History > 2006 > USA > Internet (IV)

Google lets Web sites

tailor search to user tastes

Tue Oct 24, 2006 8:09 AM ET
Reuters
By Eric Auchard

SAN FRANCISCO (Reuters) - Google Inc. is ready to let Web publishers and bloggers create custom searches on their sites, in a move that could make searches more relevant to consumers and allow the company to charge more for advertising, Google said late on Monday.

The Internet search leader said the new Google Custom Search Engine relies on the same underlying database of Web sites to allow companies or individual users to set up personalized online searches -- on topics ranging from global climate change to gossip on pop stars.

"This is really a way to make your own version of Google search," Marissa Mayer, Google's vice president in charge of search, said in a phone interview with reporters.

The announcement, which executives said was one of the biggest it will make this quarter, came after shares of the Web search leader set a fresh lifetime high of $480.78 on Monday, following a strong quarterly financial report last week.

The Google Custom Search Engine is the company's biggest push yet to rely on "the wisdom of crowds," where rival Yahoo Inc. and start-ups such as Rollyo.com and Eurekster.com have focused for several years.

"It is basically applying human judgment by saying I can make search better by allowing people to decide," said Forrester Research analyst Charlene Li.

Google is moving beyond the formula-driven, one-size-fits all way it indexes the Web to a relativistic approach for finding sites. The move also points toward a balkanization of what different groups of people see on the World Wide Web.

Details can be found at http://www.google.com/coop/cse/ . It is set to be available on international sites in a few weeks.

MY GOOGLE VS YOUR GOOGLE

The service allows users to choose which pages they wish to include in a tailored Web search index, what the search results will look like on their own Web sites and whether other users can contribute their own favorite links to the index.

Search results are derived from Google's constantly changing database of billions of sites. Custom Search Engines generate revenue through Google's existing AdSense advertising revenue-sharing program with Web sites, the company said.

Universities, government organizations and recognized non-profit groups will be given a choice of whether to run ads alongside their search results, or not. Commercial users will be required to carry Google ads to pay for the free service.

Customized Web search should result in more relevant search results for specific users, which in turn is likely to entice advertisers to pay more as ads can become more targeted, officials of the Mountain View, California-based company said.

Privacy is protected because Google hosts the searches on its own computers. Custom-created sites do not receive access to database logs showing specific user searches, they added.

Sites employing custom search can choose whether users see results only from their site, from a select list of related Web sites, or across tens of thousands of others. They may also give priority to certain sites over others, in contrast to Google's classic page-rank system based on popularity.

Intuit Inc., the company behind Turbo Tax and Quicken personal finance software, is relying on Google Custom Search on a new site it is testing called JumpUp.com that helps new business owners connect with other business owners.

RealClimate.org, another site testing Custom Search, only links to sites it deems to offer credible expert opinion on the science of climate change, bypassing highly politicized sites.

"Custom search engines empower communities everywhere to organize their own information and make it searchable," said Shashi Seth, product manager for Google Custom Search Engine.

    Google lets Web sites tailor search to user tastes, NYT, 24.10.2006, http://today.reuters.com/news/articlenews.aspx?type=technologyNews&storyID=2006-10-24T120828Z_01_N23383119_RTRUKOC_0_US-GOOGLE-SEARCH.xml&WTmodLoc=Home-C5-technologyNews-3

We’re Google. So Sue Us.

October 23, 2006
The New York Times
By KATIE HAFNER

SAN FRANCISCO, Oct. 19 — Google attracts millions of Web users every day. And, increasingly, it’s attracting the attention of plenty of lawyers, too.

As Google has grown into the world’s most popular search engine and, arguably, the most powerful Internet company, it has become entangled in scores of lawsuits touching on a wide range of legal questions, including copyright violation, trademark infringement and its method of ranking Web sites.

Any company that is large and successful is going to attract lawsuits, and Google’s deep pockets make it an especially big target. But as it rushes to create innovative new services, Google sometimes operates in a way that almost seems to invite legal scrutiny.

A group of authors and publishers is challenging the company’s right to scan books that are still under copyright. A small Web site in California is suing Google because it was removed from the company’s search results. And European news agencies have sued over Google’s use of their headlines and photos in Google News.

In these cases and others, potential legal problems seem to give the company little pause before it plunges into new ventures.

“I think Google is wanting to push the boundaries,” said Jonathan Zittrain, professor of Internet governance and regulation at Oxford University.

“The Internet ethos of the 90’s, the expansionist ethos, was, ‘Just do it, make it cool, make it great and we’ll cut the rough edges off later,’ ” Professor Zittrain said. “They’re really trying to preserve a culture that says, ‘Just do it, and consult with the lawyers as you go so you don’t do anything flagrantly ill-advised.’ ”

Now, with its planned $1.65 billion acquisition of the video site YouTube, which contains not just homemade videos but also copyrighted clips that users upload without permission, some observers say Google is exposing itself to a new spate of lawsuits.

Along with YouTube’s 34 million viewers, Google will inherit a lawsuit filed last summer against the company. Robert Tur, who owns a video from the 1992 riots in Los Angeles that shows a trucker being beaten by rioters, is suing YouTube, accusing it of copyright infringement.

“Clearly, we investigated that whole issue,” said David C. Drummond, Google’s general counsel and senior vice president of corporate development. Mr. Drummond pointed to the “safe harbor” provision of the 1998 Digital Millennium Copyright Act. A number of courts have held that under this provision, Web sites are not liable for copyrighted content posted by users, as long as they promptly remove it when it is pointed out to them.

“We rely on the same safe harbor that YouTube relies on, so we’re fairly familiar with the issues,” Mr. Drummond said. “If you look at it, it’s somewhat illustrative of the kinds of lawsuits we face.”

Google has been known to settle, but for the most part it aggressively fights litigation — so far with a good deal of success.

Over the last few years, the company has spent millions in legal fees and hired a small army of bright young lawyers, many of them technically proficient and experts in the field of intellectual property.

The company’s legal department has grown from one lawyer in 2001 to nearly 100 lawyers now, not just at its headquarters in Mountain View, Calif., but also overseas. The company has also retained counsel at many outside law firms.

Many of the lawsuits Google is facing carry little weight. Yet it has a vested interest in fighting all of them, even those of questionable merit, and seeing that they are resolved quickly. In part, this is because any lawsuit that reaches the discovery, the pretrial fact-finding phase, poses the danger of revealing too much about Google’s proprietary technology. Google also has an interest in establishing a solid body of legal interpretation in its favor.

Many of the plaintiffs are asking for damages, but money is not always the issue. There are several cases, focusing on questions of intellectual property and trademark protection, that challenge Google’s whole way of doing business. These plaintiffs are suing Google to protect their well-established practices; their interest is not so much in remuneration as it is in getting Google to change its approach.

Peter S. Menell, a professor at Boalt Hall School of Law at the University of California, Berkeley, said that although Google’s well-established core search functions are not at risk, “there are a number of areas now in which new and exciting business models are being threatened.”

Cases addressing trademark protection in Google’s ad system could hurt its bottom line, as the company’s revenue comes mainly from advertising sales, said Eric Goldman, director of the High Tech Law Institute at the Santa Clara University School of Law in California.

In one of the most important such cases to date, last year a federal judge in Alexandria, Va., dismissed a claim by Geico, the auto insurance company. Geico said that a Google policy of permitting Geico’s competitors to buy advertisements tied to searches for the keywords “Geico” and “Geico Direct” confused Web surfers looking for the company’s site. The two companies settled the case before the judge reached a full decision on the other issues involved.

“This is Google’s cash cow,” Professor Goldman said. “If they can’t sell keywords freely, they’re not worth their market valuation.”

Michael Kwun, a senior litigation counsel at Google, agreed that “the Geico case was very important.” Mr. Kwun said that establishing a body of precedent was a priority for Google, especially as legal interpretations continued to evolve. “If we don’t at least litigate to the point where we get rulings on the issues that matter to us, we’re left with less clarity in the law,” he said.

Yet in the course of a long run of legal triumphs there have been a few bumps, and Google is facing some uncertain outcomes in the coming months.

Copyright challenges are at the center of the uncertainty. In one case that could have large ramifications, Perfect 10, a publisher of pornographic magazines and Web sites, sued Google for using thumbnail-sized reproductions of photos in its image search results, among other things.

Earlier this year, a Federal District Court judge in California said Google had violated copyright because it had undermined Perfect 10’s ability to license those images for sale to mobile phone users, and he issued a preliminary injunction. Google appealed the decision, and oral arguments before the United States Court of Appeals for the Ninth Circuit are scheduled for next month.

Google’s use of snippets of copyrighted works has also raised the ire of news outlets.

Last month, a Belgian court ordered Google to stop publishing headlines from Belgian newspapers without permission or payment of fees. And in a case pending in a Federal District Court in Washington, Agence France-Presse is suing Google, accusing it of violating its copyright by using its headlines, photographs and story fragments in Google News.

Google is arguing that news headlines and short phrases are not copyrightable.

“From our perspective, these are simple issues that were decided a long time ago,” said Alex Macgillivray, 34, whose title at Google is senior product counsel.

The company is making the same argument in cases pending against its book search service. Representatives of publishers and authors are challenging the company’s practice of scanning books that are still under copyright. They argue that because Google must copy an entire book to make it searchable, it is violating the copyright of the author or publisher if it does so without permission.

Google has offered to let publishers opt out of the book search program but has refused to ask permission to make the copies in advance.

Google has been known to settle cases. But in general it mounts a vigorous defense, Mr. Goldman said. “If they get sued, they turn the tables on the plaintiff and file motions to get the upper hand in the case,” he said.

Last spring, KinderStart, a small search engine in Southern California that focuses on information for parents of young children, sued Google after it noticed that its site had been removed from Google’s search results — leading to a loss of traffic and revenue for the company.

Google said in court filings that an area of the site that permitted visitors to add links had been full of pointers to low-quality or pornographic sites, indicating that it was poorly maintained or was an effort to manipulate Google’s search results. KinderStart said the removal was unfair and unjustified and that Google’s guidelines on ways to avoid such punishment were too vague.

A federal judge in San Jose dismissed the first version of the complaint, in essence agreeing with Google that the company is free to shape its search results in any way it chooses. KinderStart has filed a second, amended complaint, which is scheduled to be heard by the same judge on Friday.

“We’re not against innovation at all,” said Gregory J. Yu, a lawyer for KinderStart. “But Google should not dictate what we should or should not see and find on the Web. They can knock off these small Web sites and there’s nothing the small Web sites can do.”

In the KinderStart case, Google was quick to take the offensive. Shortly after the lawsuit was filed last spring, Google responded with a motion that, if granted, would throw out several of KinderStart’s claims and require KinderStart to cover Google’s legal fees. The judge deferred consideration of the motion.

Professor Zittrain of Oxford said Google’s corporate mantra — “to organize the world’s information and make it universally accessible” — gives some insight into its approach.

“They actually see that as Promethean,” Mr. Zittrain said. “They think of it as bringing fire to humankind. And it may even cause them to be bolder than other companies.”

Google’s legal muscle and shrewdness are not lost on those on the other side of the fights.

“We’ve got a formidable legal team, but obviously it’s nowhere near the unlimited resources of Google,” said David A. Milman, the chief executive of Rescuecom, a nationwide computer repair company that sued Google on trademark infringement grounds similar to Geico’s — and quickly lost. The company said that it would appeal the decision.

“People say you can’t fight the government,” Mr. Milman said. “Google, in this case, is very similar to the government. They’re the government of the Internet.”

    We’re Google. So Sue Us., NYT, 23.10.2006, http://www.nytimes.com/2006/10/23/technology/23google.html

Digital Domain

It’s Not the People You Know. It’s Where You Are.

October 22, 2006
The New York Times
By RANDALL STROSS

FIBER networks cross the world. Data bits move at light speed. The globe has been flattened, and national boundaries obliterated. Yet in Silicon Valley, the one place that is responsible more than any other for creating the network technology that supposedly renders geography irrelevant, physical distance is very much on the minds of the investors who provide venture capital.

Meet the “20-minute rule” that guides fateful decisions in Silicon Valley. Craig Johnson, managing director of Concept2Company Ventures, a venture capital firm in Palo Alto, Calif., who has 30 years of experience in early-stage financings, said he knew many venture capitalists who adhered to this doctrine: if a start-up company seeking venture capital is not within a 20-minute drive of the venture firm’s offices, it will not be funded.

Mr. Johnson explained that close proximity permits the investor to provide in-person guidance; initially, that may entail many meetings each week before investor and entrepreneur come to know each other well enough to rely mostly on the phone for updates. Those initial interactions are fateful. “Starting a company is like launching a rocket,” Mr. Johnson said. “If you’re a tenth of a degree off at launch, you may be 1,000 miles off downrange.”

Capital and attention are lavished on entrepreneurs in the Valley as in no other place. Ten years ago, when Dow Jones VentureOne began a quarterly survey of where venture investments landed, one-third of all deals in the country went to the San Francisco Bay Area. Since then, the same share of deals has gone to the same place, almost without variation. Most recently, in the first six months of this year, Silicon Valley still pulled in 32 percent; the region with the second-largest total, New England, was far behind, at 10 percent.

The latest wave of innovation, embodied in Web 2.0 companies, is centered in Silicon Valley. Joshua Grove, a research analyst at VentureOne, said that 43 percent of Web 2.0 deals this year were in the Bay Area, the formal category for the Valley. These included three of the four largest financings: the $25 million that went to Facebook, $14.5 million to Zimbra and $12 million to Six Apart.

How well is the Valley doing in incubating this newest crop of start-ups? Ask the investors at YouTube, who are celebrating Google’s $1.65 billion deal for a company that was all of 19 months old. Or look at Google’s own record of growth: building a market capitalization of $141 billion in only eight years.

YouTube and Google share the same source of venture financing: Sequoia Capital, situated among the venture capital firms clustered in a handful of blocks in office parks along Sand Hill Road in Menlo Park, near the Stanford campus. Google’s other source of venture capital, Kleiner Perkins Caufield & Byers, is nearby, too.

Why so many of these firms, which form the world’s most concentrated source of capital for new ventures, originally collected in that particular spot, rather than, say, outside the Massachusetts Institute of Technology or the California Institute of Technology, is not important; what is important is that this is where they happen to be today.

Sequoia makes its preference for the 20-minute rule almost explicit, telling applicants whose companies are at the “seed stage” (receiving less than $1 million) or “early stage” ($1 million to $10 million) that “it is helpful if the company is close to our offices” because they “require very frequent contact.”

Kleiner Perkins has only one office, the one in Menlo Park. Sequoia has reached out to entrepreneurs more considerately, providing five offices. But only one of the five, the one in Menlo Park, is in the United States. The others are in China (two), India and Israel.

If you have a brilliant idea for the New New Thing and want Sequoia to provide its funds and blessing — using the same golden touch provided not long ago to Google’s founders — you would be much better off in Beijing, where Sequoia has an office, than in Boston, where it does not.

It’s convenient for venture capitalists to have entrepreneurs close by, but the reverse is true, too, said Allen Morgan, a managing director of the Mayfield Fund, which manages $2.3 billion in venture capital and is also on Sand Hill Road. Mr. Morgan made the case by pointing out that a prospective entrepreneur would, on average, need to have three to eight meetings with a venture fund before he or she was successful, but would have to go through a similar process with 5 to 10 firms before finding the one that approved the funding request.

