By Yi-Wyn Yen

Take-Two Interactive’s management is rallying behind the videogame company’s impressive release of Grand Theft Auto IV last month, but its $500 million opening week may not have been good enough to impress shareholders or ward off a hostile takeover from EA.

Take-Two’s popular franchise, which was released on April 29, crushed Halo 3 in video game sales records and even surpassed movie ticket sales for Spider-Man 3, the blockbuster movie with the highest grossing opening week.

But investors haven’t been inspired to value the company any higher since Grand Theft’s results were released Wednesday morning. Take-Two’s shares shot up 55% after EA announced its unsolicited $1.9 billion offer on Feb. 25, and have remained relatively steady since then. Prior to the bid, Take-Two’s stock traded in the mid-teens.

“Take-Two is totally justified in being very proud of Grand Theft Auto, but this goes to show you that the company is not worth any more today than it was on Feb. 25,” said WedBush Morgan analyst Michael Pachter. “The first-week results have changed nothing.”

Take-Two is banking on its best bargaining chip, GTA IV, to show how valuable the company is to potential buyers. GTA IV sold more than 6 million games in its opening week for more than a half billion worldwide. Halo 3, a Microsoft (MSFT) Xbox 360 exclusive, was the previous record holder with its $300 million first-week launch. Spider-Man 3, the No. 1 box office opener, brought in roughly $382 million worldwide in roughly the same time frame, according to Box Office Mojo.

The box office comparison isn’t “apples to apples” since videogames cost about six times more than a regular movie ticket, but that didn’t stop Take-Two (TTWO) from vigorously bragging about its new record. “This is the largest entertainment release for a first week launch,” Take-Two CEO Ben Feder told Fortune. “What it says about Grand Theft Auto is nothing less than remarkable.”

Analysts expect Take-Two to rake in more than $1 billion in GTA IV revenue by selling roughly 18 million copies through 2009.

There are concerns that without GTA, Take-Two is simply a one-hit wonder. “Every couple years it has a windfall product launch based on a really valuable [intellectual property] and it’s really lean in between those years,” said John Taylor of Arcadia Research. “For Take-Two so much depends on when the next shipment of Grand Theft Auto releases.”

Feder says the company is not just about the GTA franchise. “Take-Two is uniquely positioned in the industry and has the broadest array of intellectual property,” he said.

EA (ERTS) went hostile with its all-cash offer when Take-Two’s management rejected its bid in late February. It has given Take-Two shareholders until May 16 to consider its tender offer.

However, that doesn’t mean that EA and Take-Two’s management aren’t in negotiations. Take-Two’s chairman Strauss Zelnick said he would be willing to talk with EA or any other interested buyers the day after GTA IV’s launch. Last month Zelnick said at a shareholder meeting that he refused EA’s offer prior to that date because it was “highly opportunistic and poorly timed” to get the most out of Grand Theft Auto.

Feder and an EA spokesman said they had no comment on whether the parties are currently in talks

The alternative for EA is to simply walk away from the deal. But analysts say that is an unlikely scenario. They still anticipate the deal to go through, though at a slightly higher share price between $26 to $28. A dilution of shares awarded to Take-Two’s management has reduced the value of Take-Two’s original offer price by 26 cents to $25.74.

“Will EA go higher? Of course they will. But if Take-Two sits down and they want $30, that’s not possible,” said Pachter. “Are EA and Take-Two talking? Of course they are. The question is, will the two sides come up with a reasonable compromise.”

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, writer

Cisco (CSCO) eased slowdown anxieties slightly by setting its sales target below its long-range forecast, but in line with expectations.

The San Jose networking gearmaker posted better than expected adjusted earnings of 38 cents a share up from 34 cents in the year-ago period. Sales for the quarter were $9.79 billion, up from $8.86 billion last year.

Analysts were looking for pro forma earnings of 36 cents on $9.75 billion in sales, according to Yahoo Finance.

Looking ahead, CEO John Chambers told analysts on an earnings call that he expected sales in the fourth quarter ending in July to grow in the range of 9.5% over year-ago levels. That is in line with the 9.2% year-over-year growth expected by analysts.

Chambers said the company still expects its long term growth to be in the 12% to 17% range, but the current quarter was coming in below that pace due to cautious spending in the United States and Europe.

Chambers called the spending caution and sluggish economy a “relatively short-term challenge going forward.”

