Yahoo’s ad alliance with Google seems like a great deal to Messrs. Brin, Page, and Yang. Now they just have to win over the Justice Department.

Google and Yahoo had hoped to have it all up and running by now. As you may recall, the two Internet giants announced an alliance last June in which Google would supply Yahoo with search ads to supplement Yahoo’s own. Google would get a big new customer for its ad-delivery service, while Yahoo would get a new source of revenue – and best of all, they’d keep Microsoft from swallowing Yahoo.

Then Washington got in the way. Due to pushback from antitrust regulators, in early October, Google (GOOG) and Yahoo (YHOO) put off the launch to give the Justice Department more time to chew on it. In September, Justice reportedly hired veteran antitrust litigator (and former Walt Disney vice chairman) Sandy Litvack to help review the deal, and soon thereafter Canadian authorities hired an outside lawyer too. The European Union is also taking a hard look.

What’s the hang-up? Well, there are three basic concerns about just what this alliance really amounts to. First, if it had been a merger between Google, with 70% share in the paid-search market, and Yahoo, with the next 20%, it would clearly violate antitrust laws by creating a monopoly. (Paid-search ads are the ones that show up near the top of a search-result screen or off to the side, under the rubric “sponsored links.”) Second, if Google were paying Yahoo to exit the paid-search arena, that would be an illegal agreement between competitors to allocate markets. Third, if Google and Yahoo were agreeing to set a price floor for the two companies’ paid-search offerings, that would be illegal price-fixing.

Yahoo’s ad alliance with Google seems like a great deal to Messrs. Brin, Page, and Yang. Now they just have to win over the Justice Department.

Google and Yahoo had hoped to have it all up and running by now. As you may recall, the two Internet giants announced an alliance last June in which Google would supply Yahoo with search ads to supplement Yahoo’s own. Google would get a big new customer for its ad-delivery service, while Yahoo would get a new source of revenue – and best of all, they’d keep Microsoft from swallowing Yahoo.

Then Washington got in the way. Due to pushback from antitrust regulators, in early October, Google (GOOG) and Yahoo (YHOO) put off the launch to give the Justice Department more time to chew on it. In September, Justice reportedly hired veteran antitrust litigator (and former Walt Disney vice chairman) Sandy Litvack to help review the deal, and soon thereafter Canadian authorities hired an outside lawyer too. The European Union is also taking a hard look.

What’s the hang-up? Well, there are three basic concerns about just what this alliance really amounts to. First, if it had been a merger between Google, with 70% share in the paid-search market, and Yahoo, with the next 20%, it would clearly violate antitrust laws by creating a monopoly. (Paid-search ads are the ones that show up near the top of a search-result screen or off to the side, under the rubric “sponsored links.”) Second, if Google were paying Yahoo to exit the paid-search arena, that would be an illegal agreement between competitors to allocate markets. Third, if Google and Yahoo were agreeing to set a price floor for the two companies’ paid-search offerings, that would be illegal price-fixing.

CARLSBAD, Calif. – Barry Diller defines the calm, cool, collected CEO. At least on stage, when he’s on his best behavior. He called his recent (successful) litigation with partner Liberty Media a wrenching three-month distraction. Come Aug. 1, he says, IAC (IACI) will complete its split into five companies, including the “new” IAC, a pure Web company.

Diller was more interesting about other people’s businesses than his own. About Hollywood, which he knows well, he said: “It’s a community that’s so inbred it’s a wonder the children have any teeth.” His point is that other than theatrical talent there’s no creativity coming out of Southern California. He expressed dismay that Yahoo (YHOO) let Microsoft (MSFT) walk away and implied that the only way he would have turned down such an offer would be if he knew – and not simply desired – that his business plan would produce a better return.

