Microsoft, the software behemoth and online services convert, is getting religion online—again.

This time the software maker plans to shift the bulk of its advertising budget to digital media.

That detail emerged when the computer software company’s vice president of marketing told a group of advertising industry professionals at a recent conference that the move will take place over the next three years.

But one industry analyst cautioned that such a massive shift in Microsoft’s ad spending could send shock waves not only through traditional media outlets, but also among existing advertisers that currently bid for online ad placements.

“There is probably not enough advertising inventory [online] to accommodate all that spending,” said Greg Sterling, analyst at Sterling Market Intelligence.

The software giant’s readiness to spend its marketing muscle in the digital domain underscores the company’s commitment to the Internet. Microsoft currently spends about $1 billion a year on advertising in the U.S. alone, with more than three quarters of that amount earmarked for television, newspaper, radio, and other non-digital advertising outlets. The software company’s overall advertising budget was equivalent to about 6 percent of all U.S. online ad spending in 2006.

“Based on what we’ve learned so far from our investments and experiments, we’re confident that by 2010, the majority of our media mix will shift to digital,” said Microsoft VP Mich Matthews, speaking at the recent American Association of Advertising Agencies conference in Las Vegas.

Microsoft’s spending on digital marketing made up 22 percent of the company’s overall marketing budget last year. It will rise to 28 percent in 2007, according to a Microsoft spokesperson.

A move toward digital advertising is inevitable, as information and entertainment is consumed online at higher rates, said Mr. Sterling. The Interactive Advertising Bureau this week said U.S. online advertising surged 34 percent to reach $16.8 billion in 2006, although research group eMarketer has projected that online advertising growth will slow to 19 percent in 2007.

Nonetheless, as a technology company, Microsoft must stay ahead of the curve on this trend in order to meet its customer base, said Mr. Sterling.

A couple of months ago, many observers were wondering whether Insider Pages would survive. Up against such competitors as Yelp, Judy's Book, and Yahoo Local, the Redwood City, California-based online directory was recently forced to layoff two-thirds of its staff.

Insider Pages’ luck changed Thursday when Citysearch, a division of Barry Diller’s IAC/Interactive, announced it was acquiring the company for an undisclosed sum. Insider Pages’ small crew will be moved to Citysearch’s San Francisco, California office, and the site will continue to operate independently.

That may be good news for Insider Pages, but the deal also serves as a reminder that lucrative Web 2.0 exits are the exception rather than the rule despite all the venture community hype. No one can forget Google’s $1.65 billion acquisition of YouTube last fall, but most startups would be lucky to score a $10 million to $100 million exit.

“It’s not anything on the scale of what the Internet was in the 1990s. There were a lot more big, standalone companies coming out of that era than the Web 2.0 era,” said Marlboro, Massachusetts-based consultantPeter S. Cohan.

Insider Pages has amassed 600,000 reviews and claims to have a special system for developing relationships with local organizations and community members. It garners about 2 million monthly unique users—about twice as many as Yelp, according to comScore Media Metrix. And of course, user-generated content is all the rage, even among big corporations.

Insider Pages was backed by some of the most high profile venture capitalists in the Web 2.0 space. Roelof Botha, a partner at Sequoia Capital who also backed YouTube, and industry veteran Eric Hippeau, managing partner at Softbank Capital of New York City, both sat on the company’s board of directors. Bill Gross, founder of Idealab backed the project from the get-go by incubating it in his office. The three venture firms backed the company at $8.5 million in March 2006. Yet TechCrunch is estimating the acquisition at a mere $13 million—not exactly a home run.

Overall, lucrative exits in the Web 2.0 space have been somewhat thin on the ground. Dow Jones recently found that in 2006, only four companies that fit the Web 2.0 model were acquired. Other than YouTube, they were small scale acquisitions. This adds just one more to that list.

BitTorrent had to work hard to convince movie and television executives that it could shed its image as a tool for pirates and become a legitimate online video-downloading destination.

That was the easy part.

Monday, BitTorrent relaunched its site as the BitTorrent Entertainment Network. The site offers over 5,000 movies, television shows, games, and other content to buy, rent, or download for free on the newly launched site, which is the result of partnerships with major studios such as 20th Century Fox, Paramount, and MGM, among others. (See: BitTorrent Flicks on Movies)

Now, the San Francisco, California-based company must convince its core fans to pay for content they once got for free using its peer-to-peer technology. And already, there are rumblings of dissatisfaction across online forums.

On nerd news posting place Slashdot, one contributor wrote of the service: “Why should I pay … when there are plenty of web sites that provide it for free, along with more rights than I would gain with bittorrent.com?”

