All Things Digital

Yahoo’s attempts to rally shareholders in advance of its annual meeting on Aug. 1 are going about as well as its attempts to rally its business. Which is to say, not well at all.

In a regulatory filing urging shareholders to vote for its incumbent board of directors at the upcoming annual meeting, Yahoo (YHOO)
characterized Microsoft’s (MSFT) position throughout the two companies’ acquisition talks as “unresponsive and inconsistent.”

Which is ironic, because the same can be said of Yahoo’s turnaround strategy and its share price as well. Yahoo’s shares were trading at $19.18 the day before Microsoft announced its $31-per-share bid for the company. Six months later they’re trading at $19.65, not 50 cents from where they started.

“We know what Yahoo’s worth,” Microsoft CEO Steve Ballmer said back in April. “$44 billion is a lot of money. If Yahoo’s shareholders like it, that’s great. We are prepared to go forward without a merger with Yahoo. … Time is money.”

It certainly is.

The long-anticipated 3G version of Apple’s (AAPL) iPhone is still well over a week away from market, but already its promise of speedier data services, rich mobile-application platform and drastically lower retail price is driving early adopters mad with desire.

Indeed, a new survey of 3,600 RBC Technology Adoption Panel members showed that 56% of those planning to purchase a smart phone in the next 3 months will buy an iPhone 3G. That’s more than double the 23% that plans to buy a BlackBerry. And it’s nearly 19 times the number that plans to buy a device from the much-diminished Palm. This sort of pent-up demand is unprecedented, notes RBC analyst Mike Abramsky, who expects Apple to ship 14 million iPhones in 2008 and 24 million in 2009.

[Image credit: Nick Anderson]

Steve Martin once said, “The difference between a good comedian and a great one is ti … ming, tiiiii-ming, timmm-ing . . . timing!” If that’s the case, Microsoft’s comedic timing is impeccable.

In a status report filed with Federal antitrust regulators yesterday, Microsoft (MSFT) said it had done much to comply with its 2002 antitrust consent decree and generally applauded its efforts toward interoperability and fair competition.

In the states, perhaps. But apparently not in Asia. Because not 24 hours later, China’s State Intellectual Property Office said it’s investigating the software giant for discriminatory pricing. And according to the Shanghai Securities News, it may sue Microsoft under a new antitrust law scheduled to go into effect Aug. 1.

“On the one hand, global software firms, taking advantage of their monopoly position, set unreasonably high prices for genuine software, while on the other hand, they criticize Chinese for poor copyright awareness,” an unnamed source told the publication. “This is abnormal. With the anti-monopoly law in place, [the] Chinese government and companies have the obligation and right to correct the situation.”

Of course, it’s also “abnormal” for Windows Vista to be priced at $2.50 a copy, yet copies of the OS are widely available in China at that price. Syndicates that distribute more than $2 billion worth of counterfeit Microsoft software aren’t exactly normal either, but you’ll find those in China as well. The FBI did. Which is not to say that China is wrong to complain of Microsoft’s unreasonably high prices–just laughably vindictive in the way it’s gone about it.

Next year is shaping up to be Apple’s (AAPL) best financial year ever–and we’re not even out of 2008 yet.

Last week Piper Jaffray (PJC) analyst Gene Munster said the company’s new App Store could end up generating $1.21 billion in revenue. And now Morgan Stanley (MS) is predicting Apple will sell 27 million iPhones in 2009. “We believe the market generally expects a doubling of iPhone units with the lower price point ($199) and we believe this is realistic, if not conservative,” the investment bank said in a note.

At $200 a phone that would generate roughly $5 billion in revenue. And that’s not accounting for whatever subsidy Apple’s collecting from its carriers.

Like great civilizations, great companies are not conquered from without until they have destroyed themselves from within. And Yahoo (YHOO) appears to be well on its way to doing just that.

Shares in the company slid still deeper into the mud today as the market reflected on the uneventful conclusion of the company’s merger talks with Microsoft (MSFT) and its decision to–well, let’s face it–become a reseller of Google (GOOG) ads. In early trading, Yahoo’s stock, which plummeted 10% in late trading yesterday, fell another 6% to around $22. And it’s likely to fall further still, with financial analysts taking swings at it like kids at a piñata.

“This deal diminishes Yahoo’s relevance among advertisers and strengthens the hand of a key competitor,” analyst Mark May of Needham & Company told clients in a research note today.

And over at Cantor Fitzgerald, analyst Derek Brown agreed. “We remain concerned about the long-term implications of this deal for Yahoo,” he said. “While the company should reap a near-term financial windfall with Google by its side, it seems to be sacrificing its vision of becoming a ‘must buy’ for online advertisers. After all, doesn’t this deal make Google, not Yahoo!, the ‘must buy’ for online advertisers?”

Jeffrey Lindsay of Bernstein Research says the deal is a litigation nightmare waiting to happen. “We think at a minimum that the current deal will result in further lawsuits, which Yahoo will ultimately have to settle, further impacting the economics of the deal,” he said.

