tools for the homepage,” he said. “It’s too soon to be milking for margins right now. We need to focus on growth.”

By Scott Moritz

Yahoo (YHOO) chief Jerry Yang has lost a deal and gained some enemies.

Yes, Microsoft (MSFT) walked away from the proposed blockbuster merger - but no, the new enemy is not Microsoft CEO Steve Ballmer.

Instead, it’s Gordon Crawford of Capital Research Global Investors, a holder of 6% of Yahoo’s shares.

Crawford voiced his extreme disappointment in Yang in press reports, including a piece in Tuesday’s Wall Street Journal taking direct aim at Yang and his hamhanded treatment of the Microsoft offer. “I think he overplayed a weak hand,” Crawford told the Journal.

He’s not alone. Other Yahoo investors have taken issue with the way Yang tried to hardball his way to a higher bid.

“This $37 price was ridiculous,” said one Yahoo investor referring to Yang’s deal-breaking counter offer to Ballmer in Seattle on Saturday. “I would have had no problem taking the thing at $31,” the investor said.

Yang has since protested that the $37 pitch was merely a starting point to get the talks going. But after three months, two rejections and a ad outsourcing pact with rival Google (GOOG), Microsoft’s Ballmer decided to use Yang’s starter as an end to the discussions.

The move puts Yang under the spotlight as big investors and small watched Yahoo’s value shrink - on Monday, the stock closed 15% below its closing price Friday.

“This is a clear example where the management didn’t have the best interest of the shareholders at heart. I think a lot of shareholders would have been very happy to do this deal at $33,” said Jacob Internet Fund manager and Yahoo shareholder Darren Chervitz, in Fortune Techland story Monday.

Another big stakeholder, Bill Miller of Legg Mason, whose firm swung to a $256 million loss in the first quarter on bad bets in Countrywide and Bear Stearns, is also feeling the pressure of having more than a 6% position in Yahoo. Miller told Bloomberg that he’s holding out hope that Microsoft and Yahoo can rekindle the discussions.

“There’s probably a lot of people jumping up and down today,” Miller told Bloomberg.

He expects Microsoft to come back. “If I’m sitting in their shoes, I’ll go away and see what happens,” Miller said . “I can come back and the worst case is, I’ll pay six months more of my free cash flow.”

For Microsoft, while the software giant may have averted overpaying for Yahoo, it hasn’t solved the bigger problem: How to compete with Google for the Internet advertising bounty.

Meanwhile, Yang and Yahoo will have a chance to feel some of the investor blowback at the annual shareholder meeting scheduled for July 3.

Observers such as Fortune’s Go West columnist Adam Lashinsky ask: “What will happen to Yahoo’s board? Will angry shareholders kick out its value-destroying board?”

By Scott Moritz

Comcast (CMCSA) has raised $2 billion through a bond sale as the company explores its wireless broadband options, among other things.

The Philadelphia cable giant was able to increase its planned debt offering of $1.5 billion to $2 billion on strong demand for the note, according to Bloomberg News. The news comes a day after the company posted solid first quarter earnings and said it was still planning to move ahead in wireless data.

On the earnings conference call with analysts, Comcast executives said they would take action to to preserve its credit rating.

“We are going to be very disciplined in our capital structures, and do things that make a lot of sense,” Comcast executives said Thursday.

As of March 31, Comcast’s total debt was $37.4 billion, according to a regulatory filing.

Some analysts says the financing move is a good sign that Comcast is getting closer to reaching some sort of agreement on a proposed WiMax joint venture between Sprint (S) and Clearwire (CLWR). Other players that have been involved in those discussions include Time Warner Cable (TWC), Intel (INTC) and Google (GOOG).

Comcast has a big role in the fate of a national WiMax network. If the joint venture fails to find enough funding or participants, the so-called 4G wireless technology faces falling behind the long term evolution or LTE technology that AT&T (T) and Verizon Wireless (VZ) have already committed to.