Even if the process goes smoothly and requires only 15 meetings — the fewest possible, given the lowest range of possibilities — and even if most of those meetings are set up in advance, the time consumed in getting to Sand Hill Road, even using local highways, can be significant. The problem is that much worse when, as often happens, a meeting is called with just an hour or two of notice. “If you live in Santa Clara, it’s doable,” Mr. Morgan said. “If you live in Dubuque, it’s not.”

Entrepreneurs who live in Silicon Valley also find the technical talent they need faster than they can in any other place; they pay more for that talent, but speed is the sine qua non for success. Seth J. Sternberg, the chief executive of Meebo, an instant-messaging company in Palo Alto that is backed by Sequoia, described Silicon Valley with the fervent appreciation of a recent transplant from New York, where he had suffered three separate bad experiences with start-ups, none of which had attracted venture funding.

The ecosystem in Silicon Valley, Mr. Sternberg said, includes “incredible techies, who live here because this is the epicenter, where they can find the most interesting projects to work on.” The ecosystem also includes real estate agents, accountants, head hunters and lawyers who understand an entrepreneur’s situation — that is, emptied bank accounts and maxed-out credit cards.

“In New York, it would be extremely difficult to find a law firm willing to defer the first $20,000 of your legal fees,” Mr. Sternberg said. “Here, we got that. It’s a pretty standard thing in Silicon Valley.”

On the East Coast, a business plan contest at the Harvard Business School in 2004 prompted one M.B.A. graduate, Arijit Sengupta, to found BeyondCore, a software company, in his apartment in Boston. Mr. Sengupta, who earlier had earned a bachelor’s degree in computer science and economics at Stanford, was determined to develop a finished product and to acquire customers by the oldest method of all: bootstrapping, or starting a business without outside capital.

He did end up needing Silicon Valley for something else: technical talent that would be willing to accept equity in place of any salary. Six weeks ago, he moved to Silicon Valley to recruit more people like his chief technical officer, who has been working full time since Jan. 1 for equity only.

“Elsewhere, if people in a large organization think you have potential, they offer you a job, trying to save you from the uncertainties of a start-up,” said Mr. Sengupta, who himself has worked at Oracle, Microsoft and General Motors. “In Silicon Valley, they say, ‘Can I join you?’ ”

Mr. Sengupta now has six “employees” working for BeyondCore without salaries. Only in Silicon Valley, he said, do “people have confidence that if you act on great ideas, the money will come.”

Predictions of the Valley’s demise have become a perennial, said Mr. Morgan, the Mayfield venture capitalist. “Every five years, Time or Newsweek runs a story: ‘Silicon Valley is Dead,’ ” he said. “But Silicon Valley is bigger and more vibrant and better at creating companies than it has ever been.”

Silicon Valley is not “bigger” in a literal sense. In fact, it remains geographically contained by the Santa Cruz Mountains on one side and San Francisco Bay on the other. The physical features of the place help explain the Valley’s vitality.

MR. JOHNSON, the venture capitalist in Palo Alto, noted that the greater Los Angeles area also has a pool of talented engineers (working at aerospace companies like Lockheed, Northrop and Hughes) and great universities (notably Caltech and U.C.L.A.) and plenty of money to invest. “But in Los Angeles,” he said, “people are scattered across a wide area; everything is more spread out.”

It’s harder for entrepreneurs to meet with one another and with investors, he added. And that means connections take longer, deals move slowly, fewer companies are formed. “Like a gas, entrepreneurship is hotter when compressed.” he said.

Why, one might ask, must relationships be built only by physical presence? Why, if the phone does not serve well, cannot the newest generation of videoconferencing gear — which provides stunning video to accompany sound — save the various participants from the vexations of getting together in person?

Mr. Morgan of Mayfield scoffed at the suggestion of virtual meetings as a feasible medium of establishing trust in business. He said that if the matter were important — and human beings were involved — he believed that there would never, ever be a replacement for face-to-face meetings.

Randall Stross is an author based in Silicon Valley and a professor of business at San Jose State University.

    It’s Not the People You Know. It’s Where You Are., NYT, 22.10.2006, http://www.nytimes.com/2006/10/22/business/yourmoney/22digi.html

Profit Doubles at Google as It Continues to Expand

October 20, 2006
The New York Times
By SAUL HANSELL

Google just doesn’t stop.

The world’s largest search engine said yesterday that its third-quarter profits nearly doubled from a year ago, as it maintained a torrid growth rate that is highly unusual for a company of its size.

The numbers are all the more significant because Google’s largest rival, Yahoo, has been faltering, as sales have tapered off for both its search and display advertising.

“Forty-eight hours ago we were discussing Yahoo; the contrast is pretty amazing,” said Jordan Rohan, an analyst with RBC Capital Markets. “This is an eye-opening and refreshing quarter for Google investors.”

In after-hours trading, Google’s shares surged 7.5 percent. In regular trading, before the results were reported, the shares rose $6.75, or 1.6 percent, to $426.06.

Eric E. Schmidt, Google’s chief executive, attributed the company’s growth to its unusually high level of investment in research and computing equipment.

“In our model, the capital investments we are making give us differentially better service quality, better scale and better leverage,” Mr. Schmidt said. “And we intend to continue this.”

Google spent $313 million for research and development in the quarter, up 76 percent from a year ago.

It also invested $492 million in capital equipment, mainly for computers and networking systems.

At the same time, Google continued to pack more engineers and ad sales people into its overflowing campus in Mountain View, Calif., and its dozens of other sites around the world. The company added more than 1,400 employees in the quarter, for a total of nearly 9,400 workers on Sept. 30.

The profit margins from Google’s core search advertising business are so high that it can spend liberally on development and still report very strong profits.

Google earned $733 million, or $2.36 a share, up 92 percent from $381 million, or $1.32 a share in the period a year ago.

Excluding charges related to stock-based compensation, it earned $2.62 a share, well above analysts’ estimate of $2.42.

Google had revenue of $2.69 billion, up 70 percent from the quarter a year ago.

For advertising that Google sells that is displayed on other sites, the company passes a majority of the revenue to the site owner. Excluding those payments to Web sites, Google’s revenue was $1.86 billion, slightly more than the $1.82 billion analysts had expected.

Google continued to extend its reach overseas, with 44 percent of its revenue from outside of the United States, compared with 39 percent a year ago.

The company outlined a very aggressive program of expansion yesterday. Over the last quarter it has secured many large new outlets for displaying ads, through deals with Adobe, eBay, the News Corporation (which owns MySpace), Intuit and Viacom.

Last week, Google agreed to pay $1.65 billion for YouTube, the most popular video-sharing site.

Google is quickly expanding from text ads to ads with graphics and videos. Indeed it now sells video ads in 30 countries.

While Google’s plans for YouTube are still unclear, so far its video ads are much less intrusive than most of those on other Web sites because people have to click on them to start the video.

Google is also building systems to place advertising for cellphones, print publications, radio stations and television channels.

“We will use our targeting technology not only to find the right advertisement for the each person, but to find the right medium for each advertiser,” Sergey Brin, a co-founder of Google, said in an interview.

Mr. Schmidt added that in the long run, Google also foresaw very large businesses from lines other than advertising. These include its selling devices for corporations to search their own computer networks and the Google checkout service, which earns fees from processing credit card transactions for merchants.

Recently it introduced new services that will allow companies to run their e-mail, word processing and other functions entirely on Google’s network rather than on their own computers.

As for its core search business, which represents nearly all of the company’s revenue so far, Google continues to gain market share. In September, 50 percent of all Web searches in the United States were conducted on Google, compared with 23 percent on Yahoo.

The company said that while growth in users typically slows in the summer, it benefited from some changes in how its system chooses advertisements to show on a page. Most notably, it started to analyze the Web sites of advertisers to make sure that they were related to what users were looking for.

While this resulted in playing down some ads, Larry Page, the company’s other co-founder, said it actually resulted in higher income for Google.

“Over time, as people notice the ads are higher quality, they are more likely to notice them and click on them, and that does affect revenue,” Mr. Page said in an interview.

Mr. Brin said that he saw no end to other innovations. “You might imagine the lower-hanging fruit has been picked,” he said, “but at the same time we have built ladders and are reaching for larger, higher-hanging fruit.”

    Profit Doubles at Google as It Continues to Expand, NYT, 20.10.2006, http://www.nytimes.com/2006/10/20/technology/20google.html

No Test Tubes? Debate on Virtual Science Classes

October 20, 2006
The New York Times
By SAM DILLON

When the Internet was just beginning to shake up American education, a chemistry professor photographed thousands of test tubes holding molecular solutions and, working with video game designers, created a simulated laboratory that allowed students to mix chemicals in virtual beakers and watch the reactions.

In the years since, that virtual chemistry laboratory — as well as other simulations allowing students to dissect virtual animals or to peer into tidal pools in search of virtual anemone — has become a widely used science teaching tool. The virtual chemistry laboratory alone has some 150,000 students seated at computer terminals around the country to try experiments that would be too costly or dangerous to do at their local high schools. “Some kids figure out how to blow things up in half an hour,” said the professor, Brian F. Woodfield of Brigham Young University.

Now, however, a dispute with potentially far-reaching consequences has flared over how far the Internet can go in displacing the brick-and-mortar laboratory.Prompted by skeptical university professors, the College Board, one of the most powerful organizations in American education, is questioning whether Internet-based laboratories are an acceptable substitute for the hands-on culturing of gels and peering through microscopes that have long been essential ingredients of American laboratory science.

As part of a broader audit of the thousands of high school courses that display its Advanced Placement trademark, the board has recruited panels of university professors and experts in Internet-based learning to scrutinize the quality of online laboratories used in Web-based A.P. science courses.

“Professors are saying that simulations can be really good, that they use them to supplement their own lab work, but that they’d be concerned about giving credit to students who have never had any experience in a hands-on lab,” said Trevor Packer, the board’s executive director for Advanced Placement. “You could have students going straight into second-year college science courses without ever having used a Bunsen burner.”

Internet-based educators are seeking to convince the board, and the public, that their virtual laboratories are educationally sound, pointing out that their students earn high scores on the A.P. exams. They also say online laboratories are often the only way advanced science can be taught in isolated rural schools or impoverished urban ones. Online schooling, which was all but nonexistent at the elementary and secondary level a decade ago, is today one of the fastest-growing educational sectors, with some half-million course enrollments nationwide.

Twenty-five states operate public, Internet-based schools like the Florida Virtual School, the nation’s largest, which has some 40,000 students. Virtual High School, a nonprofit school based in Maynard, Mass., has 7,600 students from 30 states and many countries. Susan Patrick, a former Department of Education official who is president of the North American Council for Online Learning, estimated that 60,000 public school students were enrolled in some online science course.

John Watson, an education consultant who wrote a report last year documenting virtual education’s growth, said online schools had faced lawsuits over financing and resistance by local school boards but nothing as daunting as the College Board.

“This challenge threatens the advance of online education at the national level in a way that I don’t think there are precedents for,” Mr. Watson said.

The board signaled a tough position this year.

“Members of the College Board insist that college-level laboratory science courses not be labeled ‘A.P.’ without a physical lab,” the board said in a letter sent to online schools in April. “Online science courses can only be labeled ‘A.P.’ if the online provider” can ensure “that students have a guided, hands-on (not virtual) laboratory experience.”

But after an outcry by online schools, the board issued an apology in June, acknowledging that “there may be new developments” in online learning that could merit its endorsement.

Mr. Packer of the College Board said in an interview that the board had set up three five-member panels composed of biology, chemistry and physics professors and online educators, which are to meet in New York next month to review the online laboratories offered by Internet-based schools for A.P. courses.

The board’s rulings will determine whether high schools can apply the A.P. designation to online science courses starting next fall on the transcripts of students applying to colleges, Mr. Packer said.

In recent conversations with college science professors, the board has encountered considerable skepticism that virtual laboratories can replace hands-on experience, he said.

But educators at several prominent online schools pointed to their students’ high scores on A.P. exams.

On the 2005 administration of the A.P. biology exam, for instance, 61 percent of students nationwide earned a qualifying score of three or above on the A.P.’s five-point system. Yet 71 percent of students who took A.P. biology online through the Florida Virtual School, and 80 percent of students who took it from the Virtual High School, earned a three or higher on that test.

“The proof is in the pudding,” said Pam Birtolo, chief learning officer at the Florida Virtual School.

Still, there is tremendous variety. A 2005 guidebook, “Finding an Online High School,” compiled by Vincent Kiernan, a senior writer at The Chronicle of Higher Education, lists 113 Internet-based secondary schools, 32 of which offered at least one A.P. science course. Online curricula are anything but standardized, and new approaches to online laboratories are emerging at a dizzying pace, said Kemi Jona, a computer science professor at Northwestern University.

“It’s not a one-size-fits-all landscape,” Dr. Jona said.

The science courses offered by some online high schools draw on multiple Internet sites that provide data, then lead students through an analysis. At one site, for instance, operated by the University of Arizona, students collect data from the cells of an onion root and use it to calculate the duration of each phase in the cells’ division.

Chemistry and other science courses at many Internet-based high schools include laboratories often characterized as “kitchen science,” in which students use household materials — ice, cooking oil, glass jars — to carry out experiments.

“ ‘Make sure we have potatoes in the house,’ my daughter told me before her last lab,” in which students studied osmosis, said Mayuri Shah, whose daughter Sonia is taking A.P. biology from the Florida Virtual School. Sonia, 16, enrolled in the online course because her high school in Lecanto, Fla., north of Tampa, does not offer it.

That is one of the most common reasons students sign up for online classes, said Ms. Patrick, the North American Council for Online Learning president.

“Thousands of schools in rural areas don’t have science labs, but they have kids who want to go to college and need that science inquiry experience,” she said. “Virtual science labs are their only option.”

ConVal High School in Peterborough, N.H., offers more than a dozen science courses, but zoology is not among them. So Katherine Lantz, a junior, is studying it online.

One recent evening she was at home, moving through a virtual pig dissection screen by screen. One image showed a pig kidney, outlined by pulsing yellow dots.

“Whoa, that’s kind of gross!” Katherine said. She clicked her mouse, causing a virtual scalpel to lay the pig’s kidney open, its internal regions highlighted by blinking labels.

“Its nice to have it enlarged because if we were dissecting this in my school lab this would be hard to see,” Katherine said. “I learn a lot online — as much as I would attending a physical class.”

But Earl W. Fleck, the biology professor who created the virtual pig dissection, believes otherwise. Dr. Fleck began working on the virtual dissection in 1997 to help his students at Whitman College in Walla Walla, Wash., review for tests and to offer a substitute for those who, for ethical reasons, objected to working with once-living specimens.

Dr. Fleck, who is now provost at Hampden-Sydney College in Virginia, said students worldwide found the virtual dissection useful. But he called it “markedly inferior” to performing a real dissection.

“You don’t get the look and the feel and the smell,” he said.

    No Test Tubes? Debate on Virtual Science Classes, NYT, 20.10.2006, http://www.nytimes.com/2006/10/20/education/20online.html?hp&ex=1161403200&en=3e39d8a8d225b0dc&ei=5094&partner=homepage

A Virtual World but Real Money

October 19, 2006
The New York Times
By RICHARD SIKLOS

It has a population of a million. The “people” there make friends, build homes and run businesses. They also play sports, watch movies and do a lot of other familiar things. They even have their own currency, convertible into American dollars.