In March, Cisco fed slowdown fears with a belt-tightening move, asking managers to limit travel expenses and use accumulated vacation time. Those moves may have help contribute to the 2 cent expectation-beating bottom line performance.

Cisco’s solid results helped send the stock up 2% in after-hours trading Tuesday.

By Paul Sloan

If the humans can’t conquer the chaotic digital music marketplace, let the machines try. At least that is part of the message in a Warner Music announcement Monday.

Warner CEO Edgar Bronfman Jr., long frustrated that the industry gave Apple (AAPL) chief Steve Jobs too much control over the pricing of digital music, has enlisted a small software company to help it figure out a varying pricing model that might eventually affect what we all pay for digital albums on sites like Amazon.com.

The company, Indianapolis-based Digonex, has developed a system that suggests prices for Internet goods based on a set of behavioral principles and economic and psychological theory. Digonex has built software products used by eBay buyers and sellers. Now it’s turning to music, which is a natural fit since Digonex began in 2000 as a music download service called MusicRebellion.com.

Digonex spokesman Chris Pohl said Warner (WMG) will send Digonex a range of data that Digonex will feed into its system, called DigitalOnlineExchange. Among the factors it will examine: The number of downloads a particular album receives; the genre of music, sales by similar artists and historical sales data about that artist. It will then come up with wholesale prices that will fluctuate depending on what the data tells it.

Warner, home to such acts as Matchbox Twenty and Lil Kim, can then decide whether this algorithmic method might be help get people to buy more music online and at prices that helps Warner’s bottom line.
Warner, which has seen its stock trade between $5 and $9 in the past few months, is set to report earnings on Thursday.

By Michal Lev-Ram

Just as one high-profile buyout bid is wrapping up, another may be beginning.

Deutsche Telekom AG (DT), the parent company of T-Mobile, is considering a bid to acquire Sprint Nextel (S), according to news reports Monday.

Shares of Sprint were up nearly 6% on the news, while Deutsche Telekom was down about 1.4%.

While Germany-based Deutsche Telekom has nearly 120 million customers worldwide, T-Mobile is the smallest of the top four mobile operators in the United States, with just 28.7 million subscribers. A combination with Sprint (which has about 54 million customers) would make T-Mobile the largest U.S. wireless carrier, ahead of rivals Verizon Wireless (VZ) and AT&T (T).

Last year, Deutsche Telekom said it would look at international acquisitions as part of a new growth strategy its CEO called “Focus, fix and grow.”

“We want to use our expertise to be able to grow in mobile communications, including the possibility of acquisitions, based on our strict business criteria,” Rene Obermann, the company’s chief executive, said in March 2007.

But while Sprint’s flagging share price, coupled with the benefits of its subscriber base and spectrum holdings, may make it an attractive target, some analysts say a buyout is unlikely to happen anytime soon.

Sprint has been struggling with customer service issues and managing the two networks it currently runs, and has also run into problems with the delayed launch of yet another next-generation network called WiMAX, now expected to roll out later this summer. All three of Sprint’s network technologies are different from T-Mobile’s GSM infrastructure, which means they’re compatible with different phones. Running all four could be a logistical nightmare for Deutsche Telekom.

Citigroup analyst Michael Rollins predicts that there’s a 25% chance of a Sprint acquisition — not just by Deutsche Telekom — in the next year.

“…The problems at Sprint are still deep-rooted and may deter a buyer in the near-term…” Rollins said Monday in a written report, adding that other potential obstacles to a deal going through include issues with regulatory approval and the difficulties of integrating Sprint and T-Mobile’s different networks.

A Deutsche Telekom spokesperson could not be immediately reached for comment. Sprint spokesperson Leigh Horner declined to comment on “speculation.”

Also on Monday, T-Mobile announced the New York City launch of its 3G network. It is the last of the top four carriers to roll out the technology, which provides customers with a higher-speed network well-suited for data services.

By Scott Moritz

AT&T’s (T) planned $200 subsidy on Apple’s (AAPL) iPhone could increase the sales of the new 3G model by 50%, according to one analyst.

Using a comparison to price cuts of Motorola’s (MOT) Razr — the 110-million-units-sold wonderphone from yesteryear — Bernstein analyst Toni Sacconaghi says its reasonable to expect that AT&T could more than double its iPhone sales, which currently account for half of all Apple’s iPhone numbers. He made the analysis after Fortune first reported the plan by the Apple’s exclusive iPhone partner to cut the price of the upcoming 3G version of the phone.

