All Things Digital

Microsoft (MSFT) has withdrawn its bid for Yahoo (YHOO), spanked its CEO in a stink-bomb of a public letter, disavowed plansfor any future acquisitions, and disbanded the slate of dissident directors it had lined up should it have decided to go forward with a hostile proxy bid for the company.

But if Yahoo, beaten into submission by irate investors, should suddenly come crawling back to the now empty negotiating table, Microsoft might indulge it, if only for a moment. For now, it’s busy with what Microsoft’s Chief Research and Strategy Officer Craig Mundie refers to as “Plan B.”

“The market may wish that the Yahoo deal may come back together, but Microsoft at least at this point assumes it’s over,” Mundie told Reuters. “Yahoo could always come back again and say, Please buy us for $33 (a share), and I’m sure we might reconsider it, but we’re not assuming that’s going to happen.”

Seems Microsoft, like Yahoo CEO Jerry Yang, is more than willing to listen if the company has anything new to say. And it’s not even facing any shareholder lawsuits …

Get this. Yahoo (YHOO) didn’t accept Microsoft’s (MSFT) offer of $33-per-share, because it didn’t know Microsoft had offered $33-per-share. This according to people close to Yahoo, who claim that Yahoo only learned Microsoft was willing to raise its bid in Microsoft CEO Steve Ballmer’s kiss-off letter to Yahoo CEO Jerry Yang. “We did not know what the offer was,” said one.

Meanwhile, another source close to Yahoo claims Microsoft has mischaracterized the negotiations between the two companies. “It is simply factually incorrect to make it seem as though we weren’t actively engaged in robust negotiations,” he told CNBC, stressing that Yahoo had embraced its fiduciary responsibilities, not shirked them as Microsoft would suggest. “Microsoft is lying,” he said. “How much communication do they want? They were upset because we wouldn’t accept a low-ball bid.”

But perhaps not as upset as Yahoo shareholders may be having just watched $14 billion evaporate into thin air because the company’s board suddenly claims not to have known what Microsoft’s offer was. You can almost hear the shareholder lawsuits being written. Said Stuart Grant, managing director at Grant & Eisenhofer, a law firm that specializes in bringing investor lawsuits: “I think it’s pretty hard for the Yahoo board to turn down $33 when they’ve shown no ability to turn around their stock price. There’s going to be breach-of-fiduciary-duty lawsuits, and I must tell you they are looking pretty good right now.”

As one of the original 13 colonies, you’d think that New York State would have a particular antipathy toward things like “taxation without representation.” And perhaps it does, just not when it’s the one doing the taxing.

The state recently passed a so-called Amazon Tax, a new law compelling out-of-state online retailers to start collecting New York sales tax. The law, designed to recover sales taxes potentially lost to Internet purchases, requires any e-tailer with even a single affiliate site with a New York State address–say, a blog that earns a referral fee for sending customers to Amazon (AMZN)–to collect sales tax on all goods sold in the state, even those not sold through the affiliate.

Its authors say it will contribute about $50 million to the state’s budget, and it might, if Amazon doesn’t get it declared unconstitutional first. Earlier this week, the company filed a suit challenging the law because it imposes tax-collection obligations on retailers, online and off, with no physical presence in the state. Worse, it does so based on nothing more than advertising in New York, a definition that includes retailers with even the slightest connection to the state.

Said Amazon: “This statute was intended to impose tax-collection obligations on out-of-state Internet retailers such as Amazon. Nonetheless, the statute, as drafted, on its face would also impose tax-collection obligations on non-Internet out-of-state retailers who pay New York print media, television or radio outlets to advertise their products and thereby refer New York customers to buy them.”

The controversy over Facebook’s Beacon advertising system may have been laid to rest last December, but its memory lingers on.

Today brings news of the first lawsuit over the service and, oddly enough, it wasn’t filed against Facebook. It was filed against Blockbuster. Facebook member Cathryn Elaine Harris is suing the video chain Blockbuster (BBI) for its participation in the Beacon program. Her complaint alleges that Blockbuster violated the federal Videotape Privacy Protection Act when it shared information about her movie rentals and sales with Facebook without her consent. It seeks class action status and $2,500 for each violation of the 1988 statute.

Yahoo’s paid search performance may be the fastest growing in the industry, but that doesn’t mean it’s the most effective. In fact, some companies would argue it’s not that effective at all. Companies like BigReds.com, which is suing Yahoo (YHOO) for more than $1 million for click fraud.

The collectibles retailer claims it paid Yahoo’s Search Marketing unit, formerly known as Overture Services, some $936,000 between 2002 and 2006 for click-throughs. It assumed these click-throughs were from legitimate customers, but it turned out they were generated by Yahoo/Overture affiliates who received commissions based on the number of clicks their sites generated for advertisers.