But residents also fly around, walk underwater and make themselves look beautiful, or like furry animals, dragons, or practically anything — or anyone — they wish.

This parallel universe, an online service called Second Life that allows computer users to create a new and improved digital version of themselves, began in 1999 as a kind of online video game.

But now, the budding fake world is not only attracting a lot more people, it is taking on a real world twist: big business interests are intruding on digital utopia. The Second Life online service is fast becoming a three-dimensional test bed for corporate marketers, including Sony BMG Music Entertainment, Sun Microsystems, Nissan, Adidas/Reebok, Toyota and Starwood Hotels.

The sudden rush of real companies into so-called virtual worlds mirrors the evolution of the Internet itself, which moved beyond an educational and research network in the 1990’s to become a commercial proposition — but not without complaints from some quarters that the medium’s purity would be lost.

Already, the Internet is the fastest-growing advertising medium, as traditional forms of marketing like television commercials and print advertising slow. For businesses, these early forays into virtual worlds could be the next frontier in the blurring of advertising and entertainment.

Unlike other popular online video games like World of Warcraft that are competitive fantasy games, these sites meld elements of the most popular forms of new media: chat rooms, video games, online stores, user-generated content sites like YouTube.com and social networking sites like MySpace.com.

Philip Rosedale, the chief executive of Linden Labs, the San Francisco company that operates Second Life, said that until a few months ago only one or two real world companies had dipped their toes in the synthetic water. Now, more than 30 companies are working on projects there, and dozens more are considering them. “It’s taken off in a way that is kind of surreal,” Mr. Rosedale said, with no trace of irony.

Beginning a promotional venture in a virtual world is still a relatively inexpensive proposition compared with the millions spent on other media. In Second Life, a company like Nissan or its advertising agency could buy an “island” for a one-time fee of $1,250 and a monthly rate of $195 a month. For its new campaign built around its Sentra car, the company then needed to hire some computer programmers to create a gigantic driving course and design digital cars that people “in world” could actually drive, as well as some billboards and other promotional spots throughout the virtual world that would encourage people to visit Nissan Island.

Virtual world proponents — including a roster of Linden Labs investors that includes Jeffrey P. Bezos, the founder of Amazon.com; Mitchell D. Kapor, the software pioneer; and Pierre Omidyar, the eBay co-founder — say that the entire Internet is moving toward being a three-dimensional experience that will become more realistic as computing technology advances.

Entering Second Life, people’s digital alter-egos — known as avatars — are able to move around and do everything they do in the physical world, but without such bothers as the laws of physics. “When you are at Amazon.com you are actually there with 10,000 concurrent other people, but you cannot see them or talk to them,” Mr. Rosedale said. “At Second Life, everything you experience is inherently experienced with others.”

Second Life is the largest and best known of several virtual worlds created to attract a crowd. The cable TV network MTV, for example, just began Virtual Laguna Beach, where fans of its show, “Laguna Beach: The Real O.C.,” can fashion themselves after the show’s characters and hang out in their faux settings.

Unlike Second Life, which emphasizes a hands-off approach and has little say over who sets up shop inside its simulated world, MTV’s approach is to bring in advertisers as partners.

In Second Life, retailers like Reebok, Nike, Amazon and American Apparel have all set up shops to sell digital as well as real world versions of their products. Last week, Sun Microsystems unveiled a new pavilion promoting its products, and I.B.M. alumni held a virtual world reunion.

This week, the performer Ben Folds is to promote a new album with two virtual appearances. At one, he will play the opening party for Aloft, an elaborate digital prototype for a new chain of hotels planned by Starwood Hotels and Resorts. The same day, Mr. Folds will also “appear” at a new facility his music label’s parent company, Sony BMG, is opening at a complex called Media Island.

Meanwhile, Nissan is introducing its Nissan promotion, featuring a gigantic vending machine dispensing cars people can “drive” around.

And some of this is likely to be covered for the outside world by such business news outlets as CNet and Reuters, which now have reporters embedded full-time in the virtual realm.

All this attention has some Second Lifers concerned that their digital paradise will never be the same, like a Wal-Mart coming to town or a Starbucks opening in the neighborhood. “The phase it is in now is just using it as a hype and marketing thing,” said Catherine A. Fitzpatrick, 50, a member of Second Life who in the real world is a Russian translator in Manhattan.

In her second life, Ms. Fitzpatrick’s digital alter-ego is a figure well-known to other participants called Prokofy Neva, who runs a business renting “real estate” to other players. “The next phase,” she said, “will be they try to compete with other domestic products — the people who made sneakers in the world are now in danger of being crushed by Adidas.”

Mr. Rosedale says such concerns are overstated, because there are no advantages from economies of scale for big corporations in Second Life, and people can avoid places like Nissan Island as easily as they can avoid going to Nissan’s Web site. There is no limit to what can be built in Second Life, just as there is no limit to how many Web sites populate the Internet.

Linden Labs makes most of its money leasing “land” to tenants, Mr. Rosedale said, at an average of roughly $20 per month per “acre” or $195 a month for a private “island.” The land mass of Second Life is growing about 8 percent a month, a spokeswoman said, and now totals “60,000 acres,” the equivalent of about 95 square miles in the physical world. Linden Labs, a private company, does not disclose its revenue.

Despite the surge of outside business activity in Second Life, Linden Labs said corporate interests still owned less than 5 percent of the virtual world’s real estate.

As many as 10,000 people are in the virtual world at a time, and they are engaged in a gamut of ventures: everything from holding charity fund-raisers to selling virtual helicopters to operating sex clubs. Linden also makes money on exchanging United States dollars for what it calls Linden dollars for around 400 Linden dollars for $1 (people can load up on them with a credit card). A typical article of clothing — say a shirt — would cost around 200 Linden dollars, or 50 cents. As evidence of the growth of its “economy,” Second Life’s Web site tracks how much money changes hands each day. It recently reached as much as $500,000 a day and is growing as much as 15 percent a month.

On Tuesday, a Congressional committee said it was investigating whether virtual assets and incomes should be taxed.

But many inhabitants simply hang out for free. For advertisers worried about the effectiveness of the 30-second TV spot and the clutter of real world billboards and Internet pop-up ads, Second Life is appealing because it is a place where people literally immerse themselves in their products.

Steve F. Kerho, director of interactive marketing and media for Nissan USA, said the Second Life campaign was part of a growing interest in online video games. “We’re just trying to follow our consumer, that’s where they’re spending their time,” Mr. Kerho said. “But there has to be something in it for them — it’s got to be fun; it’s got to be playful.”

Projects like the Aloft hotel, an offshoot of Starwood’s W Hotels brand, are designed to promote the venture but also to give its designers feedback from prospective guests before the first real hotel opens in 2008.

The new Sony BMG building has rooms devoted to popular musicians like Justin Timberlake and DMX, allowing fans to mingle, listen to tunes or watch videos. Sony BMG is also toying with renting residences in the complex, as well as selling music downloads that people can listen to throughout the simulated world.

Sibley Verbeck, chief executive of the Electric Sheep Company, a consultancy that designed the Aloft and Sony BMG projects, said the flurry of corporate interest stemmed from the 10 to 20 percent growth in the number of people who had gone into virtual worlds each month for the last three years. Though exact numbers are difficult to come by, the figure should top a few million by next year, he said.

The spread of these worlds, however, is limited by access to high-speed Internet connections and, in Second Life’s case, software that is challenging to master and only runs on certain models of computers.

“If it doesn’t crash and burn then it will become real,” he said. “So now’s the time to start experimenting and learning ahead of your competition.”

As part of that process, businesses are learning that different rules apply when they venture into an arena where audiences are in control. “Users are the content — that’s the thing that everybody has a hard time getting over,” said Michael Wilson, the chief executive of Makena Technologies, which operates the virtual world There.com and helped build Virtual Laguna Beach.

For example, Sun Microsystems kicked off the opening of its Second Life venue with a press conference online hosted by executives and Mr. Rosedale of Linden Labs. But by the time the event was in full swing, several members of the audience had either walked or flown onto the stage, where they were running roughshod over the proceedings.

Even Mr. Rosedale got in on the act: he conjured a pair of sunglasses that he superimposed on a video image of a Sun representative talking on a screen behind the stage. (In virtual world lingo, such high jinks are known as “griefing.”)

Some corporate events have been met with protests by placard-waving avatars. And there is even a group called the Second Life Liberation Army that has staged faux “attacks” on Reebok and American Apparel stores. (The S.L.L.A. says it is fighting for voting rights for avatars — as well as stock in Linden Labs.)

Companies in this new environment have to get used to the idea that they may never know exactly who they are dealing with. Most of those in Second Life have chosen their names from a whimsical menu of supplied surnames, resulting in monikers like Snoopybrown Zamboni and Bitmason Pimpernel; males posing as female avatars and vice versa are not uncommon.

Another issue companies have to contend with is that their brands may already be in these virtual worlds, but illegally. Henry Jenkins, a professor at the Massachusetts Institute of Technology Media Lab, said one Second Life habitué created a virtual reproduction of the Ikea catalog to help people decorate their digital pads.

Mr. Verbeck of Electric Sheep said copyright infringement was rampant. His company runs an online boutique where Second Life residents sell each other pixelized creations of everything from body parts to home furnishings to roller skates — many of them unauthorized knockoffs.

So far, the boutique has not had many requests to stop selling fake products. But “we did have a request from the Salvador Dali Museum — which was great,” Mr. Verbeck said. “Second Life is so surreal that it was perfect.”

    A Virtual World but Real Money, NYT, 19.10.2006, http://www.nytimes.com/2006/10/19/technology/19virtual.html

Music Companies Grab a Share of the YouTube Sale

October 19, 2006
The New York Times
By ANDREW ROSS SORKIN and JEFF LEEDS

YouTube’s young founders may have been the biggest beneficiaries of last week’s $1.65 billion deal with Google, but they have some unexpected bedfellows — old-line media companies that had been considered YouTube’s biggest legal threat.

Three of the four major music companies — Vivendi’s Universal Music Group, Sony and Bertelsmann’s jointly owned Sony BMG Music Entertainment, and the Warner Music Group — each quietly negotiated to take small stakes in YouTube as part of video- and music-licensing deals they struck shortly before the sale, people involved in the talks said yesterday. The music companies collectively stand to receive as much as $50 million from these arrangements, these people said.

Because a significant portion of the videos posted to YouTube contain copyrighted songs or video material, the Web site had been considered a litigation land mine. Last month, Doug Morris, the chief executive of the Universal Music, called YouTube and MySpace “copyright infringers” and said the sites “owe us tens of millions of dollars.”

Just this week, Universal filed suits against Bolt and Grouper, two smaller video-sharing sites, for allowing users to post hundreds of pirated music videos of its artists, including Mariah Carey, 50 Cent and the Black Eyed Peas.

The deals that the music companies struck for stakes in YouTube should help to shield Google from copyright-infringement lawsuits, an issue that concerned some Google investors when the YouTube deal was first announced. Still, other copyright holders, including the Hollywood and television studios, could pursue legal action if their content appears on YouTube.

The decision to take a stake in YouTube is a sharp departure from the tack that record companies took regarding Napster, the pioneering file-swapping service that transformed the industry in 1999. Back then, after the major companies filed suits against Napster, the two sides discussed various settlements that involved the music companies receiving a big equity stake.

The Napster talks, which were led on the industry side by Edgar Bronfman Jr., then the chief of Universal’s then-parent Seagram — eventually broke down.

The record companies went on to win a series of legal victories that ultimately forced Napster to shut its site, but the labels have been fighting an uphill battle against free peer-to-peer services ever since. The music industry has also filed thousands of lawsuits against individuals, hoping the threat of civil fines will reduce unauthorized sharing of songs.

But the failure to end digital piracy and the continuing slump in CD sales has slowly pressured record executives to rethink their approach to Internet distribution.

These days, music marketers are eagerly pursuing fans by advertising on independent music blogs and on vast online social networks like MySpace. (Universal’s Interscope unit even struck a deal to distribute a label created by MySpace.)

Lately, the music companies have begun trying to wring more revenue from their music videos. Instead of offering music videos at a nominal fee as a way to promote CD sales, the companies have struck deals with services like Yahoo to share in revenue from advertisements that run in front of the music clips.

Indeed, the companies’ deals with YouTube call for them to share revenue from ads that will run alongside their music videos. As part of the deal, YouTube will use new technology to identify copyrighted material that users have uploaded to the site without permission.

It was Mr. Bronfman, now chief executive of Warner Music, who struck the first deal with YouTube. Universal and Sony BMG followed suit.

Details of the stakes that the music companies received as part of those revenue-sharing and content-licensing deals could not be learned last night. Of the four major record companies, only EMI did not strike a deal with YouTube.

Spokesmen for YouTube, Google, Universal, Sony BMG and Warner all declined to comment. EMI did not return a telephone message left late last night.

Other old-line media companies, including CBS and NBC, which also negotiated content licensing deals with YouTube before its sale to Google, did not receive stakes in YouTube, these people said.

The deal with the music companies could result in other content companies seeing similar arrangements as a requirement before agreeing to similar pacts with YouTube.

YouTube’s deals with Universal and Sony BMG came hours before it announced its deal with Google.

Indeed, people involved in the discussions said that the music companies rushed to complete the deal ahead of the YouTube deal, in part so that it could benefit in the jump in YouTube’s value.

Record companies have benefited from investments in online companies before. In 1999, EMI made $40 million literally overnight by selling part of its stake in Musicmaker.com during its first trading day. That sum dwarfed the company’s earnings from American CD sales for the entire first half of that year.

    Music Companies Grab a Share of the YouTube Sale, NYT, 19.10.2006, http://www.nytimes.com/2006/10/19/technology/19net.html

Video Game Wars Moving Online

October 18, 2006
The New York Times
By JOHN MARKOFF and MATT RICHTEL

SAN FRANCISCO, Oct. 17 — Sony has prevailed in the game wars so far, with consoles judged largely on their power and graphics, and a big library of games. But as it prepares to introduce its PlayStation 3, the battlefield is expanding.

Having spotted Microsoft’s Xbox 360 a one-year head start, Sony must also show that its new machine can hold its own in Internet-based gaming, its rival’s sweet spot.

With the arrival of its PlayStation 3 less than a month away, Sony is embarking on a worldwide marketing campaign that will collide directly with an equally ambitious effort by Microsoft. And both will face a challenge from the Nintendo Wii.

“This is the start of a long-term battle,” said David Cole, president of DFC Intelligence, a market research firm based in San Diego.

Sony will contend that the PlayStation 3’s powerful hardware makes it the best investment, even at a higher price. The PlayStation 3’s base price will be $499, compared with $299 for the Xbox 360 and $249 for the Wii.

To blunt Sony’s advantage in computer horsepower, Microsoft has been making the case that the network is the difference. Since it introduced the Xbox 360 last fall, Microsoft has been promoting Xbox Live, a $50-a-year networking service that lets users play together in casual games or enter tournaments.

Sony will finally respond at a San Francisco media event scheduled for Thursday. Sony will detail its own online service, and game developers and analysts say that unlike Microsoft’s, the Sony service will be free.

Xbox Live offers a free level of service, but it is limited to content like game trailers and movie trailers, and does not allow competition.

Sony is actually building two networks, one to allow multiplayer gaming and one to allow commerce, like purchases of music downloads, said Giancarlo Varanini, news editor for The Official U.S. PlayStation Magazine, a Ziff-Davis publication.