Thanks to Grand Theft Auto, PS3 and Xbox 360 are shifting into overdrive to sell more gaming machines. Courtesy of Take-Two

By Yi-Wyn Yen

Wall Street analysts predicts Grand Theft Auto IV will easily break video game sales records this week. But one question remains: Will fans buy the game for Sony’s PlayStation 3 or Microsoft’s Xbox 360?

Both Sony (SNE) and Microsoft (MSFT) are in a heated race to win over undecided gamers who must buy one of the two consoles to play the biggest game to be released this year. The popular franchise, from Take-Two Interactive (TTWO), is expected to surpass first-week sales of $400 million, which would top Halo 3’s record of $300 million, according to Evan Wilson, an analyst with Pacific Crest Securities. “Grand Theft Auto is clearly going to be a blockbuster game,” Wilson says.

GTA IV launches Tuesday, which should result in a big boost in monthly console sales for Sony and Microsoft. Both are a distant second to market leader Nintendo with its family-friendly Wii. Nintendo, which does not offer GTA IV, sold 721,00 Wiis in the United States in March, according to market research firm NPD. The Wii sold more than the PS3 — 257,000 units — and the Xbox — 262,000 console — combined. Analysts anticipate first-week sales of about six million copies for GTA IV, which retails for $60 or $90 for a special edition.

“It’s interesting that both Sony and Microsoft are spending a lot of money to align the game with their console,” says Sam Kennedy, the editorial director for gaming publication, 1 Up Network.

Neither Microsoft nor Sony will disclose how much they have spent to promote the game, though both were quick to promote their gaming machines as the best option for GTA IV fans. The Xbox 360, with a 20 gigabyte hard drive retails for $350 while the PS3, which features Blu-ray and twice the hard drive capacity, retails for $399.

“Grand Theft Auto is a premier brand that was really established on the PlayStation platform,” says Peter Dille, senior vice president for Sony’s PlayStation Network. “Guys who love the game grew up on PlayStation. We think that they’ll vote with their wallets for the PS3.”

The GTA franchise has sold more than 65 million copies worldwide in the last 11 years. Of the previous installments, only one was made available for the Xbox platform while all the games were playable on Playstations.

A Microsoft representative says gamers will side with the Xbox because Rockstar Games, the Take-Two game studio that developed GTA IV, is making exclusive add-ons for the console.

Rockstar will release two additional game plays for those who can’t get enough of the drug trade adventures of GTA hero Niko Bellic. The first will be made availabe this fall for the Xbox. “We absolutely believe having exclusive content will boost sales,” says Xbox spokesman David Dennis. “The Grand Theft Auto franchise may have been home to the PS2, but we believe PlayStation owners will stand up and upgrade to the Xbox for [GTA IV].”

Dennis says major retailers in Europe have informed Microsoft’s sales team that GTA pre-orders favored the Xbox over PS3 by 2 to 1. He argues that this is a “strong indication” that more gamers will purchase the Xbox for the month of April.

Other Xbox perks, like Xbox Live and online rewards for top gamers, will attract console converts, he contends. “The PS2 and PS3 has an online network that’s in the low single digits. Make sure you put that number next to ours,” Dennis says. PlayStation’s online network has 3.7 million users, and Xbox Live has more than 10 million.

PlayStation’s Dille was just as quick to diss the Xbox. “Microsoft had its moment with Halo, and that moment has past,” he says. “Sure they’re touting Grand Theft Auto, but you can play it on our platform too. You want to talk about exclusive content? Sony has a very deep lineup of exclusive games like Metal Gear Solid and Grand Turismo that has the industry buzzing. The PS3 has a more exciting story going on this year.”

The two rivals can continue to throw pot shots at each other until May 15, when NPD will name a console leader for April sales in the U.S. Consumers should be happy either way. GTA IV has received fierce reviews in the gaming community. “It’s quite an amazing experience,” Kennedy says. “I can’t imagine any game being bigger this year.”

