Microsoft And Yahoo Met To Discuss Merger, Sources Say

Senior executives from Microsoft and Yahoo met Monday to discuss Microsoft's takeover bid for the company, according to two people familiar with the matter.

The meeting was said to be the first since Microsoft made its unsolicited offer for Yahoo, worth nearly $42 billion, on Jan. 31. Yahoo rejected the offer as inadequate last month.

The meeting was not a negotiation and no bankers were present, said one of the sources, who was not authorized to speak about the matter and thus wanted to remain anonymous.

The meeting with Microsoft is part of the company's strategy to keep all its options open, the people familiar with the matter said.

Yahoo has held talks with News Corp. and Time Warner's AOL, other sources told Reuters earlier.

The session was intended to allow Microsoft to present its vision of a combined company, and Yahoo executives mostly listened, said the Wall Street Journal, which first reported the news, citing a person familiar with the matter.

Financial terms were not discussed and it was unclear which executives took part, the Journal said.

Microsoft and Yahoo spokesmen declined to comment.

The meeting represents a

"solid move, heading into the inevitable,"

said The 451 Group analyst Brenon Daly, referring to a consensus that a deal between the two companies will happen.

"My read on it is that it's a good-faith effort on both sides to begin the process of sorting through really thorny personal questions"

such as how to divide talent and how to work with counterparts in case of a merger, he said.

Since Yahoo rejected Microsoft's offer last month, no other bids have been made public nor has Microsoft sweetened its bid, leaving the two companies in a stalemate.

Yahoo recently extended the deadline for nominations to its board of directors in an effort seen by analysts and investors as forestalling a potential hostile effort by Microsoft.

Microsoft had originally proposed to pay nearly $45 billion for Yahoo, but the value of its offer has since declined to less than $42 billion as its shares have fallen 12 percent.

Microsoft shares were down 61 cents, or 2.1 percent, at $28.05 in Friday afternoon trade on the Nasdaq, and Yahoo shares were down 72 cents, or 2.6 percent, at $26.78.

News Corp Chief Executive Rupert Murdoch has said he would not fight Microsoft for a Yahoo deal.

AOL Thursday said it was buying the social networking site Bebo, in a move that some say signals that its parent, Time Warner, has plans that do not involve Yahoo.

Microsoft shows IE 8 at Mix

Microsoft offered its first public demonstration of Internet Explorer 8 on Wednesday, a prospect that had general manager Dean Hachamovitch struggling to figure out what to cover.

"I'm so excited that I had to figure out how to focus,"

he told the crowd. The marketing folks naturally suggested he point to three major advances, but Hatchamovitch disagreed.

"These are developers,"

he said he told the marketers.

"They can count higher than three."

So, instead he said he would talk about eight features: CSS 2.1 support, CSS Certification, performance, start of HTML 5 support, new developer tools, activities, Web slices and one he hasn't named yet.

Microsoft also said that the first beta of the browser, intended for developers, will be available after today's keynote.

One of the new features, WebSlices, allow users to break a Web site into parts and only get updates from the part they want.

"In IE 8 users can subscribe to parts of Web page,"

Hachamovitch said. He showed an example in IE 8 where users can use Web slices to subscribe to a single eBay auction.

Apple has its own Web-clipping subscription method that is part of Mac OS X.

Separately, Microsoft said it was making available a beta version of Silverlight 2, which will move the technology further beyond delivering video and into creating rich Internet applications.

Among the features of Silverlight 2 is what Microsoft calls adaptive streaming: the ability of the client PC to decide how large a streaming file it can handle at any given moment based on its CPU and network resources.

"If the network gets congested it can drop down to a lower bit rate,"

said Scott Guthrie a vice president in Microsoft's developer division.

With IE8, Hachamovitch discussed Microsoft's commitment to compatibility. He relayed a story of what his kids used to say whenever they had Internet problems.

"They'd ask 'Daddy, did you break the web?'"

Hachamovitch said.

"Most of the time I could honestly say 'No.'"

In a broader sense though, Hachamovitch said, that others might disagree that Microsoft, had in fact broken the Web.

"Web developers might answer the question differently,"

he said.

Hachamovitch then went on to talk about Microsoft's commitment to interoperability and steps that it has taken. Microsoft announced earlier this week that IE 8 would use its most standards compliant mode by default. The company said it believed that move would assuage developer concerns as well as regulatory and competitive issues.