Diller has been around, so his thoughts on management are illuminating. He said the reason for breaking up IAC is that its more than 50 brands are too much for one company to handle. There’s always trouble somewhere with that many brands, he said. And as a manager, “what you tend to do is go where the trouble is,” as opposed to making trouble, which is far more enjoyable and profitable. Asked his opinion of the digital prowess of the major media conglomerates, he praised only one, News Corp. (NWS)

How do you define Dell (DELL) these days? Listening to Michael Dell speak, I have no idea. Dell himself noted that the company’s former “monolithic” strategy – its famous direct-to-customer manufacturing technique – didn’t work so well toward the end of its run. He cited five areas where Dell missed the boat: consumers, emerging markets, notebook computers, data centers and small- and medium-sized businesses. (Dell is the leader in PC sales to large businesses.) So instead Dell now emphasizes all those things, or at least is trying to. It dabbles in retail. It targets smaller businesses. Its growth has been impressive, but is that over a weak base, what Wall Streeters call an “easy compare?” Perhaps Dell eventually will do many things as well as it used to do one thing. For now, it’s a still a computer maker that spends a tiny percentage of its revenues on R&D ($600 million out of $65 billion in sales) and therefore sells me-too products, though often more efficiently than the competition.

It’s being widely reported that Yahoo (YHOO) and News Corp. (NWS) are back in talks to combine Yahoo with MySpace and other properties that make up Fox Interactive Media, News Corp.’s online arm. The companies held what I’m told were very preliminary talks along a similar vein last year. The deal would have three main components: 1) News Corp. would contribute FIM to Yahoo; 2) News Corp. would invest in Yahoo; 3) a private-equity partner would inject yet more cash into Yahoo. The goal, in theory, would be to raise Yahoo’s value with the cash investments, thus obviating the need for Yahoo to sell to Microsoft (MSFT).

Here’s the problem. Or, rather, the problems. It’s going to be tricky to value MySpace, which will be the linchpin of the value of what News Corp. is contributing. If whatever News and Yahoo were to assemble didn’t add up to Microsoft’s current offer ($31), or counter-offer, the board of directors at Yahoo would be in a pickle.

Couldn’t they just accept a lower bid with the argument that Yahoo is worth more independent than selling out? Sure. Then they’d get sued. They’ve got to be able to best Microsoft’s offer in a reasonable timeframe, or they’re not doing their fiduciary duty.

There’s more. In a note to clients Wednesday, UBS analyst Ben Schachter (who had a buy rating on Yahoo at $19, when many of his competitors had lost faith, because he figured Yahoo’s falling price would provoke a sale, or at least a bid) reasons that the only way for a YahooSpace to achieve necessary profits would be do a search outsourcing deal with Google (GOOG). That’d bring the companies back to the same regulatory conundrum they’ve already been grappling with: Google’s search share is too big. There’s also the question of whether Yahoo needs MySpace. After all, “Yahoo’s problem has not been a lack of inventory, ” writes Schacter, meaning that it already has a huge audience. It’s problem, he writes is “its poor execution on optimizing monetization.” That means Yahoo isn’t so good at making money from its 500-million-plus audience. Schacter has a $34 price target on Yahoo because he thinks Microsoft will raise its bid.

So is Yahoo wasting its time talking to News Corp.? Of course not. Its stock traded over $30 Wednesday, closing at $29.88. To the point of my earlier post, that’s a sign investors expect a higher bid from Microsoft, not that it’s overly impressed with a News Corp.-Yahoo tie-up.

My friend, the Newsweek columnist Daniel Gross, posted an entertaining and informative column this week on Slate about what he sees happening next in the Microsoft-Yahoo merger. Like everything Dan writes, this column is worth reading, partly because it’s delightful and also because he does a great job of explaining how these catfights typically work. I agree with everything he wrote — except his conclusion.

To boil down his wonderful words, Dan believes that because Yahoo’s (YHOO) stock price hovers around $29.50, where it’s been more or less since Microsoft (MSFT) offered on Feb. 1 to buy the company for $31 a share, Wall Street is signaling its belief the deal will collapse. He reasons that if investors believed a higher bid was coming, the stock would trade higher. The fact that no private-equity or sovereign-wealth firm has materialized to bid for Yahoo is further proof that no one wants it and that Microsoft won’t fight.