Sacconaghi sees a strong parallel in the scorching history of Motorola’s Razr phone. In 2005, Razr’s expensive ultrathin metal-clad design went from being the coveted phone of the moment to a pop culture sensation as the price fell.

“The Razr’s unit sales run-rate doubled when its price dropped from an initial $500 to $150, then doubled again when the price fell further to $100,” Sacconaghi wrote in an Apple research note Thursday.

“While offering the subsidy would cost AT&T $200 per iPhone user, we estimate the cost would be more than offset if the subsidy results in an increase in the iPhone subscriber base of around 100% - which appears to be a realistic assumption in light of the Razr’s experience,” he wrote.

Sacconaghi is an Apple analyst but he says he has not confirmed the price cut plan with Apple or AT&T.

Cell phone and smart phone subsidies are common throughout the U.S. and Europe. The iPhone was unusual in that it was sold at full price. Despite the hefty $400 price tag, Apple has sold 5.7 million iPhones, over half the way to its goal of 10 million for the year.

For AT&T, the phone is fantastic bait to reel in customers from rivals like Verizon Wireless (VZ), Sprint (S) and T-Mobile (DT), at a time when wireless growth is slowing. To date, AT&T says about 40% of iPhone customers are coming from other services. Not only does the iPhone lure customers, it brings in the type of customers that the industry cherishes: big spenders.

AT&T says it rakes in an average of $95 a month from each iPhone customer, nearly twice the average monthly bill of its conventional cell phone user. With faster 3G phones, it’s likely that iPhone fans will spend even more money time on the mobile Internet. AT&T has a revenue sharing agreement with Apple where it forks over as much as 25% of its iPhone customers’ monthly payments to the company.

The remaining take for AT&T is between $70 and $75 a month per iPhone user totaling more than $1,700 over the life of the two-year contract, wrote Sacconaghi.

AT&T plans to lock the subsidized iPhones so they can’t be used on other companies’ networks. That leaves it open to debate whether Apple will sell unlocked, unsubsidized phones at its stores. Sacconaghi says people might pay a premium for an unlocked iPhone, untethered as it would be from the AT&T service. “We believe the availability of factory-unlocked iPhones would further stimulate overall iPhone sales, though price may remain a barrier to truly mass market adoption.”

The mass market however, is a double-edged blade as Razr observers will note. Razr’s ride to popular glory was followed by a plunge into ignominy as the price of the phone went to zero, a precursor to the downfall of the Motorola’s mobile phone business. But that is one Razr parallel Apple fans aren’t likely to make.

By Michael V. Copeland

Web chat platform Meebo has landed $25 million in a venture funding from a group of investors including Time Warner Investments (TWX) (Fortune is owned by Time Warner), JAFCO Ventures and KTB Ventures. Existing investors Sequoia Capital and Draper Fisher Jurvetson also re-upped in the Series C round, which puts a valuation on the year-old Mountain View, Calif-based startup at an estimated $200 million before the additional money.

Meebo joins Web 2.0 startups Slide and Ning in recently closing massive rounds of venture capital funding (Slide, which creates widgets, raised $50 million at a $550 million valuation. Ning, a platform for creating social networks, raised $60 million at a $500 million valuation).

Ning investor and co-founder Marc Andreessen has explained his company’s Series D round as a way “to make sure we have plenty of firepower to survive the oncoming nuclear winter.” Other bellwether social media startups including music discovery site Imeem, and widget factory RockYou, are also rumored to be on the fund-raising trail, looking for equally large war chests and valuations to go along with them. They are being watched very closely as proxies for the rest of the Web 2.0 ecosystem.

With M&A seemingly drying up, many Web 2.0 startups are scrambling for another round of venture capital money so they can survive — most won’t. In the last few months, VCs and other private equity players have become reluctant to pour more cash into all but the most wildly successful Web 2.0 companies.

Meebo, with 30 million unique users in March, fits that bill in terms of growth for its instant messaging service and chat rooms, but it has very little revenue. Instant messaging has not been a place that companies have found easy to monetize, but Meebo thinks it may have landed on the right formula.

The startup has been testing forms of advertising on its service, including buddy icons and wallpapers sponsored by brands like Puma and featuring television shows from CBS.

The idea is to create advertising in forms that people will want to pass around to their friends, whether that is movie trailers, quizzes or buddy icons, says Meebo CEO and co-founder Seth Sternberg.