As far as online game play, Mr. Varanini said that one difference from the Microsoft gaming platform was that Sony would allow game companies to be the host of multiplayer contests on their own servers, not only on a central server, as in Microsoft’s network. In addition, the game publishers can sell online games directly to the players, not just through the console maker.

“Sony’s telling developers: you can use our network if you don’t have resources to make one, or you can make your own servers,” Mr. Varanini said.

In addition, players will be able to connect directly to one another through the network, again avoiding a central server, a setup likely to give significantly better performance.

Of course, the battle will be fought on other fronts as well. Sony’s console, both the basic version and a $599 premium model, will be able to play high-resolution DVD’s in the BluRay format that Sony is promoting. The Xbox 360 has a comparable ability for another format, HD-DVD, but only as a $200 add-on.

Two developers working on games for the PlayStation 3, who have been briefed on Sony’s strategy, say the company plans to emphasize the ability to download and play games in high definition.

“The PS3 is almost the ideal multimedia computer cloaked as a game system,” said Richard Doherty, president of Envisioneering, a consumer electronics industry consulting firm. He said Sony hoped to set itself apart from Microsoft and Nintendo by offering a range of video and entertainment features.

Sony’s console will go on sale in the United States on Nov. 17, followed two days later by the Wii.

Mr. Varanini said Sony had struggled in recent months to figure out how to define the PlayStation 3 for consumers, but he said the online component was clearly becoming central.

“It’s huge,” he said. “They’re basically changing their entire outlook with online with the PS3.” He noted that with the new console, the Internet capability is built in, not requiring separate hardware as does its predecessor, the PlayStation 2.

Nintendo also plans online play and downloading of games with its new system, the Wii, although some industry analysts have said Nintendo may not make the online component as significant a part of its console and marketing. Instead, it may emphasize an unusual feature that lets players control action on the screen by waving and manipulating the controller.

As for Microsoft, it has had time to establish its online service.

It says that since its introduction, 60 percent of the five million Xbox 360 owners have joined Xbox Live, up from 10 percent in the previous console. Microsoft says a majority are of those are subscribing to the fee-based service and not merely using the free content; it does not offer more specific figures.

Over all, though, it is Microsoft that has had the steeper mountain to climb. In the last generation of video game consoles, Sony had a roughly 60 percent market share, compared to 20 percent for each Microsoft and Nintendo. Analysts point out that the PlayStation 2 is still the leading game machine by volume currently selling.

Sony executives said they believed they already had a lead over Microsoft with an online PlayStation 2 community of three million consumers and that they would be able to compete effectively in the next generation.

“Online is relevant and it will become more relevant over time, but it’s not the biggest thing to be excited about the next generation,” said Jack Trenton, the co-chief operating officer of Sony Computer Entertainment of America. He said Sony’s decision to allow developers to establish a direct relationship with players would offer the significant advantage of what he described as an open platform.

“Every PS3 owner should be able to plug in Day 1 and take full advantage of everything we have to offer,” he said. “There is freedom for the development community and freedom from the consumer standpoint.”

Gamers are watching Sony’s online offering closely.

“It could be Sony’s Achilles’ heel,” said Johnny Nhan, 29, an avid game player and graduate student in criminology at the University of California, Irvine, who plays on an Xbox 360 as well as a PlayStation 2.

Mr. Nhan said that he was a fan of Sony hardware but that the company needed to prove to gamers that it could build a multiplayer network that was well organized and simple to use.

A game console without such a network, he said, is like a computer without an Internet connection. “It feels kind of dead,” Mr. Nhan said.

He said he would wait before deciding to buy a PlayStation 3 “to see what it has in terms of games and the online stuff.” And he will be watching to see if Sony’s online service can surpass Microsoft’s.

“If Sony is going to tout that it’s free, it better be good,” he said. “It just can’t be free and bad.”

David Hufford, director of Xbox product management, said Microsoft had invested hundreds of millions of dollars — though he would not be more specific — in building its network infrastructure, creating billing systems, and serving and marketing it.

“Our entire theme is connected entertainment,” he said. “That’s the driving theme for us this holiday.”

Mr. Hufford said it would be a challenge for Sony to match Microsoft on that front. “Sony missed their mark in digital music when Apple took over the Walkman,” he said. “We think that online could have the same impact on PS3.”

He said Microsoft’s marketing would emphasize that point. “The onus of proof is squarely on their shoulders,” Mr. Hufford said of Sony. “This is the battleground of the future.”

    Video Game Wars Moving Online, NYT, 18.10.2006, http://www.nytimes.com/2006/10/18/technology/18game.html

E-Commerce Report

I’ll Trade You My ‘Titanic’ for Your ‘Spider-Man’

October 16, 2006
The New York Times
By BOB TEDESCHI

One of the world’s oldest forms of commerce has finally gotten a foothold in the newest commercial medium.

Online bartering, an idea with many proponents but few successes, is emerging as an e-commerce model, bolstered by a spate of new Web sites run by veterans of the e-commerce industry. And although these sites won’t soon challenge Amazon.com or eBay, they are carving out a significant niche in what could be a highly profitable business.

It sounds unlikely, but it’s true, according to Billy McNair, chief executive of Peerflix, a DVD trading service based in Palo Alto, Calif. The company’s 250,000 members post titles of DVD’s they are willing to trade on the Web site (peerflix.com), which then facilitates the swaps by giving members printable forms that include postage and the recipient’s address.

Trades are not directly between two people. For every DVD shipped from one’s library, the sender receives credit toward the acquisition of other titles available in the network. Peerflix also determines the relative value of a DVD, to prevent people from trading, say, “Halloween 5” for a restored version of “Citizen Kane.”

In exchange for this service, Peerflix charges users $1.50 for each title they receive. Of that, 51 cents goes to cover the company’s shipping and handling costs.

“The rest comes to us,” Mr. McNair said. “This is an extremely high-margin business.”

Mr. McNair, who introduced the company in 2004, said the Web site had made significant progress in the last year, with membership growing fivefold and the number of available DVD’s growing at nearly the same rate. The site offers roughly 37,000 DVD titles, and has a total inventory of 225,000 copies. By comparison, the DVD rental service Netflix offers about 65,000 titles. Users trade DVD’s about five times each month.

Even though digital distribution is presumed to be the future for media businesses, Mr. McNair says he believes that physical media will remain the bedrock of the industry and of his business for the foreseeable future. About 1.5 billion DVD’s are purchased annually in the United States, he said, or about 20 a household. “And our members say they purchase more DVD’s now because they know that after they watch the movie it’ll still have value,” he said.

Investors are apparently attracted by his logic. Mr. McNair said the company in late 2004 raised about $2 million from the venture firms 3I and BV Capital, a firm founded by former executives from AOL Germany. That cash would have been more than enough to last until mid-2006, Mr. McNair said, but Peerflix raised another $8 million in October 2005, primarily from Battery Ventures, the firm behind the early search engine Infoseek. More money is on the way.

“One of the key differentiators in this space will be who is best capitalized,” Mr. McNair said. “We have some announcements coming up that’ll be well reflective of that.”

As Peerflix ventures beyond movies and into other forms of media, as Mr. McNair says he hopes to do, it will face upstarts and established businesses at every turn. Bartering networks have sprung up, for example, around CD’s (LaLa.com), video games (www.GameSwap.com) and books (PaperBackSwap.com).

La La Media, which operates LaLa.com and is also based in Palo Alto, is another recent darling of the Silicon Valley venture capital community, having raised $9 million since the business formed in June 2005. According to Bill Nguyen, one of the company’s founders, the site has built an inventory of two million titles since its debut in March, and every day members add 30,000 copies to the collection.

“People are starting to realize this is a really great way of finding new music,” Mr. Nguyen said.

La La charges $1 a trade — about 75 cents for postage and handling costs. The company sets aside about 20 cents for musicians who perform on the disc. “We’re a little bit commie, a little bit co-op,” Mr. Nguyen said.

Like Peerflix, La La spends little on marketing, relying instead on its members to spread the word. The company, which has 23 employees, also spends little on customer service; members typically rely on the site’s online forums to guide each other through problems, and the site has a liberal credit policy for damaged discs. (Members merely send an e-mail to the site, reporting that the disc is damaged, and they are sent another.)

As promising as these businesses are, they represent no threat to big online companies like Netflix and Amazon, analysts said. “The mainstream audience, in my view, is not interested in barter, given how simple renting and purchasing have become,” said Safa Rashtchy, an Internet analyst with the investment firm Piper Jaffray. “Barter will be a small fraction of e-commerce activity.”

Run as they are by tiny teams of entrepreneurs, though, these companies embody the kind of asymmetric economic threat that has forced established businesses to at least take notice, if not entirely alter their business plans. Take books, for instance. PaperBackSwap’s members trade 30,000 books weekly for $1.59 apiece, according to Richard Pickering, one of the site’s founders. The company is now exploring ways to help members trade nonmedia items, possibly within distinct geographical areas.

“You’re going to see a lot more from online bartering in the future,” Mr. Pickering said. “This is just in its infancy.”

    I’ll Trade You My ‘Titanic’ for Your ‘Spider-Man’, NYT, 16.10.2006, http://www.nytimes.com/2006/10/16/technology/16ecom.html

From Crime to Arrest, by Way of Computer

October 15, 2006
The New York Times
By NICHOLAS CONFESSORE and AL BAKER

Michael J. Sandy almost escaped his death.

When Mr. Sandy pulled up to a Sheepshead Bay street corner last Sunday, he found not the lone man he thought he had been exchanging instant messages with, but two men. Uncomfortable, he drove away.

Back home, Mr. Sandy resumed his online chat with the man calling himself “fireyefox,” who persuaded him to go through with the rendezvous.

Later that night, Mr. Sandy was led to a trash-strewn parking lot near the Belt Parkway, and confronted by four men who, the authorities say, were hoping to rob him. He was beaten and chased onto the highway, where he was hit by a car. On Friday, a day after Mr. Sandy turned 29, his family removed him from a respirator.

But Mr. Sandy had left behind a trail of electronic breadcrumbs: When he left his apartment for the last time, he did not turn off his computer.

Combined with old-fashioned detective work, information on Mr. Sandy’s computer helped paint a detailed picture for investigators of the online seduction that hurled Mr. Sandy, a gay man from Williamsburg, into the path of a group of would-be toughs from the other side of Brooklyn.

Several law enforcement officials, speaking on condition of anonymity because the case is still under investigation, described how they used the records to reconstruct the planning of the attack, and then later to track down the men they believe were involved.

What those men had in common were the sorts of things a lot of teenagers these days have in common, whether in Sheepshead Bay or another of the city’s working-class neighborhoods. Cruising the neighborhood. Drinking and lounging on the beach. A keen appreciation for graffiti and hip-hop bluster.

“I could imagine them stealing or doing something stupid like that,” said Michael Romeo, who said he knew two of the suspects, John Fox and Gary Timmins. Mr. Romeo purchased a home on Allen Avenue from Mr. Fox’s father. “But to go out on the Internet, beat someone up? It’s disgusting.”

People in Sheepshead Bay described one of the men arrested, Ilya Shurov, 20, as a tough guy. Mr. Timmins, 16, was known for his temper, and was even tougher.

His friend Mr. Fox was short and skinny, and sensitive about it, those who knew him said. Mr. Fox, 19, was arrested in his dormitory room at SUNY Maritime College in the Bronx, where he is a sophomore.

On Friday, a grand jury indicted Mr. Fox on charges of assault and attempted robbery as a hate crime. During the grand jury proceedings, law enforcement officials said, prosecutors gave notice that they intended to upgrade the charges to felony murder. On Monday and Tuesday, a grand jury is expected to vote on whether to indict Mr. Timmins and Mr. Shurov, who are being held on charges of assault and attempted robbery as hate crimes.

The authorities said that the four men devised a plan to rob someone, and that they chose a gay person, thinking he would be less likely to fight back.

“It wasn’t a hate crime against blacks or gays,” said a 17-year-old woman who said she knew all four men, but would not give her name. “They were just hanging out and drinking. They just wanted the money. They were looking to rob him. They didn’t think he’d fight back if he was gay. It was just a stupid thing that they did.”

A fourth man, Anthony Fortunato, 20, has been questioned by the police but has not been charged.

Reached at home yesterday, Mr. Fortunato’s mother, Joan Fortunato, would not talk to a reporter or allow her son to speak.

But friends and neighbors said that neither Mr. Timmins nor Mr. Shurov was a stranger to violence. Several said Mr. Timmins had effectively dropped out of high school and had done a stint in rehabilitation, though they were not certain for what.

One neighbor, who said she was afraid to give her name, described him as a “troublemaker, big time,” who fought constantly with his mother and two brothers. No one answered the door during several attempts to reach his family at home.

Mr. Shurov was less well known to neighbors, but not to the police. He spent a month at Rikers Island last year, on misdemeanor charges of possession of stolen property and criminal mischief, though it is not clear whether he was convicted.

But Mr. Fox’s arrest seemed to surprise some friends and neighbors.

“He’s very polite and well-mannered,” said Michael Bonsignore, 57, a retiree who lives in the same Sheepshead Bay apartment complex as Mr. Fox’s father.

Mr. Fox’s friends seemed to agree, saying that since enrolling at SUNY Maritime, he came to the neighborhood mostly on weekends, bursting with stories of travels to Ireland and Greece. Within days of the attack, friends of Mr. Fox’s had posted supportive messages on his MySpace page, urging authorities to “Free Fox.”

But some neighbors and friends said Mr. Fox, skinny and diminutive, nursed a desire to appear tough. In pictures on MySpace, he appears flashing gang signs and drinking. A former neighbor of Mr. Fox’s, who gave his name as Joseph, said that Mr. Fox “was always hanging around the wrong kind of kids,” especially Mr. Timmins, whom he described as “a little punk.”

Friends said that the two had gotten to know Mr. Fortunato and Mr. Shurov from around the neighborhood.

It is not clear how the four men first made contact with Mr. Sandy. But within days of the attack, a joint investigation of the Brooklyn South Homicide Squad, detectives from the 61st Precinct, and the Police Department’s computer crimes squad and Hate Crimes Task Force determined the course of events that led to his death.

Officials say they believe the four gathered at Mr. Fortunato’s house on Sunday and began exchanging instant messages with Mr. Sandy, whom they may have found through the gay-themed Web site Adam4Adam.com. They apparently accessed the Web by tapping into a neighbor’s wireless Internet connection and used Mr. Fox’s America Online account and screen name, “fireyefox,” to exchange instant messages with Mr. Sandy, the officials said.

Posing as a single individual, they proposed a tryst. “Fireyefox” told Mr. Sandy to go to the corner of Emmons and Coyle Streets, about a block from Mr. Fortunato’s home in Sheepshead Bay, around 7:30 p.m. But when Mr. Sandy arrived, both Mr. Fox and Mr. Fortunato were waiting for him, officials said.

He decided to drive away. The officials are not sure why Mr. Sandy decided to leave, but said that during questioning, the suspects said that Mr. Sandy indicated he did not want to have group sex.

After arriving home, however, he continued exchanging messages with “fireyefox” and was eventually persuaded to return. They encouraged Mr. Sandy to bring marijuana and $100 for a hotel room. Mr. Sandy balked at the idea of a hotel room. He agreed to have sex on the beach and said he would bring a blanket. The last message was sent about 8:50 p.m.