I beg to differ, and not just because I wrote in the current issue of Fortune that a Microsoft acquisition of Yahoo is inevitable. First, Yahoo’s stock price is held back in part because Microsoft’s stock price is down, and half its offer is in stock. Second, if the market really believed that Yahoo will succeed in telling Microsoft to buzz off, the stock wouldn’t be at $29 and change. It would have plunged back toward $19, the sorry level to which it had fallen just before Microsoft dropped its bomb.

Yes, Yahoo traded for $31 not so very long ago. But that was before investors realized how little was going on inside the company, that CEO Jerry Yang was taking his sweet time to clean house, that Yahoo continued to poorly articulate its growth strategy and, perhaps most importantly, that the company faces “headwinds” in its core business, online display ads. Those realities haven’t changed since Microsoft offered to buy the company.

As for another bidder materializing, the fact that nobody — not a phone company, not another media company and certainly not a private-equity shop — has stepped forward tells you something about how the world outside Redmond, Wash., and Sunnyvale, Calif., views Yahoo’s valuation. A financial buyer simply can’t make the numbers work; Only Microsoft can.

But can’t Yahoo simply say no? Sure it can. But if Wall Street really believes no means no, you’ll see a stock drop and lawsuits fly. “We do not believe that Yahoo’s board will be able to turn down a mid-$30s bid without another offer in hand,” RBC Capital Markets analyst Jordan Rohan wrote to clients this week. “Yahoo management has already exhausted the patience of its largest, longest-suffering shareholders and Microsoft’s offer allows them to save some face.” Rohan then reports something I haven’t seen elsewhere: “Microsoft held several meetings last week with some of Yahoo’s largest shareholders. Ultimately, since there is only one class of stock, if those shareholders band together behind the likely-future-revised Microsoft bid, the deal will eventually get done.”Already, that’s beginning to happen. T. Rowe Price and Legg Mason, two large Yahoo shareholders, have gone public with their support for the Microsoft offer.

What this means is that it’s likely wrong to interpret Microsoft’s lack of a higher bid so far as an unwillingness to raise its offer. Instead, think of Microsoft’s behavior as a pause, an opportunity to make Yahoo sweat — or at least get an earful from its own shareholders. Of course Microsoft will raise. But only after Yahoo has the time to consider the meaning of Microsoft not raising.

A few more things to consider, at least for readers not caught up in the mind-messing media games that get played by all sides in this circus. The Wall Street Journalis reporting in Wednesday’s editions that Google (GOOG) is no longer overly interested in pursuing a revenue-sharing deal with Yahoo for search ads. It sources are “people familiar with the matter.” I haven’t checked, but I’m guessing that the Journal, citing “people familiar with the matter,” first broke the news that Google was interested in pursuing a revenue-sharing deal with Yahoo for search ads. Gold star for anyone who can guess where that information started and ended.

Similarly, the conventional wisdom for why Microsoft won’t actually mount a hostile takeover bid, a term of art that is different from the public “bear hug” it currently is pursuing, is that it would scare away Yahoo’s best people. What’s odd about that is that the conventional wisdom up until earlier this month was that most folks you’d want to retain at Yahoo already had left. Conventional wisdom’s a funny thing.

A final thought, and not a happy one for Microsoft, but even less so for Yahoo. Yahoo undoubtedly will draw this process out for a bit. Who knows, they may even force Microsoft to mount a proxy fight, though I doubt it. But let’s say it’s three months before Yahoo acquiesces and another nine months before U.S. and European regulators approve a Yahoo acquisition. Google likely will complete its long delayed DoubleClick purchase this spring. Under this scenario, it would then have a year’s headstart against MSN-Yahoo, which will be the mother of all integration challenges. Neither Yahoo nor Microsoft and the ad businesses it acquired when it bought aQuantive last year will stand still, of course. But talk about distractions.