Bill and Steve's Dueling Keynotes End With a Whimper

With Bill Gates' upcoming retirement, January marked the last time he and Steve Jobs would deliver back-to-back keynote speeches at CES and Macworld, respectively. We're witnessing the end to one of the most interesting personal rivalries the technology industry has ever known. Both men's presentations lacked any real punch, though, and they've left us hanging.

Because the Consumer Electronics Show and Macworld run back to back, it's easy to make comparisons between the two men who headline the big tech trade shows. As a journalist, I had barely unpacked my bags, mentally speaking, before I had to move on from listening to Bill Gates to hearing Steve Jobs.

This year is the last when I can draw a timely comparison between, as the Apple ads depict, the straitlaced PC Guy and the cool Mac Guy. Gates said this year's speech was his final CES keynote before he becomes a full-time philanthropist. Jobs won't have Gates to belittle anymore. However, even with Gates gone, Apple will no doubt still find ways to belittle Microsoft . I get the sense that the needling comes from the very top. This kind of tit-for-tat sparring has gone on between the two men since the 1970s.

How Times Change

It is funny how things change. When Gates gave his first CES keynote in 1994, Microsoft was on the march and Jobs was still trying to get his little animated film company, Pixar , off the ground. Now the positions seem reversed. Jobs has more cachet than Gates. He has a Midas touch, with everything from his new operating system to the iPhone getting rave reviews. The only exception was the original Apple TV.

Gates went out with a whimper. Microsoft didn't have many new products to tout at CES. Some cool things, like the Microsoft Surface Computing table, weren't ready to ship. Gates repeated parts of his past speeches on the "digital decade," but he didn't close with any great predictions. Nor did he slam rivals or dazzle us with his intelligence.

His most scintillating quote:

"This is just the beginning. There is nothing holding us back from going much faster and much further in the second digital decade."

I got a sense that Gates didn't have his heart in everything he was talking about. Sure, he had shipped 110 million copies of Windows Vista, the new Microsoft operating system. That's a good way to go out. However, he closed with a demo of "Guitar Hero III," a video game you can get on non-Microsoft platforms. It was as if he had nothing profound to say.

The Man With the $7 Haircut

The hilarious thing that Gates did was make fun of himself in a video that depicted his "last day" of work at Microsoft, expected to happen sometime in the summer. It was as if he was minimizing his importance at Microsoft, signaling that the company could go on without him. He mocked his own celebrity status and used the cachet of his video guests -- George Clooney, Hillary Clinton, Barack Obama, Al Gore and others -- to entertain the crowd. He apparently wants to be remembered for his sense of humor, not for wise words or stunning demos. NBC anchor Brian Williams closed the video with this:

"Let's face it, (Gates) doesn't believe in paying more than $7 for a haircut."

That's what you say about the class clown, not the world's richest man.

Proud Papa

Jobs, meanwhile, was the celebrity at Macworld. The crowd hooted and cheered every little announcement. With his showman's flair, Jobs showed off a few innovations that reflected the different styles of the companies.

Microsoft did so many demos that it diluted the impact of each one. Jobs limited himself to just four products that he treated like his babies. He looked like a proud papa when he held up the world's thinnest notebook computer, walking back and forth on stage with it so everyone could photograph it. And he touted such accomplishments as selling 5 million copies of Apple's new operating system in 90 days and selling 20,000 iPhones a day in 200 days.

Clearly, the personal style of Jobs is hands on, as if he were a Swiss-watch maker. With the dueling keynotes, I have come to expect more from Jobs than I do from Gates. Maybe that's why I was more disappointed with Jobs.

No "One More Thing"

These were evolutionary, not revolutionary, announcements by Apple standards, said Tim Bajarin, analyst at Creative Strategies.

Last year, Macworld outshone CES because of Jobs' big iPhone announcement. This time, Jobs rescued Apple TV from an early death, but he didn't close with his signature "one more thing," surprising the audience with something totally unexpected. Instead, he introduced singer Randy Newman and walked off the stage. It was as if Jobs pulled a punch and decided to keep more announcements in his pocket for another day.

Last year, Jobs and Gates appeared on stage together at the All Things D conference to reminisce about old times. Gates said he would love to have Jobs' taste in picking designs. Jobs commented on how the Mac Guy and the PC Guy need each other.

That's all the closure we'll get to the "Steve & Bill Show." We're witnessing the end to one of the most interesting personal rivalries the technology industry has ever known. In the past couple of weeks, it happened without much ado. It leaves me hanging. Like the ending of "The Sopranos."