In order to play ball with the studios, BitTorrent had to agree to digital rights management (DRM) protections on the paid content they are selling on the site—and this has meant that there are limits to their use.

Feature-length films on the site are only for rent, rather than to own, in most cases. Some have a 30-day limit. For some titles, however, the limit is just 24 hours after the first time the movie has been played—something else that has some bloggers fuming. Yet, most other content, such as games, TV shows, and music videos, can be purchased on the site and viewed as many times as the user chooses.

At $2.99 to $3.99 per movie rental and $1.99 to purchase TV shows and music videos, BitTorrent’s offerings are in line with competitors’ prices—but they don’t undercut them. BitTorrent will also be providing high-definition programming. In addition, there is a certain amount of free, non-DRM protected content available—both user-generated and commercial. However, such extras may not be enough to put BitTorrent ahead of its competitors, who include such heavy hitters as iTunes, Joost, Microsoft, YouTube, and Wal-Mart.

In addition, the site’s launch didn’t go as smoothly as many expected, with many who tested it experiencing hiccups while attempting to buy or rent content. For example, PC users’ online publication Ars Technica tested the service and ran into several difficulties with the download process almost every step of the way.

Meanwhile, the site requires downloading the BitTorrent client—something that might alienate non-tech types who find other services more straightforward.

All of this is “part of the growing pains the company is experiencing,” said Gartner analyst Mike McGuire, who believes BitTorrent has a good chance of becoming a significant force because of its advanced technology.

“It’s going to be a constant balancing act among all the stakeholders,” Mr. McGuire said.

These stakeholders include not just the movie studios but BitTorrent’s existing user base. Estimated at 135 million, these are the mostly male, young, tech types that have been using BitTorrent’s peer-to-peer technology for years.

Oscar madness is over, but peer-to-peer download service BitTorrent is just getting going. The company’s long-awaited video download service, launched Monday, comes just in time to promote itself as a place to get hold of some of the Academy winners, such as Little Miss Sunshine and An Inconvenient Truth.

The new BitTorrent site, dubbed the BitTorrent Entertainment Network, is the result of partnerships the company has forged with top Hollywood studios and media companies such as 20^th Century Fox, Lions Gate, MTV Networks, Paramount, Warner Bros. Home Entertainment, and MGM.

The newly launched site will offer paid downloads of more than 5,000 feature films, TV shows, games, and music videos. Movie titles can be rented and then downloaded to any Windows user for $2.99 to $3.99 per file. TV shows and music can be purchased for $1.99 each. Free content is also available.

The launch is a major step for the San Francisco, California-based company, which has been working hard to shed its image as an illegal downloading tool.

“BitTorrent is [officially] a media company when we launch this,” said Ashwin Navin, co-founder and president of BitTorrent.

Of course, BitTorrent is hardly first to the party. Apple’s iTunes online store has been offering movie downloads since September, and Microsoft’s Xbox Live has had a similar service for use with its game console since November. Even discounter Wal-Mart is in the game now.

On the video side, the company must compete with YouTube and Joost. And meanwhile, there are lots of smaller movie-downloading services, such as MovieLink, CinemaNow, and Guba—not to mention the many illegal download sites.

But analysts say BitTorrent has a fighting chance against these formidable competitors, because of its technology. Developed by BitTorrent CEO Bram Cohen, BitTorrent’s peer-to-peer transmission speeds download times considerably—and it is something none of the industry heavyweights possess.

“Bottom line is, things tend to download faster” from BitTorrent, says Inside Digital Media analyst Phil Leigh.

The new BitTorrent site is aimed squarely at the demographic that’s already using its peer-to-peer technology for both legal and illegal downloads—males in the 15- to 35-year-old range. For instance, movie descriptions on the new site have a distinctly male-oriented tone. In other words, lots of talk about hot babes, cool games, and use of phrases like “things suck.” The real question, however, is how many of the estimated 135 million current BitTorrent users will be willing to pay to use the technology—especially after getting it for free for so long.

Mr. Leigh bets many of them will. The viruses, malware, and legal risks are making illegal downloading too much of a hassle, he says.

And of course, BitTorrent is hoping so too.

A consortium of photo agencies is planning to sue blogger Perez Hilton for using their photographs without permission, Red Herring learned Friday.

The suit will allege that Mr. Hilton—one of the most popular bloggers on the Internet—has been using photos of celebrities such as Britney Spears and Paris Hilton without permission or payment, and that this harms the businesses of the photo agencies. This adds to the two other outstanding suits against Perez Hilton that also allege copyright infringement.

The cases come at a time when a full-fledged battle is erupting between more traditional media companies and sites that use their images and video without permission.