What with all the exciting stuff going on in the Web world of late — Google (GOOG) laying a rare earnings turd, Facebook becoming the next Google, Yahoo (YHOO) losing altitude fast — a morsel from eBay’s (EBAY) earnings call last week was undereported. CEO Meg Whitman, vowing to rejuvenate eBay.com’s core listings, promised to market more offline. She also commented briefly on eBay’s recent spat with Google. Consider this from the New York Times:

Last month, eBay temporarily stopped buying keyword advertising on Google, the Web’s largest search engine. EBay said the suspension did not have had significant effect on its bottom line. “We learned a great deal from that test,” Ms. Whitman said. “It actually had no impact on the financials of the quarter, and we learned a lot about where we want to spend money and where we think we can save money on Internet marketing.”

Think about that. eBay, once and perhaps still Google’s largest advertiser, saying that perhaps online advertising isn’t all it’s cracked up to be anymore. That’d be fine, say, if Procter & Gamble (PG) decided it had had enough of this newfangled form of advertising. But not eBay, an Internet pioneer. Internet advertising taking a back seat to offline marketing? The horror, the horror.

My former boss Eric Pooley published a juicy, access-laden cover story about Rupert Murdoch in the current issue of Time Magazine. There’s a small amount of news, like Murdoch confirming that he discussed combining MySpace with Yahoo (YHOO), a conversation he had with former CEO Terry Semel. Pooley also describes how Murdoch threatened to walk away if the Bancrofts didn’t submit a more reasonable response to his $5-billion bid to buy the Wall Street Journal. Murdoch also voices support for newly installed Journal managing editor Marcus Brauchli. All in all, it’s a good read, with the cover line “The Last Tycoon”, after the Fitzgerald novel.

There’s also an intriguing throwaway line from Murdoch deep in the story, regarding MySpace. “It was an education for me, the way it took off,” Murdoch tells Pooley. “It was the cool young site. Now the average age is climbing.”

What’s intriguing about Murdoch’s point is that MySpace CEO Chris DeWolfe went out of his way to make a similar point to me Wednesday morning over breakfast in San Francisco. He told me 40% of MySpace’s audience is 35 years or older. The reason for stressing this is to counter the assumption that rival site Facebook has a better plan for growing beyond its youthful audience. I don’t doubt that more older people are using MySpace, and Facebook, for that matter. When I asked DeWolfe, however, what percentage of time spent on MySpace is attributed to the 35-year-old-plus crowd, he said he didn’t know but agreed with my assumption that the figure would be well below 40%.

I still doubt that adults, the kinds with careers to build and families to raise, will spend much time on sites like MySpace and Facebook in years to come. The owners of those sites disagree, of course. Their businesses depend on it.

I mentioned this topic in my article Tuesday after Jerry Yang’s appointment as CEO of Yahoo (YHOO), and the The New York Times devoted a considerable amount of ink to it the next day. This is a bit of an arcane topic to people who aren’t in the biz, but an extremely important one. It essentially suggests that Yahoo should stop investing in its search-advertising platform because it has been such a laggard and instead outsource the function to Google (GOOG). That’s what Yahoo used to do, and there’s widespread agreement that Google is and always will be superior at this to everyone else.

In fact, it’s a classic business-case problem. Should Yahoo let the fact that it has spent billions of dollars buying Inktomi and Overture and investing in its Project Panama stand in the way of making the right financial call? Unemotional business theory suggests that you can’t let past poor decisions stand in the way of good decisions today. Then again, if search advertising is central to what Yahoo does — and that has been management’s position to date — then they simply can’t give up.