Slide takes $50 mln in funding amid Facebook craze

Social network software maker Slide Inc said on Friday it had closed a $50 million institutional financing round, marking the rising valuations of start-ups riding fast-growing Facebook's wave of popularity.

Slide made some of the hottest programs running on Facebook and News Corp's MySpace, including media-sharing applications Slide Shows, Top Friends, SuperPoke! and FunWall.

Max Levchin, its Ukranian-born and Chicago-raised founder, declined to name the investors. But sources close to the deal said they were Fidelity Investments and T Rowe Price.

The round is nearly 10 times the size of the median round of $5.18 million for Web 2.0 firms in the first half of 2007, according to Dow Jones investment tracking unit VentureOne.

This follows the roughly $500 million recently raised by Facebook from Microsoft Corp and Hong Kong billionaire Li Ka-shing, giving it an implied $15 billion valuation.

Slide, incorporated in 2005, was originally self-funded by Levchin, 32, who co-founded online payments company PayPal a decade ago. He later took funding from Peter Thiel, the other founder of PayPal, which eBay Inc bought in 2002.

Subsequent funding for San Francisco-based Slide was provided by leading Silicon Valley venture capitalists Mayfield Fund, former Nokia venture arm BlueRun Ventures, Khosla Ventures and Founders Fund, Thiel's venture fund.

These earlier rounds of funding totaled in the "low tens of millions of dollars," one of the sources said.

DOT-COM RESURGENCE

Slide is among the first companies to capitalize on the success of Facebook and MySpace in becoming central stages for consumer Web use, playing the role of Windows in the personal computer era or the Netscape browser in the early Web days.

Comparing the social network software generation with the dawn of the PC era, Levchin said Slide was poised to lead in the same way that Adobe, Electronic Arts and Intuit became leaders 20 years ago in design and imaging, games and finance.

"We believe there is a huge opportunity to build this next set of businesses,"

Levchin, a self-described caffeine addict who often sleeps just two hours a night, said in an interview.

Slide is based in the heart of San Francisco's former warehouse district, now a hotspot for media and software start-ups like Six Apart, Yelp, Hi5 and StumbleUpon. T-shirted programmers work long hours huddled at rows of PC-cluttered tables, as pet dogs freely roam the Slide office.

Levchin said the new cash will fund accelerated development of products and features, both on Facebook and the soon-to-be-upgraded MySpace platform, while hiring should grow from its current 65 employees to 100 this year. Acquisitions are a low priority, he said, but not out of the question.

Slide's first popular application was a slide show application that allowed Web users to dress up digital photos with glitter and other decorations to share with friends.

That caught fire on MySpace in 2006, before being built to run on other social networks. Slide then shifted its focus to Facebook ahead of that company's move last May to let outside developers build applications to run inside Facebook.

Although MySpace still has nearly double the 61 million users of Facebook, the latter has exploded beyond its roots as a college social network, topping MySpace in terms of media buzz, daily user activity, and software developer attention.

Slide has in turn emerged as the top developer of so-called widgets for Facebook. Web traffic researcher Quantcast says Slide attracts 50 million Facebook users monthly. Slide claims 143 million active users of its programs across the Web.

Microsoft Finds Excel Security Flaw

Microsoft Corp. said hackers have found a way to use some older versions of its Excel spreadsheet program to take over control of people's computers.

Microsoft said late Tuesday that it is investigating reports of such attacks, but has not yet determined whether it will patch the hole, or when.

People who open a specially crafted Excel file from an e-mail attachment or visit a compromised Web site could be inviting hackers to take over their PCs for malicious purposes such as stealing passwords and other personal information, or sending out spam. Microsoft Office Excel 2003 Service Pack 2, Excel Viewer 2003, Excel 2002, Excel 2000 and Excel 2004 for Mac all contain the security hole.

The software maker said in a statement that users of these programs can protect their computers by using a tool that scans the files for bad code before opening, called Microsoft Office Isolated Conversion Environment.

The most recent versions of the spreadsheet program, Excel 2007, Excel 2007 SP 1 and Excel 2008 for Mac, are not thought to be affected, Microsoft said.

Windows Home Server remains a tough sell

Microsoft has largely succeeded in getting a PC into the home, but its effort to put a server there will be an uphill battle.