And analyst Laura Martin of Soleil Securities Group says it’s just a nightmare, plain and simple. “Execution issues become more challenging as talent continues to stream out the door,” Martin said in a research note. “With the collapse of the Microsoft deal, Yahoo employees lost (in addition to shareholders), and we expect Yahoo’s employee turnover to accelerate as its share price falls and their stock options are way underwater. Shareholder litigation may distract the board and senior management and will cost Yahoo shareholders more money.”

And Shar VanBoskirk, an analyst with Forrester Research (FORR), well, she reacted as I imagine many observers did–with a slow shake of the head. “It’s a great deal for Google,” she told BusinessWeek . “I have no idea what Yahoo’s thinking.”

If it was thinking at all … Said Mark May, an analyst at Needham & Co., “This just reaffirms the view that Yahoo, and particularly Jerry Yang and David Filo, blew it. It’s hard to see how this management team is going to be able to extract or create value anywhere near 33 bucks a share anytime soon.”

Our long national nightmare of unceasing Yahoo-Microsoft headlines is finally over. Shares of Yahoo (YHOO) slipped into the mud this afternoon after the company said it had concluded, “definitively,” whatever spectacularly unrewarding discussions it’s been having with Microsoft (MSFT) without reaching any sort of merger agreement. Redmond, it seems, is no longer willing to pay $33 per share to acquire Yahoo.

Meanwhile, Yahoo and Google (GOOG) moved to complete a search-ad deal.

Dueling statements from Yahoo and Microsoft on the conclusion of their negotiations below. (Carl Icahn’s outraged letter on the whole matter presumably forthcoming…)

Yahoo Announces Microsoft Talks Have Concluded

Yahoo, a leading global Internet company, today announced that discussions with Microsoft regarding a potential transaction–whether for an acquisition of all of Yahoo or a partial acquisition–have concluded. The conclusion of discussions follows numerous meetings and conversations with Microsoft regarding a number of transaction alternatives, including a meeting between Yahoo and Microsoft on June 8 in which Chairman Roy Bostock and other independent board members from Yahoo participated. At that meeting, Microsoft representatives stated unequivocally that Microsoft is not interested in pursuing an acquisition of all of Yahoo, even at the price range it had previously suggested.

With respect to an acquisition of Yahoo’s search business alone that Microsoft had proposed, Yahoo’s board of directors has determined, after careful evaluation, that such a transaction would not be consistent with the company’s view of the converging search and display marketplaces, would leave the company without an independent search business that it views as critical to its strategic future and would not be in the best interests of Yahoo stockholders.

Yahoo remains focused on maximizing value for stockholders by continuing to execute on its strategy of being the ’starting point’ for the most consumers on the Internet and a ‘must buy’ for advertisers. The online-advertising industry is projected to grow from $40 billion in 2007 to approximately $75 billion in 2010, and the company believes it has the right assets, strategic plan, board of directors and management team to capitalize on this growth opportunity.”

Microsoft Issues Statement Regarding Yahoo

In the weeks since Microsoft withdrew its offer to acquire Yahoo, the two companies have continued to discuss an alternative transaction that Microsoft believes would have delivered in excess of $33 per share to the Yahoo shareholders. This partnership would ensure healthy competition in the marketplace, providing greater choice and innovation for advertisers, publishers and consumers.

As stated on May 3 and reiterated on May 18, Microsoft was not interested in rebidding for all of Yahoo. Our alternative transaction remains available for discussion.”

Well, that was fast. Yahoo (YHOO) has issued a reply to Carl Icahn’s latest missive. Terse and caustic, it doesn’t really add much to the “conversation” between the two parties. Yahoo’s message to Icahn: You don’t have a credible plan to operate Yahoo either.

Leaving aside Mr. Icahn’s inaccurate interpretation of our retention plan, we again note that he has no credible plan to operate Yahoo. We believe that Mr. Icahn’s suggestion that we cancel our retention plan would have a destabilizing impact on Yahoo and would clearly not be in the best interests of our shareholders. Furthermore, his suggestion that we put out a price publicly to see if Microsoft (MSFT) will alter its stated position is ill-advised. As we have stated numerous times publicly and privately, we are open to any transaction including a sale to Microsoft if it is in the best interests of shareholders.”

Microsoft’s unsolicited acquisition bid for Yahoo is apparently looking more attractive to the now-minor Internet major, especially since Carl Icahn has mounted a full-fledged fight for the nine seats now on Yahoo’s board.

Sources close to Yahoo (YHOO) say the company would likely agree to an acquisition if the price is right. Trouble is, Microsoft (MSFT) doesn’t seem to be interested in one anymore.