I’ve had two interesting responses to my article in the last couple days from executives who think about his stuff all day long. One thinks Yahoo’s preparing to sell itself. The other sees plenty of opportunity. “A CEO who has never run anything large and a president who hasn’t either and came from Wall Street,” wrote one. “Can this truly be anything other than Yahoo pursuing ’strategic options?’” Said the other: ” There are a lot of people who think that search is still relatively early and that there’s a whole lot of ad technology left to be built in years ahead and that Google, Microsoft (MSFT), AOL and others are going to be investing heavily. Jerry seems to be the kind of guy to lead a similar effort for Yahoo.”

What do you think? Tell me below or in this poll.

David Kirkpatrick and I have been having a cordial argument about Facebook. He thinks it’s going to be the next big thing. I think it’s really annoying. He likes to send me messages through Facebook, which then notifies me, by email, that I have a message on Facebook from David. I ask him to send me emails instead. I just can’t see myself ever spending significant amounts of time on Facebook. It’s cute and all, but, well, I don’t know, it’s just not my thing.

That got me thinking about just how difficult it is to change one’s behavior online. I believe that kids use Facebook and love it, and I’m sure many will keep using it when they grow up. Most, however, will have to attend meetings and do actual work during the day — unless, of course, they become journalists — and therefore won’t have the time to see who is “poking” them on Facebook.

Similarly, I was stunned by news that Google (GOOG) now has 56% of the U.S. search market, up from 49% a year ago. Then again, I’m sort of surprised anyone doesn’t use Google. I keep meaning to spend a whole day using Ask.com’s search. (Jim: LOVE the new commercials.) But then I forget, so ingrained is Google in my search psyche. (The IAC (IAC) unit also didn’t do as good a job of helping me find a news story about search marketshare as Google did.) Then there’s Google Finance, which is doing some really neat stuff — and has started a new blog (Katie, you’re a blogger!). I like Google Finance. But I rarely use it. Yahoo (YHOO) Finance has been my browser home page for about … forever. I just can’t conceive of not seeing Yahoo Finance when I go online.

What will it take to change that?

Mike Volpi has been on the job as CEO of Joost, the new online video network, for a few weeks. But already he’s got his mission statement down better than Terry Semel ever did at Yahoo (YHOO). (See this interview I did last summer with Semel to get a sense of what I mean.) “We want to transform the way people entertain themselves,” Volpi said last night at a party at the Academy of Television Arts & Sciences in North Hollywood, Calif. (A fairly serious guy, Volpi also began his remarks with a pitch-perfect zinger: “My staff has told me this will be my only opportunity ever to say, ‘I’d like to thank the Academy …’”)

If you know anything at all about Joost, you know it doesn’t suffer from ambition. Founded by the two guys who started Kazaa and Skype, Joost is one of scores of companies that are trying to be the next YouTube. And yet it’s gotten a higher profile than the others, even before officially starting its service. That’s due in part to its founders and partly to early investors like Skype funder Index Ventures (hey Danny!), CBS (CBS), Google (GOOG) and YouTube investor Sequoia Capital. Nabbing Volpi added yet more cred to Joost. He was a Cisco (CSCO) bigshot for years. (Read David Kirkpatrick’s overview of Joost on the day Volpi’s hiring was announced.)

Okay, so how is Joost doing? Well, it’s hard to say. The company is still in its testing phase. Volpi told me 700,000 users have downloaded the company’s player, a piece of software to watch videos on your computer. It has signed all sorts of deals with creative types — which is why it threw a party in La-La Land. And it’s working with Interpublic Group’s (IPG) Emerging Media Lab to let IPG’s advertising clients test how Joost slices and dices both programming and user data. In short, well-funded Joost basically isn’t going for the hard sell yet, either with advertisers (whom it’s charging only nominally) or with users, while it’s trying to see if they actually like the experience Joost is pushing.

Watching Joost must be what it was like when the cable networks got going: a new video experience with a splotchy menu of shows that only a few people were experiencing. Will it break out of the pack? Way too early to tell. At least Joost seems to know where it wants to go.