He arrived back in Sheepshead Bay sometime after 9 p.m. This time, only Mr. Fox awaited him. They drove together in Mr. Sandy’s blue Mazda to the narrow, dark parking lot by Plumb Beach, a few blocks away.

The other three men, the officials say, were waiting out of sight. When they arrived, Mr. Fox said he had to go to the bathroom, and walked toward the beach.

Once Mr. Sandy was out of the car, the officials said, all four men confronted him. According to the criminal complaint against Mr. Shurov, he punched Mr. Sandy. It is not known if the other three men did as well.

As the attack went on, the men drifted toward the highway. Then Mr. Sandy walked onto it, waving his arms both to ward off the blows and to stop traffic. According to witnesses, he made it to the middle of the road. Mr. Fortunato and Mr. Timmins ran away, the officials said.

But according to the complaint against Mr. Shurov, two of the men struggled with Mr. Sandy on the Belt Parkway. The officials said that Mr. Shurov threw one more punch at Mr. Sandy, who turned, ran and was hit by a car, eyewitnesses said. The officials said that Mr. Fox then ran away. The vehicle has not been identified, nor the driver located.

But the attack was not over. Before departing, according to the witnesses cited in the criminal complaint, Mr. Shurov rifled through Mr. Sandy’s pockets.

He found nothing, and all four returned to Mr. Fortunato’s home later that night.

Later, police found Mr. Sandy’s knapsack, containing his wallet and $40 in cash. His car was in the parking lot, the motor still running as the sea breeze whistled by.

Philip J. Smallman, a lawyer for Mr. Fox, said that his client did not personally attack Mr. Sandy.

“There is no allegation that Mr. Fox at any time used any violence against Mr. Sandy,” Mr. Smallman said. “He’s approximately 5-3 and 120 pounds.” Mr. Smallman said he did not have enough information to comment on the possible use of Mr. Fox’s Internet account to lure Mr. Sandy.

Michael F. Braun, a lawyer for Mr. Timmins, said “my understanding is that Gary Timmins took no part in the assault or attempted robbery of Mr. Sandy.” He said that his client was “at best minimally involved” in the attack. A lawyer for Mr. Shurov did not return phone calls.

Mr. Fortunato’s lawyer, Joseph Mure, declined to comment on the officials’ account, and added that his client had made no statement to anyone about last Sunday’s events.

When the police arrived at Mr. Sandy’s apartment, they found his computer on. They tracked the origin of the messages he had received to a home in Sheepshead Bay. But the owner of the home, they determined, was not involved. Whoever had sent the messages had apparently logged on by piggybacking on that person’s wireless connection.

But by subpoenaing America Online, investigators said, they were able to tie the screen name to Mr. Fox, whom they found in his dorm.

After questioning Mr. Fox, the officials said, the police went in search of Mr. Timmins and Mr. Shurov. Mr. Shurov was arrested by police on Monday after an extensive search; tipped off that police were in front of his home, he tried to sneak in by climbing up a rear fire escape, but was caught, law enforcement officials said.

Both Mr. Fortunato and Mr. Timmins later turned themselves in. Mr. Fortunato arrived at a local precinct station accompanied by his lawyer, the officials said. He was questioned and released.

Mr. Sandy, who worked in the interiors department at Ikea on Long Island, lingered in a coma for several days at Brookdale University Hospital and Medical Center. Doctors told his relatives he was unlikely to live. They removed Mr. Sandy from life support. He died at noon on Friday.

“He was already gone,” said McCartha L. Lewis, Mr. Sandy’s aunt. “He is resting in the arms of Jesus right now.”

Michael Brick, Daryl Khan and Emily Vasquez contributed reporting. Alain Delaquérière, Sandra Jamison and Jack Styczynski contributed research.

    From Crime to Arrest, by Way of Computer, NYT, 15.10.2006, http://www.nytimes.com/2006/10/15/nyregion/15attack.html

With YouTube, Student Hits Jackpot Again

October 12, 2006
The New York Times
By MIGUEL HELFT

PALO ALTO, Calif., Oct. 11 — For Jawed Karim, the $100,000 or so he would have to spend on a master’s degree at Stanford was never daunting. He hit an Internet jackpot in 2002 when PayPal, the online payment company he had joined early on, was bought by eBay.

On Monday, still early in his studies for the fall term, he got lucky again. This time he may have hit the Internet equivalent of the multistate PowerBall.

Mr. Karim is the third of the three founders of the video site YouTube, which Google has agreed to buy for $1.65 billion. He was present at YouTube’s creation, contributing some crucial ideas about a Web site where users could share video. But academia had more allure than the details of turning that idea into a business.

So while his partners Chad Hurley and Steven Chen built the company and went on to become Internet and media celebrities, he quietly went back to class, working toward a degree in computer science.

Mr. Karim, who is 27, became visibly uncomfortable when the subject turned to money, and he would not say what he stands to make when Google’s purchase of YouTube is completed. He said only that he is one of the company’s largest individual shareholders, though he owns less of the company than his two partners, whose stakes in the company are likely to be worth hundreds of millions of dollars, according to some estimates. The deal was so enormous, he says, that his share was still plenty big.

“The sheer size of the acquisition almost makes the details irrelevant,” Mr. Karim said.

On Wednesday, during a walk across campus and a visit to his dorm room and the computer sciences building where he takes classes, Mr. Karim described himself as a nerd who gets excited about learning. Nothing in his understated demeanor suggests he is anything other than an ordinary graduate student, and he attracted little attention on campus in jeans, a blue polo shirt, a tan jacket and black Puma sneakers.

Mr. Karim said he might keep a hand in entrepreneurship, and he dreams of having an impact on the way people use the Internet — something he has already done. Philanthropy may have some appeal, down the road. But mostly he just wants to be a professor. He said he simply hopes to follow in the footsteps of other Stanford academics who struck it rich in Silicon Valley and went back to teaching.

“There’s a few billionaires in that building,” he said, standing in front of the William Gates Computer Science Building. But his chosen path will not preclude another stint at a start-up. “If I see another opportunity like YouTube, I can always do that,” he said.

David L. Dill, a professor of computer science at Stanford, said Mr. Karim’s choice was unusual.

“I’m impressed that given his success in business he decided to do the master’s program here,” Mr. Dill said. “The tradition here has been in the other direction,” he said, pointing to the founders of Google and Yahoo, who left Stanford for the business world.

Mr. Karim met Mr. Hurley and Mr. Chen when all three of them worked at PayPal. After the company was acquired by eBay for $1.5 billion, netting Mr. Karim a few million dollars, they often talked about starting another company.

By early 2005, all three had left PayPal. They would often meet late at night for brainstorming sessions at Max’s Opera Café, near Stanford, Mr. Karim said. Sometimes they met at Mr. Hurley’s place in Menlo Park or Mr. Karim’s apartment on Sand Hill Road, down the street from Sequoia Capital, the venture firm that would become YouTube’s financial backer.

Mr. Karim said he pitched the idea of a video-sharing Web site to the group. But he made it clear that contributions from Mr. Chen and Mr. Hurley were essential in turning his raw idea into what eventually became YouTube.

A YouTube spokeswoman said that the genesis of YouTube involved efforts by all three founders.

As early as February 2005, when the site was introduced, Mr. Karim said he and his partners had agreed that he would not become an employee, but rather an informal adviser to YouTube. He did not take a salary, benefits or even a formal title. “I was focused on school,” he said.

The decision meant that his stake in the company would be reduced, Mr. Karim said. “We negotiated something that we thought was fair.”

Roelof Botha, the Sequoia partner who led the investment in YouTube, said he would have preferred if Mr. Karim had stayed.

“I wish we could have kept him as part of the company,” Mr. Botha said. “He was very, very creative. We were doing everything we could to convince him to defer.”

Mr. Karim was born in East Germany in 1979. The family moved to West Germany a year later and to St. Paul, Minn., in 1992. His father, Naimul Karim, is a researcher at 3M and his mother, Christine Karim, is a research assistant professor of biochemistry at the University of Minnesota.

“To develop new things and be aware of new things, this is our life,” Ms. Karim said, explaining her son’s interest in technology and learning.

After graduating from high school, Jawed Karim chose to go to the University of Illinois at Urbana-Champaign, in part because it was the school that the co-founder of Netscape, Marc Andreessen, and others who gave birth to the first popular Web browser attended.

“It wasn’t like I wanted to be the next Marc Andreessen, but it would be cool to be in the same place,” Mr. Karim said. In 2000, during his junior year, he dropped out to head to Silicon Valley, where he joined PayPal. He later finished his undergraduate degree by taking some courses online and some at Santa Clara University.

Armed with a video camera, Mr. Karim documented much of YouTube’s early life, including the meetings when the three discussed financing strategies and the brainstorming sessions in Mr. Hurley’s garage, where the company was hatched.

In his studio apartment in a residence hall for graduate students, he showed one of them, which he said was filmed in April 2005. In it, Mr. Chen talked about “getting pretty depressed” because there were only 50 or 60 videos on the YouTube site. Also, he said, “there’s not that many videos I’d want to watch.” The camera then turns to Mr. Hurley, who grins and says “Videos like these,” referring to the one Mr. Karim is filming.

Mr. Karim, who has remained in frequent contact with the other co-founders, said he was first informed of the talks with Google last week. On Monday, he was called in to the Palo Alto law offices of Wilson Sonsini Goodrich & Rosati to sign acquisition papers, and he briefly got to congratulate Mr. Chen and Mr. Hurley, he said.

Asked what he thought of the acquisition price, Mr. Karim said: “It sounded good to me.” When a reporter looked puzzled, he raised his eyebrows and added: “I was amazed.”

    With YouTube, Student Hits Jackpot Again, NYT, 12.10.2006, http://www.nytimes.com/2006/10/12/technology/12tube.html?hp&ex=1160712000&en=c6ddbc2fdb0a4dea&ei=5094&partner=homepage

Jury awards $11.3M over defamatory Internet posts

Updated 10/11/2006 10:53 AM ET
USA Today
By Laura Parker

A Florida woman has been awarded $11.3 million in a defamation lawsuit against a Louisiana woman who posted messages on the Internet accusing her of being a "crook," a "con artist" and a "fraud."

Legal analysts say the Sept. 19 award by a jury in Broward County, Fla. — first reported Friday by the Daily Business Review — represents the largest such judgment over postings on an Internet blog or message board. Lyrissa Lidsky, a University of Florida law professor who specializes in free-speech issues, calls the award "astonishing."

Lidsky says the case could represent a coming trend in court fights over online messages because the woman who won the damage award, Sue Scheff of Weston, Fla., pursued the case even though she knew the defendant, Carey Bock of Mandeville, La., has no hope of paying such an award. Bock, who had to leave her home for several months because of Hurricane Katrina, couldn't afford an attorney and didn't show up for the trial.

"What's interesting about this case is that (Scheff) was so vested in being vindicated, she was willing to pay court costs," Lidsky says. "They knew before trial that the defendant couldn't pay, so what's the point in going to the jury?"

Scheff says she wanted to make a point to those who unfairly criticize others on the Internet. "I'm sure (Bock) doesn't have $1 million, let alone $11 million, but the message is strong and clear," Scheff says. "People are using the Internet to destroy people they don't like, and you can't do that."

The dispute between the two women arose after Bock asked Scheff for help in withdrawing Bock's twin sons from a boarding school in Costa Rica. Bock had disagreed with her ex-husband over how to deal with the boys' behavior problems. Against Bock's wishes, he had sent the boys to the boarding school.

Scheff, who operates a referral service called Parents Universal Resource Experts, says she referred Bock to a consultant who helped Bock retrieve her sons. Afterward, Bock became critical of Scheff and posted negative messages about her on the Internet site Fornits.com, where parents with children in boarding schools for troubled teens confer with one another.

In 2003, Scheff sued Bock for defamation. Bock hired a lawyer, but he left the case when she no longer could afford to pay him.

When Katrina hit in August 2005, Bock's house was flooded and she moved temporarily to Texas before returning to Louisiana last June. Court papers that Scheff and her attorney David H. Pollack mailed to Bock were returned to Pollack's office in Miami.

After Bock didn't offer a defense, a Broward Circuit Court judge found in favor of Scheff. A jury then heard Scheff's arguments about damages. Pollack did not seek a specific amount for the harm he says Scheff's business suffered.

"Even with no opposing counsel and no defendant there, $11 million is a huge amount," says Pollack, adding that Scheff is considering whether to try to collect any money from Bock. "The jury determined this was a significant enough issue. It's not just somebody's feelings are hurt; it's somebody's reputation is ruined."

Bock says that when she moved back to her repaired house over the summer, she knew the trial was approaching but did not know the date. She says she doesn't have the money to pay the judgment or hire a lawyer to appeal it. She adds that if the goal of Scheff's lawsuit was to stifle what Bock says online, it worked.

"I don't feel like I can express my opinions," Bock says. "Only one side of the story was told in court. Nobody heard my side."

    Jury awards $11.3M over defamatory Internet posts, UT, 11.10.2006, http://www.usatoday.com/news/nation/2006-10-10-internet-defamation-case_x.htm

Yahoo Feels Breath on Neck

October 11, 2006
The New York Times
By SAUL HANSELL

As Google whips out its fat wallet to buy the video site YouTube, it is making Yahoo look even more out of step with the fast-changing Internet advertising market.

Yahoo itself tried to buy YouTube just a few weeks ago and got as close as negotiating price and terms, according to an executive briefed on the discussions. But the talks broke down, and Google swooped in and closed the deal quickly, just as it has in several recent partnership negotiations. Indeed, many Internet executives are noting just how often Yahoo appears to be late and slow, both in its own business and in negotiations with other companies.

Yahoo would seem to have a strong hand. It is the world’s most popular Web site, with more than 400 million monthly users and a major seller of advertising for its own and other sites. It has top Web properties in areas like e-mail messaging and music. And its management team, led by Terry S. Semel, a former Hollywood executive, is well regarded for its skill and financial rigor.

But in recent months the company has suffered some embarrassing setbacks in its sales of both display and Web search advertising. Many advertising industry executives say Yahoo’s lead in working with big marketers has eroded as other companies have built up popular Web sites, sales operations and advertising technology.

“Yahoo has lost the favor it enjoyed a year or two ago,” said David Cohen, a senior vice president of Universal McCann, a media buying agency of the Interpublic Group. He said his clients were reducing the share of their budgets they allocate to Yahoo in favor of newer sites, like MySpace, and sites developed by big media companies like Viacom.

“There are more players in town, and the others are closing the gap relative to the things Yahoo is good at,” Mr. Cohen said.

But the problems at Yahoo go beyond advertising. From video programming to social networking — areas of interest to users and advertisers alike — the company is losing its initiative. And each time a product fails in the market or is late, Yahoo loses some ability to do more deals and hire more talented employees. The shares are down 38 percent this year, sending some employees out the door in search of better shots at stock market wealth.

Google, in the meantime, is taking advantage of Yahoo’s problems to cement crucial deals that could make its rival’s recovery even more difficult. Before Google agreed to buy YouTube for $1.65 billion in stock, it paid $1 billion for 5 percent of AOL, locking in the right to sell text ads that appear next to its search results. And it agreed to pay $900 million over three and a half years to sell ads on MySpace.com, giving it a huge number of pages where it can place banner ads. (Yahoo flirted with AOL and bid actively for MySpace.)