“These clicks were not actual traffic, but were fraudulent clicks,” BigReds claims in the suit. “Affiliates of Overture used software programs, employed people, and/or directed people other than actual customers to click on plaintiffs’ links from keyword search results.”

To be fair, Yahoo did offer BigReds a refund for the fraudulent clicks. It just wasn’t as large as the retailer had hoped–$17,082.80.

It’s a Sturm und Drang race in the electric car world.

Electric-car start-up Tesla Motors is suing rival Fisker Coachbuild, charging that its founder Henrik Fisker stole valuable company design ideas and trade secrets. Along with his partner, Bernhard Koehler, Fisker was hired by Tesla to design the company’s oft-delayed plug-in electric-powered White Star hybrid sedan.

Tesla claims Fisker sabotaged the White Star project by purposely drafting a sub-par design that set it back three to six months, then stole proprietary Tesla technology and used it to build a competing car–the Fisker Karma. Unveiled at the Detroit Auto Show this past January, the $80,000 Karma is scheduled to arrive at market in late 2009. Because of the production delays allegedly caused by Fisker’s designs, the White Star won’t arrive until 2010.

Said Tesla attorney Adam C. Belsky, “I think it’s ironic that Fisker chose to name his car the Karma, when what he’s done is very bad karma.” A Fisker spokesman says the company has no comment on the lawsuit.

Hard-drive maker Seagate Technology has finally settled on a strategy for competing with its solid-state drive rivals. It will enter the SSD market this year. And to prepare the market for its arrival, it’s suing an SSD pioneer for patent infringement.

Yesterday, Seagate (STX) filed a lawsuit in federal court accusing STEC Inc. (STEC), an early SSD maker, of patent infringement. In the suit, Seagate argues that STEC’s solid-state drive products violate four Seagate patents covering the ways those products communicate with a computer. The company requested an injunction and unspecified damages, which it asks be tripled if STEC is found guilty of willful infringement.

“The public perception has been that solid-state will take over the world and run disk makers out of business, but you can’t bring that product to market without licensing disk-drive technology,” said Seagate CEO Bill Watkins. “STEC infringes on a number of Seagate’s patents which are important to the entire industry. We thought they would have to learn how to do storage differently to avoid our patents, but they decided to go ahead and violate them. … We have spent $7 billion over the last 10 years to optimize how our disks work. This is the first lawsuit brought by a hard-disk company against a solid-state company. We are protecting the entire industry.”

That’s an altruistic way of looking at litigation that Watkins suggested in an interview in March was designed to protect Seagate’s own turf. After all, a Seagate victory in the suit could pave the way for cross-licensing agreements, not just with STEC, but with other SSD makers as well.

Motorola (MOT) has finally succumbed to the aggressive … “charms” of billionaire investor-provocateur Carl Icahn and appointed two of his four nominees to its board of directors. Under the terms of the deal, William Hambrecht, co-founder of Hambrecht & Quist, and Keith Meister, a managing director of the Icahn investment funds, will be nominated to Motorola’s board. In return, Icahn will drop his lawsuit against the company as well as his proxy challenge.

Another victory for Icahn, who saw his demands for a breakup of the company met last month, when Motorola announced plans to spin off its handset business. Course, these victories have yet to pay off. Icahn, who owns a 6.4% stake in Motorola, began investing in the company when its shares traded at $19. They’re now trading around $9.86.

“This is a very positive step for Motorola in that shareholder representatives will have strong input into board decisions affecting the future of our company,” Icahn said in a statement.

“Shareholder representatives” … heh.

Frankly, I’m kind of appalled that they’re threatening me after the work I’ve done for them free of charge, but after dealing with a bunch of other groups with deep pockets and good legal connections including companies like Microsoft (MSFT), I can’t say I’m surprised. I try to shrug it off as a minor annoyance that whenever I do something successful, every capitalist out there wants a piece of the action.”

–Facebook CEO Mark Zuckerberg, February 2004

The inane dispute over the provenance of Facebook is finally nearing resolution. According to the New York Times, Facebook is reportedly close to settling that pesky lawsuit that accused founder Mark Zuckerberg of lifting social network ConnectU’s source code and business plan when he worked for it as a programmer.

Terms of the settlement haven’t been disclosed, but one would imagine it involves a nice little financial windfall for the founders of ConnectU–brothers Cameron and Tyler Winklevoss and their colleague, Divya Narendra. Facebook’s certainly got the money to pay to make the suit go away and a very good reason to pay it. It would be poor form for the company to head into an IPO with its quaint little creation myth in dispute.

Motorola has finally taken a RAZR to its handset business. In the face of growing pressure to bolster its ailing stock price, Motorola (MOT) yesterday announced plans to divide itself into two publicly listed companies–one focusing on mobile phones and the other on broadband and mobility services.