“Social media is all about sharing, it’s our job now to go out to the market and show that the units of advertising we create produce clicks,” Sternberg says. “So far the units we have been testing have been performing fantastically, but the next step is to really blow it out. Our two fundamental goals are to continue to grow and work in earnest on monetization.”

Sternberg acknowledges that this round of funding will ensure Meebo gets through any rocky economic period. “We wanted this to be a round that would carry Meebo very far,” he says. “It’s possible that the markets are going to become weak, but it’s a great time to build a business when times are rough and I think it’s wise to put yourself in a position so you can get through them and grow.”

By Scott Moritz, writer

AT&T (T) is planning to put some extra shine on the even sleeker new Apple (AAPL) iPhone.

When the 3G iPhone is introduced this summer, AT&T, the exclusive U.S. iPhone sales partner with Apple, will cut the price by as much as $200, according to a person familiar with the strategy.

AT&T is preparing to subsidize $200 of the cost of a new iPhone, bringing the price down to $199 for customers who sign two-year contracts, the source says. Apple is expected to have two versions of the new iPhone, an 8-gigabyte-memory and a 16-gigabyte-memory model with price tags widely expected to be $399 and $499.

AT&T and Apple declined to comment.

At $200, the iPhone would be within reach of a much wider consumer market and give AT&T a strong magnet to pull lucrative customers away from rivals like Verizon Wireless (VZ), Sprint (S) and T-Mobile (DT). The $200 rebate or subsidy would be limited to AT&T customers and not available through Apple’s stores. The new iPhone sold by AT&T will likely be locked or programmed so buyers can’t take the cheaper iPhone to another phone service.

Subsidies of $100 to $200 are common in the U.S. phone market, where people buy their phones from their carriers. Lowering the consumer cost of the phone to win two-year subscribers is considered a small investment with a quick payoff. The average monthly wireless bill is around $50, so a phone company can recoup the phone’s cost in a matter of months.

The average iPhone user however, runs up a $100 tab each month due to the higher priced data and calling plan. This would give AT&T an even quicker payback on its $200 outlay. But AT&T doesn’t get to keep all the money it collects from its iPhone users. Unlike most other phonemakers (but like BlackBerry maker Research in Motion (RIMM)) Apple has a revenue-sharing arrangement that requires telcos like AT&T to pay somewhere between 9% and 25% of the money collected each month from iPhone users.

The new iPhone is expected to be released on the one-year anniversary of the original iPhone debut June 27 or thereabouts. A few weeks prior to that launch, Apple is planning to stop supplies of the older model iPhone, according to the source. This will help clear out inventory and stir up demand for the new device. It will also attempt to avoid the public relations pratfall Apple made when it cut the price of the iPhone without warning last year. To soothe the ire among people who bought the iPhone just before the sudden markdown, Apple issued store credits.

A few details about the new iPhone have also been confirmed by the source. The new iPhone will be 2.5 mm thinner than the 11.7 mm original. The iPhone will also have a GPS chip for navigation and other location-based services.

Yahoo has until Saturday to accept Microsoft’s offer. Courtesy of Yahoo.

By Yi-Wyn Yen

The Microsoft-Yahoo standoff could get ugly fast.

Saturday is the deadline that Microsoft set three weeks ago for Yahoo (YHOO) to accept its buyout offer - or face the possibility of a hostile bid or a decision by Microsoft to abandon the deal altogether. The April 26 deadline brings to a head three months of high-profile jockeying during which Yahoo has repeatedly rebuffed Microsoft and demanded a better price.

At stake is Microsoft and Yahoo’s ability to compete with Google as billions of dollars worth 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 on Tuesday, 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 expires 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.”

If Yahoo doesn’t accept Microsoft’s offer by the Saturday deadline, one of the following three scenarios is likely:

• Microsoft walks away. In this case, Microsoft will likely continue to spend money acquiring other online ad companies. In the past 11 months, Microsoft has spent more than $6 billion to acquire aQuantive and Rapt.
• Microsoft turns up the heat and launches a proxy battle. The company has already hired a proxy firm and reportedly nominated 10 candidates and three alternates to its own alternative board. The Wall Street Journal reported that the 10 nominees include former Nextel CEO John Chapple, former Grey Global Group CEO Edward Meyer, former Adelphia Communications chief financial officer Vanessa Wittman, and Jaynie Studenmund, a former executive at Overture Services, the online ad company acquired by Yahoo.
• 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. Courtesy of Microsoft.

Microsoft clearly needs Yahoo. Ballmer sees the No 2. Internet portal 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). Earlier this 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 client note 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.”