With these and other deals, Google has neutralized Yahoo’s big competitive advantage on Madison Avenue: its ability to sell the full range of advertising, from splashy video campaigns to text ads on search results.

Joanna Stevens, a spokeswoman for Yahoo, said that no Yahoo executive would comment for this article.

“We feel our business is very strong, even if we are not growing at the rates at which the financial community is expecting us to,” Ms. Stevens said. “Of course growth will slow when you already reach one out of two people on the Internet.” She said that Yahoo frequently discusses business arrangements with other Internet companies, but declined to discuss any potential negotiations with YouTube.

Yahoo has been stymied because its text advertising business has been largely frozen until it completes a new software system. The upgrade is more than a year late and the delay has sucked up the company’s engineering resources and prevented it from developing new advertising products. Yahoo’s system produces much less money from every page than Google, a handicap in bidding for advertising deals.

Moreover, Google has grown so much wealthier and has so much more stock market value, it can afford to make deals that would be much more risky for Yahoo, said Jordan Rohan, an analyst for RBC Capital Markets.

Google has $11 billion in cash and a market value of $131 billion, while Yahoo has $4 billion in cash and is worth $34 billion. “In poker terms, Google is the dominating chip stack,” Mr. Rohan said.

Some analysts argue that Yahoo needs some bold moves to signal to investors, advertisers and customers its commitment to innovation. Its growth in users is slowing. The United States audience grew just 6.5 percent in September from a year earlier, to 106 million unique visitors, while Google’s grew 25 percent.

Yahoo has made several overtures to buy Facebook, a social networking site popular among college students. This would help compensate for the failure of Yahoo’s own social network — Yahoo 360 — to find a place in the market. It could also expand Yahoo’s appeal to young people, an area in which it has slipped.

But Mr. Rohan said it would be a mistake to respond to the Google-YouTube deal with a big offer for Facebook. “Facebook is a nice small business,” he said. “I would prefer they spend less than $1 billion for it.”

The company’s stumbles are a puzzle, as Mr. Semel is widely considered to have built a mature and disciplined management team. He led the company out of the collapse of the Internet ad market and built a credible Internet search unit after it became clear that Google was more a rival than a partner. But in this market, what was once admirable discipline may now look like timidity.

Yahoo may well be slipping because of the sheer scope of its ambitions. It competes in news with CNN, in sports with ESPN, in e-mail with Microsoft, in instant messaging with AOL, in social networking with MySpace, and of course in searching with Google. And it does so in dozens of countries.

“It’s hard to figure out what they want to be when they grow up, even though they are grown up now,” said Tim Hanlon, a senior vice president of Denuo, the media futures consulting arm of the Publicis Groupe. “Are they a content company? Are they a services company? Or are they a portal to other things? You ask three people and you may get three different answers.”

Current and former Yahoo employees say the company has been bogged down by bureaucracy and internal squabbling. For example, the media group, which handles video programming, and the search group, which has a system to find videos on the Web, both wanted to offer a service for users to upload their own video clips. The search group won, but the delay allowed YouTube, a start-up, to dominate the market.

“When you become Yahoo’s size, you become a little complacent, a little fat and happy,” said Youssef H. Squali, an analyst for Jefferies & Company.

Companies that try to do deals with Yahoo also say they find it to be slow, demanding and inconsistent in negotiations. The discussions with YouTube floundered, in part, over Yahoo’s demands for assurances over how YouTube would handle copyrighted material, concerns that were not so important to Google, the executive briefed on the negotiations said.

“They can’t close a deal,” said a top executive of a large media company who said he was frustrated because negotiations over a partnership with Yahoo had bogged down. “They are smart guys, but they are having real problems,” said the executive, who declined to be identified because his company has other dealings with Yahoo.

Yahoo’s faltering image and plunging stock price may also be hurting its ability to recruit talented people. “A lot of entrepreneurs I talk to would rather work for a hypergrowth technology company than what they consider — and this is funny — a stodgy old Internet company,” Mr. Squali said.

Yahoo’s existing employees are grumbling that with the stock price so low, many of their options have become worthless. Some Yahoo veterans have bolted for trendier start-ups. For example, Mike Murphy, a longtime ad salesman, is now the chief revenue officer of Facebook, and Gideon Yu, Yahoo’s treasurer, quit last month to become chief financial officer of YouTube.

“They woke up and realized they had an attrition problem,” said one executive who quit for a start-up this year.

Yahoo has responded by giving substantial raises to favored executives it wants to keep, according to one current executive who spoke on the condition of anonymity because he did not want to jeopardize the raise he received.

Yahoo has also had trouble developing many new offerings that capitalize on the latest trends on the Web and offer innovative formats for advertisers. Many marketers, for example, have become intrigued by the possibilities of weaving their products into the fabric of social networking sites. Even more, they are sponsoring original Internet content, especially video programs.

Two years ago, Yahoo made an expansion in Hollywood in an attempt to produce new video-focused Web sites, but it later backed off from the plan amid internal bickering.

Perhaps the biggest area of strategic confusion for Yahoo is its advertising network, which sells ads on other sites. Its Yahoo Search Marketing division has been falling further and further behind Google in selling text ads on other search sites. Yahoo lost a major source of attractive search pages when MSN began selling its own ads this year. And the Yahoo Publisher Network, which is meant to sell ads on blogs, news sites and other content pages, has languished. Dow Jones, for example, withdrew The Wall Street Journal and other sites out of the Yahoo network this spring, hiring Seevast, a small New York firm, instead.

Moreover, Yahoo has made few moves to expand its ad network to sell other types of advertisements like banners and video commercials, even though it is a leader in selling such ads on its own site. With a plethora of blogs and Web publishers looking to earn money from their efforts, there is a booming business in selling ads for these sites. AOL has made a major play in this field, buying the leading banner network, Advertising.com, and Lightningcast, a video network.

Google has moved to expand its network from text ads to selling banners and video ads, and the YouTube purchase will no doubt accelerate its push into video. Moreover, Google wants to sell ads in print, radio and soon traditional television as well.

“Google is so much ahead,” said Peter Hershberg, a managing partner of Reprise Media, a search advertising agency. “Google is going into new channels like video and Yahoo is still trying to fix their core channel.”

    Yahoo Feels Breath on Neck, NYT, 11.10.2006, http://www.nytimes.com/2006/10/11/technology/11yahoo.html?hp&ex=1160625600&en=2b60d0f8452222f8&ei=5094&partner=homepage

Dot-Com Boom Echoed in Deal to Buy YouTube

October 10, 2006
The New York Times
By ANDREW ROSS SORKIN

A profitless Web site started by three 20-somethings after a late-night dinner party is sold for more than a billion dollars, instantly turning dozens of its employees into paper millionaires. It sounds like a tale from the late 1990’s dot-com bubble, but it happened yesterday.

Google, the online search behemoth, agreed yesterday to pay $1.65 billion in stock for the Web site that came out of that party — YouTube, the video-sharing phenomenon that is the darling of an Internet resurgence known as Web 2.0.

YouTube had been coveted by virtually every big media and technology company, as they seek to tap into a generation of consumers who are viewing 100 million short videos on the site every day. Google is expected to try to make money from YouTube by integrating the site with its search technology and search-based advertising program. [Page C1.]

But the purchase price has also invited comparisons to the mind-boggling valuations that were once given to dozens of Silicon Valley companies a decade ago. Like YouTube, those companies were once the Next Big Thing, but some soon folded.

Google, with a market value of $132 billion, can clearly afford to take a gamble with YouTube, but the question remains: How to put a price tag on an unproven business?

“If you believe it’s the future of television, it’s clearly worth $1.6 billion,” Steven A. Ballmer, Microsoft’s chief executive, said of YouTube. “If you believe something else, you could write down maybe it’s not worth much at all.”

In a conference call to announce the transaction yesterday, there were eerie echoes of the late 1990’s boom time. There was no mention of what measures Google used to arrive at the price it agreed to pay. At one point, Google’s vice president, David Drummond, gave a cryptic explanation: “We modeled this on a more or less synergistic kind of model. You can imagine this would be hard to do on a stand-alone basis.”

The price tag Google paid may simply have been the cost of beating its rivals — Yahoo, Viacom and the News Corporation — to take control of the most sought-after Web site of the moment. It was also perhaps the only price that two YouTube founders, Chad Hurley, 29, and Steven Chen, 28, and their big venture capital backer, Sequoia Capital Partners, were willing to accept, given that they most likely could have continued as an independent company. A third YouTube founder, Jawed Karim, left the company to pursue an advanced degree at Stanford.

The deal came together in a matter of days. After rebuffing a series of other overtures, YouTube’s founders decided to have lunch on Wednesday with Google’s co-founder, Larry Page, and its chief executive, Eric E. Schmidt. The idea of a deal had been broached a few days earlier. The setting was classic Silicon Valley start-up: a booth at Denny’s near YouTube’s headquarters in San Bruno, Calif. The Google executives threw out an offer of $1.6 billion and autonomy to continue running the business.

That set off a marathon of meetings and conference calls over the next two days, which kicked into even higher gear on Friday, when news of the talks began to circulate, putting pressure on Google to sign a deal before a rival bid emerged. In fact, the News Corporation sent a letter to YouTube seeking to start talks but never received a response.

“The Google-YouTube deal has to feel a little like the 1990’s, but it isn’t,” said Dmitry Shapiro, chief executive of Veoh, a YouTube competitor that is backed by Time Warner and Michael D. Eisner, the former chairman of Disney. Arguing that online video represents an entirely new medium, he said, “If you knew then what you know now and you had the chance to acquire Amazon or eBay — which weren’t making any money either — you would have bought them.”

Of course, YouTube has also been compared to Napster, whose music-sharing service was eventually shuttered after a series of lawsuits. While YouTube has made some deals with content providers, including one yesterday with CBS, its users have uploaded millions of copyrighted clips, leading some to question whether Google is inheriting a legal minefield. YouTube has said it is different from the old Napster service because it removes content when a copyright holder complains.

“There are some issues with YouTube,” Sumner M. Redstone, chairman of Viacom, said last week on “The Charlie Rose Show.” “They use other people’s products,” he said, alluding to pirated video. “The only way they avoid litigation now is they stop doing it if you call them.”

Mark Cuban, who founded Broadcast.com, an early audio and video site that was bought by Yahoo, is even more skeptical of Google’s legal position, writing on his blog: “I still think Google lawyers will be a busy, busy bunch. I don’t think you can sue Google into oblivion, but as others have mentioned, if Google gets nailed one single time for copyright violation, there are going to be more shareholder lawsuits than Doan’s has pills to go with the pile-on copyright suits that follow.”

Yet the deal with Google was announced hours after YouTube disclosed deals with entertainment companies that appeared to reduce the risk that it would become mired in copyright disputes.

YouTube is Google’s first big acquisition after making a series of much smaller deals for companies, including Pyra Labs, creator of Blogger. Google now joins the Internet’s establishment — Yahoo, eBay and Amazon.com, among others — which have all made giant acquisitions to expand their businesses beyond their traditional trade.

But those companies have had mixed results. Yahoo paid $3.6 billion in 1999 for Geocities, a company that allowed users to create their own Web sites; today, MySpace, a social networking site bought by Rupert Murdoch’s News Corporation last year for only $580 million, far eclipses it. EBay, on the other hand, acquired PayPal, a rapidly growing start-up that lets people make payments via e-mail, for $1.5 billion in 2002. It now represents more than a third of eBay’s revenue.

Rather than pursuing big acquisitions, Google has been known for plowing money into research and development, spending $483.98 million last year, an increase of more than 114 percent over the previous year.

The success of the YouTube acquisition will probably lie in embedding video advertising into the clips that millions of people watch everyday from their computers. So far, YouTube’s management has been reluctant to include advertising within clips, for fear of alienating users.

Yesterday, however, Mr. Hurley, one of YouTube’s founders, appeared more open to experimenting, saying that he was even considering testing what’s known as a pre-roll — a 15-second ad before a clip — something he had long derided as potentially ruining the user experience.

While more marketers have been eager to advertise against online video, some big consumer companies have been reluctant to fully embrace advertising against user-generated content because it is difficult to differentiate good content from offensive material. YouTube has created an assortment of tools for users and content creators to police its site.

YouTube said it had struck accords to license content from two of the four major music conglomerates — the Universal Music Group and Sony BMG Music Entertainment — and the CBS television network in exchange for a percentage of YouTube’s advertising revenue.

YouTube is also expected to use new technology to identify copyrighted material that users have uploaded to the site without permission, and to share ad revenue with media companies that own the video or music content. (YouTube made a similar pact with the Warner Music Group last month, and had a previous advertising deal with NBC in June).

The deals reflect how media companies are rethinking the distribution of their entertainment content online.

The deal with Universal, the world’s biggest music corporation, drew particular attention because the company had said it was contemplating a lawsuit against YouTube over copyright issues.

Phil Leigh, the president of Inside Digital Media, said the new arrangements represented “a strong endorsement that the major media companies are going to see YouTube as a legitimate business partner.”

Mr. Leigh said that also suggested a rethinking of the approach the companies took to Napster. “It shows that very important, erstwhile reluctant media companies have got religion,” he said.

The YouTube alliances also came the same day that Google announced separate deals to license music videos from Sony BMG and Warner.

Under the terms of the deal, YouTube, which has about 60 employees, will retain much of its identity and will keep its name and its office in San Bruno, more than 25 miles from Google’s headquarters in Mountain View.

The transaction was announced after the stock market closed. Earlier, Google shares rose 2 percent, to $429, after DealBook, a Web log published by nytimes.com, reported that a deal would be announced at the end of the market day.

Benjamin Schachter, a UBS analyst, wrote in a note to investors. “The price tag of about $1.6 billion is difficult to justify on a spreadsheet and may be somewhat of a throwback to the days of paying for eyeballs and page views, but this is a strategic bet that Google would be placing for a long-term objective: to be the technology and distribution partner for content owners and publishers.”

Jeff Leeds contributed reporting.

    Dot-Com Boom Echoed in Deal to Buy YouTube, NYT, 10.10.2006, http://www.nytimes.com/2006/10/10/technology/10deal.html?hp&ex=1160539200&en=7f2e74db76870ea0&ei=5094&partner=homepage

Venture Firm Shares a Jackpot

October 10, 2006
The New York Times
By MIGUEL HELFT and MATT RICHTEL

SAN FRANCISCO, Oct. 9 — Even in Silicon Valley, it is rare for so much money to be made so fast — and by so few.

The biggest winners in the $1.65 billion acquisition of YouTube by Google are YouTube’s founders, Chad Hurley and Steve Chen, who have parlayed their stakes in the 19-month-old start-up into Google shares that are probably worth tens of millions. YouTube’s roughly 60 employees are no doubt celebrating as well.

But only one venture capital firm — Sequoia Capital — got in on what has turned out to be one of the hottest Internet deals since Google went public in 2004.

Sequoia, which is among the most successful venture firms in Silicon Valley, invested a total of $11.5 million in YouTube from November 2005 to April 2006. It may be walking away with more than 43 times that amount. Its stake in YouTube has been estimated at roughly 30 percent, which would give it a value of $495 million.

That kind of payday, especially for an investment that is less than 12 months old, is unusual even in Silicon Valley. But it is not likely to rank among Sequoia’s biggest. The firm, which was founded in 1972, has backed a roster of technology superstars including Apple, Cisco, Oracle, Yahoo and Google itself.