By Yi-Wyn Yen

The deadline that Microsoft set three weeks ago for Yahoo (YHOO) to accept its buyout offer passed this weekend without either side making a move. While some analysts expect Microsoft to launch a hostile bid, it’s possible that CEO Steve Ballmer will follow through on his threat and walk away from the deal.

The three-month-old battle between Microsoft and Yahoo could come to a head fast. Yahoo has repeatedly rebuffed Microsoft and demanded a higher price - step that Ballmer has said he won’t take.

Earlier news reports indicated that Yahoo’s board of directors would meet on Sunday to consider their options, but there was no official confirmation of a meeting. The Wall Street Journal reported Monday that Microsoft and Yahoo did not have direct contact over the weekend. Microsoft could move as early as Tuesday, according to the Journal.

At stake is Microsoft and Yahoo’s ability to compete with Google as billions of advertising dollars continue to flood the Internet. As Google has risen to become the dominant online ad player, Microsoft and Yahoo have both struggled to gain traction. Most analysts think a merger is the best way for Microsoft and Yahoo to compete with Google.

Microsoft kicked off the battle in late January when it made an unsolicited cash-and-stock bid for Yahoo that was originally valued at $31 a share, or $45 billion. The deal’s value has since dropped to $29.64 as Microsoft’s shares have fallen.

While Microsoft and Yahoo executives have met to discuss the bid, Yahoo has so far spurned Microsoft. Yahoo CEO Jerry Yang has said he’s not opposed to a Microsoft buyout, but argues that the offer “substantially undervalues” Yahoo. To force Microsoft (MSFT) to up the ante, Yahoo has discussed a variety of tieups with Time Warner, News Corp. and Google in recent months.

“Our board and management team continue to be open to any and all alternatives, including a sale to Microsoft,” Yang said last week, when Yahoo reported first-quarter earnings that beat estimates.

Talks between Microsoft and Yahoo have been anything but friendly. Three weeks ago, Microsoft CEO Steve Ballmer issued the ultimatum that expired Saturday. On Thursday, when Microsoft also reported better-than-expected profits, chief financial officer Chris Liddell voiced his frustration with Yahoo’s recalcitrance - and suggested the company’s prepared to go to war or walk away.

“Unless we make progress with Yahoo towards an agreement by this weekend, we will reconsider our alternatives,” said Liddell, suggesting that Microsoft will makes its decision know next week. “The transaction has been anything but speedy as is being characterized by what would appear to be [Yahoo's] unrealistic expectations of value.”

Now that Yahoo has missed Microsoft’s deadline, one of the following three scenarios is likely:

• Microsoft turns up the heat and launches a proxy battle. The company has already hired a proxy firm and reportedly nominated candidates to an alternative board of directors. That slate would come up for a vote at Yahoo’s annual shareholder meeting, sometime before the end of July. (In an attempt to stymie Microsoft, Yahoo delayed its original March 14 shareholder meeting and has not yet announced a new date. According to Yahoo’s bylaws, however, the company must hold the meeting every 13 months, which means by the end of July.)
• Microsoft walks away. The Journalreported that this seems unlikely, although abandoning the bid could increase the pressure on Yahoo to come to the negotiating table. If Microsoft drops its bid for Yahoo, the company is likely to continue acquiring online ad companies. In the past 11 months, Microsoft has spent more than $6 billion to acquire aQuantive and Rapt.
• Status quo. Microsoft extends the proxy deadline while Yahoo tries to convince its shareholders that an alliance with Time Warner’s AOL or Google is more desirable.

Microsoft CEO Steve Ballmer doesn’t want to bid against himself by upping the original deal. Photo courtesy of Microsoft.