Bill Gates announced the product to much fanfare at last year's Consumer Electronics Show. However, even folks who are bullish on the concept, such as Forrester Research analyst J.P. Gownder, say it's destined to be a niche product for years to come.

In a soon-to-be-published research report, Gownder figures that home servers (not just those running Microsoft's home server product) will reach 4.5 million households by 2012. That's up from just 190,000 such servers last year.

"That's a pretty good growth rate,"

Gownder said, though he added that "it's still a niche product, at that point," with his forecast representing home servers in only about 3 percent of American homes five years from now.

Gownder said the rise in multiple-PC homes, the increase of broadband, and the fact that people now store their music and photos on computers creates the necessary conditions for a home server to be practical.

"We really are at a point in history where a home server might actually make sense,"

Gownder said.

But, he said, it's still a tough sell. Most people don't know what a server is. And even those who do have an understanding of servers from work may not have such a favorable impression.

"They know that it goes down sometimes,"

Gownder said.

"They know that it causes problems for them."

The one thing that could speed up the slow path to the mainstream, Gownder said, is if a cable company or other TV provider chose to deploy home servers as part of their service.

That concept is not so far-fetched, he said, given the fact that providers are having a tough time keeping up with on-demand TV requirements as content shifts to high definition. Such an approach could lead to growth 10 times what Gownder has forecast.

Microsoft has its own challenges with its Windows Home Server software. The company has struggled to get it into products and onto retail shelves. Hewlett-Packard delayed its shipment until late last year, and few other big-name computer makers have followed with products of their own.

The biggest recent news was negative, with the company announcing a bad bug that could lead to file corruption and data loss. Not exactly the kind of news that makes Middle America want to rush out and buy one.

Microsoft's Steven VanRoekel said the product's sales have exceeded the company's expectations, though he declined to give specific numbers.

"It's definitely tens of thousands,"

VanRoekel said,

"which in a month and a half is good."

One area that Microsoft may look at to boost the popularity of the Home Server is having the software work better in households that have both Macs and Windows PCs.

"That's something we are taking a close look at,"

VanRoekel said, though he added that Microsoft has

"nothing to announce."

Microsoft touts Xbox sales but laments online woes

SAN FRANCISCO (Reuters) - Microsoft Corp sold 4.3 million Xbox 360 video game consoles in the last three months of 2007, helped by hit titles such as "Halo 3" and "Mass Effect," according to company data released on Thursday.

But the software giant also said it was "disappointed" with problems that had plagued its online gaming service for days and offered a free downloadable game to more than 8 million worldwide users of the network.

A total of 17.7 million Xbox 360s had been sold worldwide since it first went on sale in late 2005, Microsoft said. Earlier sales data from the software giant showed 13.4 million consoles sold by the end of September.

"Holiday 2007 was a blockbuster season for the gaming industry,"

Microsoft said, adding that the Xbox 360 has kept its lead over rivals in terms of total dollars spent on hardware and software.

Microsoft competes against Nintendo Co Ltd's wildly popular Wii and Sony Corp's 6758.T PlayStation 3 consoles for dominance in a global video game industry that is thought to have approached $40 billion in revenue in 2007.

Nintendo and Sony have not released holiday sales figures for their machines, but by the end of September, about 13.2 million Wiis and 5.6 million PS3s had been sold globally.

Microsoft has counted on its Xbox Live online service to set its console apart from rivals. The service lets users download hundreds of games, as well as television shows and movie rentals.

But gaming Web sites and forums have been filled in recent days with complaints from users frustrated by not being able to sign on to the service or play online.

Xbox Live General Manager Marc Whitten said the problems stemmed from a "massive increase" in new users of the service over the holiday season, when sales of video game hardware and software surge.

"While the service was not completely offline at any given time, we are disappointed in our performance,"

Whitten said in a statement, adding that Wednesday had set a record for the number of users signed on simultaneously.

Whitten said that as a gesture of thanks to customers, all Xbox Live members around the world will be able to freely download one game over the service. Games sold on Xbox Live typically cost from $5 to $20, and Whitten said details of the offer would come in the coming weeks.

Before the holiday sales surge, Xbox Live had more than 8 million members, many of whom were paying $50 a year for the premium service that lets them play online against others.

The company also said "Halo 3," the final installment of its popular sci-fi shooting game that went on sale in late September, had sold 8.1 million copies by the end of the year.

Another Microsoft title, epic sci-fi roleplaying game "Mass Effect," had sold 1.6 million copies since its late November release. The games typically cost $60 per copy.