Sequoia’s go-it-alone investment in YouTube represents the kind of aggressive move for which Sequoia is known. A more traditional and safer approach would have been to share the risk and rewards with other investors. That is especially true with an early-stage investment in a company that since its inception has faced the prospect of costly lawsuits over the copyrighted material that peppers the site.

“They had an absurdly high level of confidence with what they were doing,” said Paul Kedrosky, a venture capitalist and author of the blog Infectious Greed.

Sequoia did not return calls seeking comment.

The connection between Sequoia and YouTube can be traced back to Mr. Chen’s and Mr. Hurley’s days at PayPal. After PayPal was bought by eBay, the two men were looking for a new company to start. They hit upon the idea of a site that would help users exchange video files.

In the summer of 2005, the pair showed their site to another PayPal alumnus, Roelof Botha. Mr. Botha, who had been chief financial officer at PayPal, was by then a partner at Sequoia. In November 2005, he agreed to invest $3.5 million in YouTube. Five months later, Sequoia put an additional $8 million into the site.

“It wouldn’t be surprising if they owned 30 percent,” said Michael Kwatinetz, a founding general partner at Azure Capital Partners.

The fact that the man who is perhaps Sequoia’s best-known partner, Michael Moritz, sits on the board of Google could have given the search giant more insights into the legal risks associated with YouTube, and therefore more confidence in pursuing a deal, Mr. Kedrosky said.

The deal by firms that share an investor is right out of the playbook of Kleiner Perkins Caufield & Byers, the venture firm that imported from Japan the notion of a keiretsu, or network of companies with interlocking relationships, Mr. Kedrosky said.

“The whole idea of the keiretsu was friends selling to friends,” he said. “The model worked gangbusters for Kleiner Perkins.”

Venture firms like Sequoia typically raise funds from large institutional investors like pension funds and university endowments. They then invest those funds in promising start-ups, although they often end up with more misses than hits. At successful venture firms — and Sequoia ranks among the most successful — hits on the scale of YouTube more than make up for the misses.

A venture firm makes money only when the start-ups it has financed are sold or go public. It then splits profits among its investors after taking a share, which can be 20 to 25 percent.

The YouTube deal was the first major acquisition in the booming Internet video sector. In a conference call, Eric E. Schmidt, Google’s chief executive, called it “one of many investments that Google will be making to make sure that video has its proper place in people’s online lifestyle on the Internet worldwide.”

A Google spokesman said Mr. Schmidt was not necessarily talking about more acquisitions. But the prospect of more deals still has other venture capitalists and entrepreneurs salivating.

“It’s good to hope,” said Peter Clemente, chief marketing officer of ManiaTV, a Denver company that produces live video programming for the Internet. ManiaTV is backed by Benchmark Capital, Intel Capital and Centennial Partners.

Mike Hirshland, a partner at Polaris Venture Partners in Boston, said, “This is obviously the talk of the sector.” Polaris has invested $11 million in Heavy.com, an Internet video site founded in 1999 that aims at men ages 18 to 34. Mr. Hirshland called the deal the “first major venture-level return for an online video company, a sector that’s probably the most-watched and commented-on sector around the Internet.” He added: “It’s certainly the most hyped.”

The possibility of hype is leading some to worry about a bubble.

“It certainly starts to heat up the space a little bit,” said Mr. Kwatinetz, warning that Internet video might follow the same trajectory as, say, reality television, which was ignited by the success of “Survivor,” a show that was followed by a long list of imitators.

Indeed, the success of YouTube, as well as MySpace, the No. 2 video site on the Internet, has spawned a generation of competitors focused on the creation and sharing of videos, said Josh Felser, president of Grouper, a video sharing site purchased this year by Sony Pictures Entertainment for $65 million.

“There are hundreds,” Mr. Felser said. Some companies have already risen above the fray. In March, Enterprise Partners Venture Capital announced it had invested an undisclosed sum in vMix, a site that lets people upload videos and slide shows.

In April, Veoh Networks, which lets people share and watch videos, received $12.5 million from Spark Capital, Time Warner, and the Tornante Company, which is controlled by the former Disney chairman Michael D. Eisner.

Also in April, Revver, a video sharing site, received $8.7 million from the venture capitalists Draper Fisher Jurvetson and Bessemer Venture Partners, among others. The company has since received more funding from Comcast Interactive Capital and Turner New Media Investments.

Joe Lazlo, a senior analyst with Jupiter Research, said the companies that are attracting funding are ones that are finding ways to differentiate themselves. He said one creative concept was that of Break.com, which allows people to post videos, then buys the more popular ones and runs ads with them.

But so far at least, Break.com is not biting at venture capital offers. Keith Richman, its chief executive, said the company had declined financing a number of times as it tried to build the business on its own.

Mr. Felser, the president of Grouper, said there was a limit to how much a video creation and sharing company can hope to grow independently, because of the expense of bandwidth and advertising infrastructure.

Katie Hafner contributed reporting.

    Venture Firm Shares a Jackpot, NYT, 10.10.2006, http://www.nytimes.com/2006/10/10/technology/10payday.html

Adding On to the House of Google

October 10, 2006
The New York Times
By JOHN MARKOFF

SAN FRANCISCO, Oct. 9 — Google has made it a point to promote a culture of small engineering teams given free time to create new products — a strategy that it has argued will make the company more innovative than other top-down organizations.

But beginning well before its initial public offering in 2004, Google has not shied away from buying rather than building. It has made more than 15 major acquisitions in areas as diverse as blogging, personalized search, satellite imagery, image management and cellular phone technology.

And now, having pieced together a rapidly multiplying set of products, Google’s leaders have a new concern. Call it Google sprawl.

Only last week, the founders, Sergey Brin and Larry Page, and the chairman and chief executive, Eric E. Schmidt, spoke of their concern that the growing collection was confusing users. They noted that new products found one level down from Google’s famously Spartan home page drew far less attention and traffic than they would like.

The answer, they stated, will increasingly be to fold new services and products into existing applications as additional features. But that approach will be put to the test — indeed, may even conflict — with its largest deal yet, the $1.65 billion acquisition of YouTube.

The deal presented Google with a difficult choice: Integrate YouTube into Google and risk losing one of the hottest brands on the Internet, or leave YouTube independent and risk diluting its own powerful brand?

For now, anyway, Google says YouTube will remain independent, retaining a “distinct brand identity” and complementing its own existing video business, Google Video.

But while the company described Google Video on Monday as “fast growing,” it has had trouble getting traction among Web video services, trailing far behind YouTube and MySpace. And one reason may be that it is just one of many offerings housed underneath the Google roof.

At a briefing for journalists last Thursday, Google’s executives said the biggest risk to the company was the loss of the simplicity that was crucial to building the company’s brand.

“One of the things that is going to have to happen is simplicity,” Mr. Brin said. “It’s one of the reasons that people gravitated to Google initially.”

Indeed, for all of Google’s innovations and additions — like Google Earth, the satellite-mapping service that grew out of an acquisition, or Google Finance, its home-grown financial news site — it is still its search engine that drives the overwhelming share of its use.

According to Alexa, a Web information company, 72 percent of those who use Google.com do so to search from its home page. Another 10 percent use it for e-mail and 8 percent for its Web-based image search. Video has been a straggler, at 3 percent.

That helps explain the motivation for a YouTube deal. But with the stable of talent that Google has built, why not develop its own YouTube?

Its engineering teams have, after all, created services, including Google Calendar, Mail and Spreadsheet as well as language translation technology built into Google’s search engine. More than a dozen services — including Google Video, Google Maps and Google Desktop Search — have come from the company’s advanced research arm, Google Labs.

But those creations are complemented, if not overshadowed, by its acquisitions. Still, except for Google Earth, not one has become an unqualified success or market leader.

Moreover, with the exception of advertising-related technology acquisitions, Google has yet to develop significant revenue streams from its acquisitions. Its Picasa image management program allows users to purchase photo prints, and the company sells a commercial version of Google Earth for $400, but neither of those are major businesses yet.

YouTube is different from Google’s previous acquisitions not because it has a proven business model — it does not — but because it comes with an established audience.

Google executives generally answer questions about acquisitions by saying that the company is still experimenting with business plans, or by arguing that a program like Sketch-Up — a simple computer-aided design program — will have an indirect revenue impact by making the entire Google service more valuable.

Its pattern until now of integrating new features into existing products has an obvious parallel with the successful strategy that Microsoft followed during the 1980’s in continuously adding features to its MS-DOS and Windows operating systems and to its Office software package.

The strategy backfired in the mid-1990’s when the Justice Department charged Microsoft with monopoly practices after it tried to integrate the Web browser, which had been popularized by Netscape Communications, into Windows.

Mr. Schmidt, Google’s chairman, insisted that the company would not follow a similar strategy, in part because it had established a principle of not trying to control or lock up user-owned information — like calendar or spreadsheet data — that could be moved to an alternative service.

“We at Google will never trap user data,” he said.

Now, like Microsoft before it, Google is rapidly expanding into new arenas. And that presses home the challenge facing the company: that almost all of its influence and revenue still come from a single choke point, its search command line.

“What does a video storage service have to do with search?” asked Jakob Nielsen, a principal of Nielsen Norman Group, a user-oriented design group.

Last week, before reports of an impending YouTube deal surfaced, one of Google’s founders, Mr. Brin, tried to answer just that question.

Acknowledging that as a Stanford student he had experimented with lock-picking techniques, a relatively common pastime for computer hackers, he mentioned a resource unavailable to him then.

“Google Video turned out the best way to learn about this new technique,” he said.

    Adding On to the House of Google, NYT, 10.10.2006, http://www.nytimes.com/2006/10/10/technology/10google.html

Link by Link

A Slippery Slope of Censorship at YouTube

October 9, 2006
The New York Times
By TOM ZELLER Jr.

LAST week, as YouTube continued its recent campaign to spit-shine its image and, perhaps, to look a little less ragtag to potential buyers (including Google, which was said to be eyeing the upstart in the $1.6 billion range), the company took a scrub bucket to some questionable political graffiti on its servers, including a video entry from the doyenne of right-wing blogs, Michelle Malkin (michellemalkin.com).

YouTube users can flag any video as containing pornography, mature content or graphic violence, depicting illegal acts or being racially or ethnically offensive. A video is removed — as Ms. Malkin’s was on Sept. 28 — only if a review by the company’s customer support department agrees that it is inappropriate, or that the video is on its face in violation of the site’s terms of use.

But the incident raised some questions about the fine line YouTube’s administrators walk when they decide to respond to users’ complaints about contributions to the site — a mechanism that is fraught with the potential for vindictive shenanigans.

Ms. Malkin’s video, titled “First They Came,” had resided on YouTube for some time, and is essentially a crude slideshow paean to people — authors, politicians, filmmakers — who had been made targets, she implies, by intolerant Islamic fascists. (A Windows Media file version of the video can be downloaded at michellemalkin.com/archives/004456.htm).

•Salman Rushdie, the author who has lived under a fatwa, an official Islamic death sentence, since 1989 for insulting the Prophet Muhammad in a novel, is the first example cited. Fair enough. Theo van Gogh, the Dutch filmmaker murdered by Mohammed Bouyeri, apparently for insults to Islam and other affronts, is also shown, as are several of the editorial cartoons depicting the Prophet Muhammad that set off wild protests across the Islamic world in late January and February.

Included, as well, is Pim Fortuyn, the openly gay, anti-immigration politician from the Netherlands who was assassinated in 2002 by Volkert van der Graaf — although linking this to some jihadist plot is tendentious at best.

The video also contains some graphic images — file clips of Mr. Fortuyn’s and Mr. van Gogh’s newly dead bodies laid out on the streets, for instance.

Does that mean it should be banned?

After all, violence abounds on YouTube — from actual film of Iraqi snipers taking out American soldiers (that video was removed earlier last week, although an article in this newspaper on Friday suggested that others are out there), to dozens of ordinary and quite depressing fistfights from across the globe (just search for the tag “fight”).

Many, but not all, newspapers were frightened away from publication of the Muhammad cartoons. But the cartoons, and other images of Muhammad, can be found all over the Internet, as individual users decide for themselves whether or not they will abide by the Islamic restrictions on Muhammad imagery. Hosts of such images include the Metropolitan Museum of Art in New York, which, among other images, has one of the prophet atop a camel, in a leaf of “Majmac al-tawarikh,” or the Compendium of Histories, at snipurl.com/mb3j.

This is not to suggest that Ms. Malkin’s video would not be particularly offensive to some people. There is little that Ms. Malkin says or does that is not. But it is hard to imagine what YouTube hopes to gain by punting such content, or what sort of uphill rhetorical battle it is setting itself up for when it does so.

As noted by my colleague, Virginia Heffernan, in her Screens blog (screens.blogs.nytimes.com) last week, it was only a matter of hours before Ms. Malkin’s political followers mounted a countercampaign to have videos they found offensive — anti-Israeli videos, for instance, or jihadist screeds — similarly flagged and yanked.

But outside of that debate, what of other materials? It takes just minutes to find a video claiming that the Bible is “repulsive” and therefore “has no place in our society.” Another depicts a campy Jesus stripping to a loincloth and lip-synching Gloria Gaynor’s “I Will Survive” through crowded city streets, only to be abruptly struck by a speeding bus.

Will these be taken down?

Jeffrey Rutenbeck, the dean of the Communication and Creative Media Division at Champlain College in Burlington, Vt., suggested that such moves almost always backfire. “Attempts to censor in public ways almost always raises awareness of an issue,” he said. “And this provides a great conversational landscape.”

But Professor Rutenbeck also recalled some earlier, Usenet-based communities that, to ensure that no individual members were upset by anything, began censoring speech so vigilantly that the communities themselves began to wither. Conversation, it turned out, even heated conversation, was their lifeblood.

“A lot of communities in Usenet just died a slow and agonizing death,” Professor Rutenbeck said, “because they became so intolerant of anything that could offend anyone in the group. It’s hard to imagine this not becoming a bigger and bigger challenge for YouTube.”

On Friday, as users across the political spectrum went to war at YouTube, flagging each others’ videos as inappropriate, Ms. Malkin posted a video taunt to the administrators of the site: “I still haven’t heard from you about why you yanked my harmless, nonviolent, nonprofane, nonhateful, nonthreatening little video,” Ms. Malkin said, “which criticized harmful, violent, profane, hateful, threatening, Islamic terrorism.”

In an e-mailed statement to me, YouTube suggested that Ms. Malkin’s video and others recently removed, including one that implied, in as bold and outrageous a tone as possible, that images of Lebanese citizens suffering the recent Israeli bombings were staged, violated the company’s terms of service.

•“Our customer support team reviews all flagged videos before removing them,” the statement said. “Videos are not automatically removed.” The statement specifically referred to the part of the YouTube user agreement that forbids users from submitting material that is “unlawful, obscene, defamatory, libelous, threatening, pornographic, harassing, hateful, racially or ethnically offensive, or encourages conduct that would be considered a criminal offense, give rise to civil liability, violate any law, or is otherwise inappropriate.”

Phew.

To be fair, YouTube has to retain the right to boot content to maintain legal control of its servers. Otherwise, chaos would reign.

But as GaijinBiker, an American blogger living in Tokyo (ridingsun.com) — and a fan of Ms. Malkin — noted on Thursday, erasing opposing opinions is nothing to celebrate.