It’s not clear how much Microsoft could accomplish without Yahoo. Ballmer clearly sees Yahoo as the ammunition he needs to take on Google as online advertising spend skyrockets. According to eMarketer, advertisers worldwide spent $41 billion online in 2007 — a figure that is expected to double through 2011 as advertisers chase after consumers who are spending more time on the Web and less time watching TV, reading newspapers or listening to the radio. Google controls 40% of the overall market while Yahoo and Microsoft’s MSN have 15% and 5.2%, respectively. Google commands an even greater share in the lucrative search-ad business, with 58.7% of the market compared to 18.1% for Yahoo and 12% for MSN, according to the latest Nielsen data.

Microsoft fears that Google, with its March acquisition of DoubleClick, the world’s biggest online ad server company and big player in the increasingly lucrative market for online display ads, will seize an even bigger portion of the ad market as MSN falls further behind.

Microsoft isn’t the only one worried about Google. A number of media and Internet giants are now circling Yahoo — one of the last independent large-scale online players. “Microsoft’s forcing…everyone to make a move,” says Frank Addante, CEO of Rubicon Project, which helps publishers manage their online ad inventory.

Time Warner (TWX), which owns Fortune.com and CNNMoney, has pursued a deal that would fold AOL into Yahoo in exchange for a 20% stake. Along with aligning with AOL, Yahoo is also looking into outsourcing search advertising to market leader Google (GOOG). Last week Yahoo finished a two-week test that ran Google ads for searches on Yahoo’s homepage. The Justice Dept. is reportedly investigating the test for possible antitrust violations.

News Corp. has approached the deal from different angles. Yahoo and Rupert Murdoch’s News Corp. (NWS) held preliminary talks about a possible partnership after Yahoo rejected Microsoft’s bid. When those discussions stalled, News Corp. began talking with Microsoft about a three-way alliance that would combine News Corp.’s social networking site, MySpace, MSN and Yahoo.

Many analysts argue that ultimately a Microsoft-Yahoo combination is the best option for Yahoo shareholders — and for Microsoft in its war with Google. Wrote Bernstein Research analyst Jeffrey Lindsay in a note to investors on Friday: “We expect the acquisition scenario to play out before the end of July (the theoretical outer limit for the Yahoo! shareholder meeting) and think the outcome is very likely to be a sale to Microsoft at a slightly improved price.”

By Scott Moritz, writer

There may be more than money to consider in the Microsoft-Yahoo standoff.

Microsoft (MSFT) has given Yahoo a deadline of Saturday to accept its buyout offer (or, presumably, at least at start serious talks) or risk triggering a hostile takeover battle. Yahoo wants a higher offer — a demand that Microsoft has so far rebuffed.

But the focus on price may be missing a key subtlety behind the impasse.

One possible stumbling block might be Yahoo CEO and co-founder Jerry Yang’s role in a combined company. As displeased as Yang may be by the prospect of joining forces with Yahoo’s culturally-mismatched rival, some observers say he could be open to a leadership role in the merged Internet division.

“I’ve always believed Jerry Yang wants do something bigger with Yahoo,” as opposed to watching it dissolve into the works of a bigger company, says an analyst who has known Yang since Yahoo went public in 1996. ”He’s Jerry Yahoo, that’s really who he is.”

Yahoo has been exploring other options, including a possible tie up with the AOL division of Time Warner (TWX) and an advertising partnership with rival Google (GOOG) to help outsource some of its ads and trim costs. But almost any type of hookup between the No.1 and No.2 online ad giants seemed fraught with antitrust concerns.

Without a better offer in sight, Yang and the board will likely have to sit down with Microsoft over the weekend and negotiate. If Microsoft told Yang that he would play a top role in the combined company, it might sway the Yahoo founder, says the analyst, who did not want to be identified.

“He’s already a billionaire,” adds the analyst, referring to Yang. “What he wants is his brand to be massive. When the history of the Internet is written it will feature names like [Amazon (AMZN) chief Jeff] Bezos, [Google CEO] Schmidt, Page, [AOL founder Steve] Case. Yang wants to be there.”

Stay tuned.