“Our decision to separate our Mobile Devices and Broadband & Mobility Solutions businesses follows a review process undertaken by our management team and Board of Directors, together with independent advisers,” CEO Greg Brown said in a release. “Creating two industry-leading companies will provide improved flexibility, more tailored capital structures and increased management focus–as well as more targeted investment opportunities for our shareholders.”

On a conference call with Wall Street analysts, Brown said the decision to carve out its handset business was the result of an evaluation process announced in late January, not a move engineered to appease billionaire investor-provocateur Carl Icahn who sued the company in a Delaware court Monday demanding access to minutes of board discussions about the division’s potential spin-off.

I am not sure how the company lost sight of what matters to our customers (both business and home) the most, but in my view we lost our way. I think our teams lost sight of what bug-free means, what resilience means, what full scenarios mean, what security means, what performance means, how important current applications are, and really understanding what the most important problems [our] customers face are. I see lots of random features and some great vision, but that doesn’t translate into great products.

“I would buy a Mac today if I was not working at Microsoft.”

–Longtime Windows development chief Jim Allchin, Jan. 7, 2004

Allchin wrote that message four years ago, and when it was made public as part of one of Microsoft’s (MSFT) ongoing lawsuits, he claimed he’d written it to be purposefully dramatic. And perhaps that was the case.

Still, it’s hard not to look at the middling, unenthusiastic reviews given the company’s long-delayed Windows Vista OS and think that maybe he was just being honest. Hard, too, not to look at the company’s unexpected (some feel unprecedented) decision to slash the retail price of Vista to spur sales–and conclude that maybe a lot of consumers feel the same way.

Yesterday, Microsoft announced plans to lower OS’s retail price in advance of if its first major update, Service Pack 1 (SP1). The price cuts vary by market, but in general will range from 20% to 40%. In the states, for example, the price of Vista Ultimate will drop to $219 from $299, Vista Home Premium to $129, from $159–substantial cuts, and ones Microsoft hopes will broaden Vista’s appeal.

“Windows Vista has been on the market for more than a year now, with more than 100 million licenses sold in its first year,” Windows consumer marketing Vice President Brad Brooks explained. “While this is great progress … we’ve observed market behavior that suggests an opportunity to expand Windows stand-alone sales to other segments of the consumer market. Over the past year, we conducted promotions in several different markets combining various marketing tactics with lower price points on different stand-alone versions of Windows Vista. While the promotions varied region to region, one constant emerged–an increase in demand among consumers that went beyond tech enthusiasts and build-it-yourself types.”

Analysts, while taken aback by the price cut, seemed to think it a savvy one. “I think this is a smart strategic move,” said NPD Group Inc.’s Chris Swenson. “Vista hasn’t hit their initial expectations.” That said, Swenson doubts the price cut will have Vista flying off the shelves. Microsoft “really wants to help spark Vista sales, though I don’t see it taking off like a rocket like the way Office did after its price was cut.”

Mounting shareholder discontent over Yahoo’s response to Microsoft’s $44.6 billion takeover bid has inspired a legal pig-pile on the Internet company. In an annual report filed yesterday with the U.S. Securities and Exchange Commission, Yahoo (YHOO) said the company has been named in seven shareholder lawsuits claiming it has mishandled its response to Microsoft’s (MSFT) offer. What an annoyance that must be, but not nearly as annoying as the offer that inspired it, which Yahoo memorializes in a section of the report entitled simply,

“Microsoft’s unsolicited acquisition proposal has created a distraction for our management and uncertainty that may adversely affect our business.”

“The review and consideration of the Microsoft proposal (and any alternate proposals that may be made by other parties) have been, and may continue to be, a significant distraction for our management and employees and have required, and may continue to require, the expenditure of significant time and resources by us,” the company wrote in its report. “Microsoft’s unsolicited acquisition proposal has also created uncertainty for our employees and this uncertainty may adversely affect our ability to retain key employees and to hire new talent. Microsoft’s unsolicited acquisition proposal may also create uncertainty for current and potential publishers, advertisers and other business partners, which may cause them to terminate, or not to renew or enter into, arrangements with us.”

The company goes on to note that its stock price, which has been “volatile historically” (Oh, reaaaaally?) may continue to be volatile regardless of its operating performance. And this too will be Microsoft’s fault. “We further believe that, as a result of Microsoft’s unsolicited acquisition proposal, and speculation concerning a potential acquisition, the future trading price of our common stock is likely to be volatile and could be subject to wide price fluctuations,” the company said. “There can be no assurance whether a transaction will occur or at what price. If a transaction does not occur, or the market perceives a transaction as unlikely to happen, our stock price may decline.”