“This is not a positive development,” he said on the removal of some anti-Israeli videos from YouTube. “I want these videos to be widely available, so people can see just how deranged and hate-filled Israel’s opponents can be. A tit-for-tat censorship battle only leaves all of us less informed.”

    A Slippery Slope of Censorship at YouTube, NYT, 9.10.2006, http://www.nytimes.com/2006/10/09/technology/09link.html

Basic Instincts

Buying Online With a Brain That’s Offline

October 7, 2006
The New York Times
By M. P. DUNLEAVEY

STEPHEN KENNY remembers being in high spirits one evening after imbibing “one martini or maybe three ” on his way home from work. He was in such a good mood, in fact, that he decided to get his girlfriend a present.

“I logged on to this luxury jewelry Web site and I bought her a pair of $1,500 earrings — or what I thought were $1,500 earrings,” said Mr. Kenny, who works at an intellectual property law firm in Burlington, Vt. “Maybe my vision was blurred or I just missed a decimal point, but they turned out to be $15,000.”

When he discovered what he’d done the next morning, Mr. Kenny was able to cancel the charge on his credit card, so no real harm was done. “Frankly, I was amazed that I had that much credit available,” he said.

Welcome to one of the latest and strangest financial hazards of our high-tech age: clicking under the influence, or as a friend of mine called it, “sip and click.” In Mr. Kenny’s case, he realized what he had done, and was able to remedy the situation quickly, but not everyone gets off the hook so easily.

It’s not the sort of thing people like to admit. “You don’t want to sound like a boozehound,” said one woman, who didn’t remember ordering several books from Amazon until the packages started arriving.

And while logging on to go shopping after a libation or two is far less dangerous than drinking and driving, there is the potential for reckless spending.

Like the 24-hour availability of cable shopping channels, the growth of at-home Internet access has provided a confluence of factors that are alluring to many would-be shoppers. You can order from your favorite stores whenever you like, you don’t need cash, and above all you have the privacy to indulge your whims without fearing raised eyebrows from friends or store clerks.

Add a glass of good cheer and it’s easy to lose your material inhibitions, says Kate Hanley, creator of MsMindBody.com. Last fall she was captivated by a pair of Cole Haan boots on eBay, but had to abandon the auction to attend a party. After a glass of Champagne at the party, Ms. Hanley said that she noticed her host’s computer nearby. “I logged back onto the auction and bought the boots,” she said. “It took all of two minutes.”

While it’s hard to say how many people might be filling their online shopping carts in a slightly altered state, the rapid spread of high-speed Internet access does make it easier to browse and buy in the privacy of your own home. By March 2006, 42 percent of Americans had broadband access at home, up from 30 percent a year earlier, according to a study by the Pew Internet and American Life Project.

Does the easy and constant access to the world of commerce afforded by the Internet translate to a greater likelihood of irresponsible retail behavior? Not necessarily, says Kit Yarrow, a professor at Golden State University in San Francisco who studies shopping behavior. People shop “while under the influence of a lot of things, not just alcohol,” Ms. Yarrow said. “They might use it to deal with obsessive issues, loneliness, boredom, friendship issues.”

But while these behaviors are just as likely to happen at the mall, “you can’t go to the mall at 11 o’clock at night with a glass of wine under your belt,” Ms. Yarrow said.

Because clicking while under the influence is relatively new and, to some, very embarrassing, it’s hard to gauge how much people overspend when they shop this way — and what other factors are at play.

Lyndsey Gunn, a government recruiter in Washington, once spontaneously bought a plane ticket to visit a close friend after enjoying a couple of cocktails earlier that evening. “We were on the phone; she said, ‘I wish we could spend New Year’s together,’ so I logged on right there and bought a ticket,” Ms. Gunn said.

Although she hadn’t planned to spend $250 that night, Ms. Gunn says that she probably would have bought the ticket under more sober circumstances as well.

Mr. Kenny, who had one other episode of tipsy electronic shopping involving a rather costly piece of Le Crueset cookware, has decided to leave nothing to chance.

He set up a complicated alpha-numeric password for his computer to prevent further impulse purchases. “If I can’t even turn the computer on if I’ve been drinking,” he said, “I can’t do that much damage.”

    Buying Online With a Brain That’s Offline, NYT, 7.10.2006, http://www.nytimes.com/2006/10/07/business/07instinct.html

Google Is Said to Set Sights on YouTube

October 7, 2006
The New York Times
By ANDREW ROSS SORKIN and PETER EDMONSTON

YouTube, the popular video-sharing Web site that has yet to celebrate its first anniversary or its first profit, is quickly becoming the must-have prize for media and technology giants.

Google is in discussions to acquire YouTube for $1.6 billion, people involved in the talks said yesterday. While the talks are in the early stages, and may fall apart, the size of Google’s offer may push YouTube closer to a deal. Other companies have also expressed interest and could swoop in with a higher offer.

Microsoft, Yahoo, Viacom and the News Corporation, among others, have all visited YouTube’s headquarters in San Mateo, Calif., in recent months to inquire about buying the company.

The frenzied hunt to acquire the next hot Internet property — MySpace last year and now YouTube — has become reminiscent of the first Internet boom, as companies bid up prices of sites whose ability to generate profits is the subject of much debate.

A deal for YouTube would be the crowning moment for a property that emerged as a cultural phenomenon almost immediately after it officially began last December. Its site, which delivers more than 100 million video clips a day, allows users to share a broad array of offerings from news clips to home movies to spoofs — sometimes funny but often simply crude — created by ordinary users.

Almost single-handedly, YouTube has both popularized the sharing of videos and empowered would-be movie makers around the world. The site is also facing possible legal challenges over the unauthorized posting and sharing of videos. Yet a number of media companies would prefer to embrace YouTube as a partner, rather than treat it as a pariah, as was the case with Napster.

If YouTube agrees to a deal, it would be a sudden change of heart. Chad Hurley, a founder of the company, has said that he prefers to stay independent. “We’re not even thinking about being acquired or going public,” he said in a meeting with New York Times editors and reporters last month.

A spokesman for Google declined to comment. A spokeswoman for YouTube did not return calls for comment.

YouTube’s meteoric rise has made it one of the most closely watched of the new generation of Internet companies created since the technology bust of 2000 and the fallow period that followed. The millions of people that visit YouTube each day make it a valuable property, though it has yet to turn a profit.

Rumors of YouTube’s talks with Google first appeared yesterday on TechCrunch, a Web site about Internet start-ups.

The $1.6 billion price tag, while seemingly rich for so young a company, makes sense, research analysts said.

“That’s expensive but not unreasonable,” said Charlene Li, an analyst with Forrester Research. Ms. Li estimated that the company has about 50 million users worldwide, which works out to a purchase price of about $32 a user.

The deal would make sense from the perspective of both companies, Ms. Li and others said.

“Google Video has not gotten any traction,” Ms. Li said.

Despite Google’s broad reach as an Internet search service and its well-known brand name, Google Video has only a 10 percent market share, according to Hitwise, which monitors Web traffic. YouTube has a 46 percent share, and MySpace has 23 percent.

“YouTube figured out what Google and Yahoo and Microsoft and all the others in the marketplace didn’t,” she said. “It’s not about the video. It’s about creating a community around the video.”

A link-up with Google might also carry benefits for YouTube as it tries to clear up its legal picture. Google and its lawyers are already addressing similar questions involving copyrighted works on the Internet and working on technology to deal with them.

“Who is in a better position to develop that technology,” Ms. Li wrote in a blog entry posted yesterday. “Sixty burnt-out people at YouTube or the legendary technical minds at Google?”

Mr. Hurley and Steve Chen started YouTube after the two struggled to share videos of a dinner party in January 2005. In a sense, YouTube is the classic Silicon Valley start-up. The pair, working out of a garage and still in their 20’s, went on to secure $3.5 million in venture capital from Sequoia Capital, one of the two venture firms that invested in Google when it was a small, relatively anonymous company.

The recent takeover frenzy is being fueled in part by the News Corporation’s acquisition of MySpace, a social networking site immensely popular among teenagers. The company, controlled by Rupert Murdoch, bought MySpace last year for $580 million in cash, and it is now worth as much as $2 billion by some analysts’ estimates.

Sumner M. Redstone, the chairman of Viacom, recently called losing MySpace to Mr. Murdoch “humiliating.” He also said that one reason he fired Tom Freston as Viacom’s chief executive last month was because he failed to secure that deal and did not move fast enough to push Viacom’s Internet activities.

Yahoo, meanwhile, is in negotiations to buy Facebook, a social networking site originally aimed at college students, for more than $1 billion, according to people involved in those talks.

But while media moguls are fascinated by YouTube, they also harbor deep concerns.

The site’s mix of videos includes many clips from television shows and movies, often posted without a thought to who might own the copyright. As a result, there are widespread concerns that YouTube may eventually draw a hailstorm of lawsuits — especially if the company becomes part of a deep-pocketed acquirer.

Doug Morris, the chief executive of the Universal Music Group, recently called YouTube and MySpace “copyright infringers” and said that the sites “owe us tens of millions of dollars.”

Mark Cuban, who founded Broadcast.com, an early Internet video site that was bought by Yahoo, has suggested that YouTube is essentially a business based on piracy.

Some in the industry have even compared YouTube to Napster, which, before it adopted its current subscription-based model, was a hugely popular free music-swapping service. Lawsuits from the recording industry forced the original Napster to shut down, and it eventually filed for bankruptcy protection.

YouTube says it is different from Napster because it removes content when a copyright holder informs the company of a violation. It points to the Digital Millennium Copyright Act, which in general does not require Internet companies to screen material in advance.

Despite these legal uncertainties, YouTube holds obvious appeal for any potential acquirer. Buying YouTube would instantly vault Google to the lead in the business of online video, which is drawing increased interest from advertisers. Its own fledgling offering, Google Video, remains a relatively small player.

At $1.6 billion, YouTube would be Google’s most expensive acquisition. In fact, it would cost nearly as much as Google’s total acquisitions budget since 2001, according to a recent estimate from Citigroup. Google’s largest investment to date was its $1 billion equity investment in Time Warner’s AOL subsidiary, which was part of a multiyear advertising deal.

Google had cash and marketable securities of about $9.8 billion as of June 30, and its market capitalization stands at about $129 billion.

Gary Rivlin and Saul Hansell contributed reporting.

    Google Is Said to Set Sights on YouTube, NYT, 7.10.2006, http://www.nytimes.com/2006/10/07/technology/07google.html?hp&ex=1160280000&en=593c4e76431d0168&ei=5094&partner=homepage

E-Commerce Report

Wanted: A Way to Profit by Simplifying Web Classifieds

October 2, 2006
The New York Times
By BOB TEDESCHI

Web sites that list classified ads have proliferated, but so far they have mostly made life easier for buyers rather than sellers.

First there is the technology hurdle: many people who want to post a classified ad may feel daunted by the mechanics. Then there is the question of where to post: is it worth it to place a listing on more than one site, or is it enough to simply cast one’s lot with Craigslist, Google Base, eBay or Windows Live Expo from Microsoft?

A new breed of Web sites aims to simplify the process. The sites offer templates and step-by-step instructions for creating classified ads and then post the ads, sometimes free, on all the major listings services.

Two sites that offer this service already are vFlyer and Postlets; a third, Mpire, which plans to charge a small fee for the service, will join the fray soon. The sites rely primarily on outside advertising for their revenue.

While the proposition they are offering will probably resonate with sellers, e-commerce analysts say, it remains to be seen whether the money to be made in this market will be worth the effort.

“It’s relatively easy for someone to cut, copy and paste, and slap a posting for a used couch out there,” said Scot Wingo, chief executive of ChannelAdvisor, which helps large retailers and manufacturers sell on multiple Web sites. “This won’t make a ton of revenue.”

On the other hand, the sites could prosper by sparing users the task of evaluating local online marketplaces, which tend to be fragmented, said Greg Sterling, principal of Sterling Market Intelligence, a San Francisco Bay-area consulting firm. “This will be a good proposition for sellers,” he said. “With the exception of posting an ad on Craigslist, it’s hard for sellers to reach volumes of people.”

On vFlyer, which is based in San Francisco and is scheduled to move from a beta, or test version, to a full-fledged one today, sellers can quickly design an ad using templates available in roughly 30 classified ad categories. The templates include checklists of attributes specific to, say, dogs for sale or vacation rentals. (VFlyer does not offer personal ads.)

The templates also include graphics that can be customized. VFlyer checks the spelling of the seller’s written descriptions, and when an ad is finished, the seller can choose which sites to run it on.

To post on Craigslist, which accepts only ads submitted by users, vFlyer gives its customers some computer code that they can cut and paste into the Craigslist forms. The ad and the accompanying photos then appear as designed on vFlyer.

Oliver Muoto, one of two vFlyer founders, said that the service was in some ways the flip side of a recent online trend in which businesses like Oodle, SimplyHired and others have begun aggregating the ads on various classified sites to make searching easier for buyers, job seekers and apartment hunters. “Although there’s a solution for buyers, for sellers the process hasn’t changed,” he said.

VFlyer will carry its users’ ads on its computers but it will not offer buyers a way to search listings on its site, said Aaron Sperling, the company’s chief executive. Doing so would put the site in direct competition with the online marketplaces it seeks to serve, he said.

To earn money, vFlyer displays paid advertisements on its own pages as visitors surf the site. Those ads are distributed by Google, which pays publishers like vFlyer a commission each time a user clicks on a marketer’s offer. Mr. Muoto said that vFlyer would one day offer paid versions of its service for high-volume sellers like used-car dealers.

Like many new Internet companies, vFlyer plans to rely primarily on word-of-mouth for its marketing. Mr. Sterling of Sterling Market Intelligence said that this approach made sense, given that the ads the company will distribute will carry its brand, which will get the vFlyer name into circulation.

While vFlyer’s service is the newest of its kind, it is not the first. In fact, the business closely resembles that of Postlets, another San Francisco Bay area-based company that introduced its service in April 2005, a month before vFlyer was formed.

Asher Matsuda, who founded Postlets along with Ray Chen, said that his company also made money by distributing Google ads, and that it was considering charging for an enhanced service that is now available free. That service, called Plus, allows users to create ads with multiple pages, large-format photos, maps and video tours.

Postlets currently offers templates for auto and real estate ads, with employment listings soon to come, followed by personals and other categories. Mr. Matsuda said that about 6,000 people had used the service, creating roughly 30,000 listings.

Most of the ads have been posted by real estate professionals and car dealers. “We initially thought this would be more attractive to individual sellers, so we were surprised to learn the opposite was true,” Mr. Matsuda said. “It might just be an awareness thing.”

Early next year there will be a third company in this space: Mpire, which currently runs a Web site that helps people do comparison shopping. Matt Hulett, chief executive of Mpire, said that his service would differ from the others in that it would charge users a small fee and would aim at more active sellers, like small businesses. Mpire already offers eBay sellers a service that helps them create and distribute ads, and the new offering will be an extension of that.

Mr. Hulett said the new initiative would indeed make little money if it focused on people who sell only two or three items a year, because such people required more customer service. But higher-volume sellers would be less needy and more willing to pay for something that saves them time, he said.

“Most sellers,” Mr. Hulett said, “will realize there’s some value here.”

    Wanted: A Way to Profit by Simplifying Web Classifieds, NYT, 2.10.2006, http://www.nytimes.com/2006/10/02/technology/02ecom.html