Or at least that’s the way it would like to be perceived. Speaking at an event in Moscow, Microsoft CEO Steve Ballmer once again feigned disinterest in an outright acquisition. “Yahoo was never the strategy we were pursuing, it was a way to accelerate our online advertising business,” he said. “We will spend money on some acquisitions. You can do a whole lot of things with $50 billion.”

You sure can. Like spend $47.5 billion of it on Yahoo, just as you planned to last month–even though, as BoomTown’s Kara Swisher reports, Chairman Bill Gates harbored little enthusiasm for buying Yahoo.

But that may happen yet. Some inside Microsoft say the software company would still like to acquire Yahoo, it just doesn’t want to pay the $37-a-share or so Yahoo CEO Jerry Yang and Co. are reportedly demanding. And it may not have to, if Icahn and other ornery Yahoo investors like Legg Mason Capital Management (LM) force Yahoo’s hand.

Signs of a slowdown in consumer spending abound, but the Mac faithful appear not to have noticed. According to the most recent data from market firm NPD Group, Apple (AAPL) saw a 50% year-over-year boost in Mac sales in April. That’s nearly triple the growth seen in the broader PC market.

And that’s not all. In notebooks, Apple’s sales are growing at twice the market’s current rate.

Oh, and in personal computers retailing over $1,000, Apple’s machines comprised two-thirds of all that were sold during the first quarter.

Granted, the Cupertino, Calif., company only sells one Mac priced below $1,000 (the Mac Mini) and its rivals’ offerings typically price out in the $599-to-$799 range. Still, that two-thirds metric is impressive nonetheless.

Certainly, it seems Apple has tapped deeply into an affluent and expanding fan-base that’s willing to pay a premium for its iProducts. Said Stephen Baker, NPD’s vice president of industry analysis: “People see a value proposition in an offering that gives them a great experience. What Apple drives home [is this]: This is a product that we own from factory to finger. We exert some control so that you get the best experience. When you get in the store, we get you what you want.”

Apple (AAPL) CEO Steve Jobs is so intent on extending his company’s lead in online music sales to the mobile market that he may finally be willing to give up the one-price-fits-all model that’s long been a cornerstone of Apple’s iTunes Music Store’s business model.

Cupertino is reportedly in talks with some of the major music labels about adding over-the-air downloads and a greater variety of ringtones and ringbacks to iTunes in advance of the debut of the 3G iPhone. But getting the labels to agree to such a thing may come at a price, or rather a variable-pricing model.

The labels have long wanted iTunes to abandon its policy of selling songs at a flat rate of 99 cents in favor of a variable-pricing system that allows them to charge more for popular tracks. In the past, they haven’t had the leverage they needed to force Apple to do this. But with the mobile music market at stake and the company gunning for a big 3G iPhone launch come June, Apple may have no choice but to agree to the labels’ terms.

“[Mobile is] clearly an opportunity Apple is missing,” IDC analyst Lewis Ward told Wired News. “And Apple is going to want to do it all themselves, but these OTA music storefronts have not sold very well. Maybe there’s secret sauce Apple’s thinking about, but the track record [of mobile music and ringtone stores that require a credit card rather than charging users via their cellphone bills] has not been impressive to date. The real issue is billing. People are much more comfortable with paying through a carrier [because] you don’t have to enter a credit card number or be worried about security. … That puts the carrier in the supply, and the carrier is going to want their cut, which means the margin for Apple goes lower.”

Looks like Yahoo’s (YHOO) boardroom blitz is on. Billionaire investor Carl Icahn has decided to move forward with a proxy fight to oust Yahoo’s entire board in favor of one more amenable to merger negotiations with Microsoft (MSFT).

“It is unconscionable that you have not allowed your shareholders to choose to accept an offer that represented a 72% premium over Yahoo’s closing price of $19.18 on the day before the initial Microsoft offer,” Icahn wrote in a letter to Yahoo’s leadership. “I and many of your shareholders strongly believe that a combination between Yahoo and Microsoft would form a dynamic company and more importantly would be a force strong enough to compete with Google on the Internet.”

So strongly, in fact, that Icahn–who owns 59 million Yahoo shares–has asked the Federal Trade Commission for permission to buy as much as $2.5 billion more of the company’s stock and has assembled a 10-member alternative board slate. Among the directors nominated, Icahn himself, his lieutenant Keith Meister, former Viacom Inc. (VIA) Chief Executive Frank J. Biondi Jr., and Dallas Mavericks owner Mark Cuban (Mark Cuban?!?).

And lest there be any doubt that Icahn was gunning for anything less than a referendum on Microsoft’s takeover offer, the financier concluded his letter with a parting word of advice: “I sincerely hope you heed the wishes of your shareholders and move expeditiously to negotiate a merger with Microsoft, thereby making a proxy fight unnecessary.”

What’s not yet clear is whether Microsoft is even willing to resume merger talks. Though it’s certainly possible that Microsoft CEO Steve Ballmer and Icahn have been having some back-channel chats about the issue recently …

Yahoo and Microsoft are both trading higher on the news.