Microsoft's announcements came ahead of the annual Consumer Electronics Show in Las Vegas this weekend, when Chairman Bill Gates and other executives are expected to give a peek into the future of the company's products, including the Xbox 360.

Apple's Piping Hot Innovation

Apple (nasdaq: AAPL - news - people ) Chief Executive Steve Jobs wants to patent a process that will save customers the hassle of waiting to order a cup of coffee at a local Starbucks (nasdaq: SBUX - news - people ) or a fresh burger at the nearest fast food restaurant. Even better: The technology would let you jump the line of those ordering in person.

In an application with the U.S. Patent Office published on Dec. 20, the Cupertino, Calif.-based computer and gadget company described a wireless system that would allow customers to place an order at a store using a wireless device such as a media player, a wireless personal digital assistant or a cellphone.

The system could go far beyond the program that Apple announced with Starbucks in September, which allows iPhone users to press a button and wirelessly download the song playing in the background as they sip their soy lattes.

Apple's application with the U.S. Patent and Trademark Office describes a process for placing an order and then notifying customers when an order is ready to grab at a pick-up station. One goal, the patent application notes, is to avoid an

"annoying wait in a long queue if the purchaser arrives before completion of the order."

U.S. Patent Application #20070291710 describes a device that also would keep tabs on where a user shops and what he or she likes to buy. Computers at participating stores would keep track of regular customers and their favorite orders.

Customers might tap a button to order their favorite drink, say a double-shot mocha, as they stroll up to the nearest coffee shop. When the drink is ready go to, the device--such as an iPhone--would chime or blink to let the thirsty one know it's time to scoop up the order at the counter.

The patent puts Apple's partnership with Starbucks in a new light. The technology promises to morph Apple from the business of simply selling gadgets and music and movies that can be played on those devices into an intermediary in all kinds of exchanges.

Apple is notoriously tight-lipped about its future products. But head honcho Jobs has also said that he believes the innovative insights at the core of the iPhone all start in the software built into the device, not its sleek form factor.

Apple granted eight patents in December, and the patent office published applications for 12 others, giving investors and Apple fans an idea of where the secretive company could be headed next.

Most cover relatively mundane technologies. Others, however, have stirred interest. Patent application #20070288886, unhelpfully titled

"Run-Time Code Injection To Perform Checks,"

describes a system that would restrict the use of some software to

"specific hardware platforms."

The application, published Dec. 13, suggests Apple could adopt something similar to Microsoft's (nasdaq: MSFT - news - people ) widely criticized Windows Genuine Advantage copy protection program, which checks a user's machine to confirm that it is not running a pirated version of Microsoft's software in exchange for access to certain software updates.

Microsoft sees Xbox 360 sales growth in '08

Microsoft expects to sell more Xbox 360 consoles in 2008 than in 2007, with Europe standing out as a key battleground for dominance in the $30 billion video game industry.

In Japan, where the Xbox 360 has far lagged Nintendo's Wii and Sony's PlayStation 3, Microsoft said recent and upcoming games from popular Japanese designers should boost sales.

"We will sell more consoles next year than this year,"

Jeff Bell, head of global marketing for Microsoft's games business, told Reuters in an interview.

"We don't want to trade places with anybody,"

Bell said.

He said that the Xbox 360 was strong in Britain and was gaining market share in France and Germany, but that Sony had also been lifted in Europe by a recent price cut for the PS3.

"Europe for us is still the swing,"

Bell said.

"The biggest challenge is that Sony as a brand has had greater staying power than in other areas. Not just PlayStation 3, but Sony as a brand,"

Bell said.

Microsoft had seen some retailers sell out of the high-end Elite model of the console as well as of the lower-priced Arcade version.

Asked if Microsoft was benefiting from Nintendo's ongoing shortage of Wii machines, Bell said:

"Sometimes you're good, sometimes you're lucky, and it's wonderful when you're both."

Bell also took a dig at Nintendo, playing on an industry perception that independent video game publishers have not enjoyed great success on the Wii so far, in part because Nintendo's own offerings are so strong.

"Clearly, we have a competitor where they win and no one else wins. That is not sustainable, it's never been sustainable,"

Bell said.

Nintendo's U.S. president, Reggie Fils-Aime, told Reuters earlier this week that perception was misguided, and he pointed to recent market data showing that 60 percent of Wii game sales in November came from outside publishers.