“He won’t take pictures down when we send a DCMA [Digital Millennium Copyright Act] notice. He won’t discuss crediting or linking. We’ve gotten to the end of our ability to deal with him,” said Gary Morgan, CEO of SplashNewsOnline.com, a global photo agency headquartered in Los Angeles, California.

Depending on how such cases are decided, it could mean that the burgeoning celebrity blogging industry will have to become more like its more mainstream cousins who pay for the use of photos. In recent months, however, big media companies have been coming down hard on sites like YouTube for allowing copyright protected materials to be posted (see Could YouTube Be Napsterized?).

The consortium of agencies represents the many freelance paparazzi photographers who regularly sell photos to celebrity news sources such as Us Weekly and People, as well as several mainstream celebrity news publications. They include: Splash, London Entertainment, Philip Ramey, Bauer-Griffin, Flynet Pictures, and Insight News and Features (INF). More agencies may join the suit, which will be filed some time in the next week or two, said Nicholas Penkovsky, attorney for the photo agencies.

“I’m certainly of the opinion this is illegal conduct,” said Mr. Penkovsky.

Bryan Freedman, an attorney for Perez Hilton, said that without seeing the lawsuit he cannot comment on the specifics of it. Overall, he said, his client is using photos on his site in such a way that he believes should be protected under the fair use exception to the Copyright Act.

“Anybody can say, ‘that’s my photo take it down.’ Perez has no idea whether that’s actually their photo, and I haven’t seen a letter with copies of photos, or copyright registrations, or any indication of proof of ownership,” said Mr. Freedman.

In December, Perez Hilton was served with a $7.6 million copyright infringement suit by Los Angeles paparazzi photo agency X17. That case has yet to be decided (see Paris Hilton Tops News Search).

Earlier this week it was revealed that Universal Pictures is also suing the blogger, whose real name is Mario Lavandeira, for posting a topless photo of celebrity Jennifer Aniston on his site that they claim was not his to use.

In that suit, Universal, whose parent is NBC, accuses Perez Hilton of placing “stolen footage” on his site and that he is infringing their copyright. The photo came from an edited out segment of the comedy The Break-Up which co-starred Vince Vaughn. Most likely it was captured during the editing process and leaked to the gossip press.

Mr. Freedman argues that by using the photos for the purpose of commentary and not selling them, his client Perez Hilton is not infringing on the copyright. In addition, he said, the blogger is taking the photos and “transforming” them by using only a portion of the picture, posting in much lower resolution, combining pictures together, and sometimes scribbling on them. In addition, he is using the photos to comment on public figures and to start a dialogue on them, he said.

For this and other reasons, Mr. Freedman said he believes Perez Hilton is protected under the fair use exception to the Copyright Act.

However, the judge will have to decide whether Perez Hilton’s use of photos on his site meets the test of the act, say legal experts.

“Blogging in general is a relatively new phenomenon,” said Stephen Freccero, litigation partner at law firm Morrison and Foerster. “To say something is fair use is just the beginning. It’s a test that’s done by looking at the context.”

One element in this test is whether the user benefited financially from the use of the image—and whether another party was harmed financially in the process. Mr. Morgan said that Perez Hilton often boasts that he earns as much as $50,000 a month from advertising on his site.

“We’re not out to quash blogs—we want to work with them. It’s a new market for us. But we feel people like Perez are so big they need to pay for the [photos they use],” said Mr. Morgan.

He added that many celebrity blogs, such as TMZ and PinkIsTheNewBlog have started coming to agencies for permission, and are willing to pay for use of photos.

There is no question that these sites are driving traffic. PerezHilton drew 2.2 million unique visitors in December—double the number just three months earlier. He is often cited as topping lists of most popular bloggers.

Yet in part because they exist in a legal gray area, many celebrity blogs haven’t garnered mainstream acceptance or significant backing from investors. Sand Hill Road venture capital firms have backed PopSugar and Glam (see Cashing in on Tom Cruise), but not some of the edgier, more popular blogs, such as Perez Hilton’s.

A year ago, the only wiki most people had heard of was Wikipedia—the online user-created encyclopedia managed by the nonprofit Wikimedia Foundation.

But over the past six months or so, such sites have been popping up all over the Internet. Many are built using tools provided by two recently funded startups: PB Wiki and WetPaint.

PB Wiki, based in San Bruno, California, received a $2-million cash infusion Wednesday from Mohr Davidow Ventures to pursue its strategy of selling wiki-building tools to non-techies.

Its competitor, Seattle-based WetPaint, which is also aiming at the newbie market, garnered $9.5 million in January in a second round of funding led by Accel Partners, a VC firm that has backed such Web 2.0 startups as Facebook and Glam.

So, are VCs onto something, or is this another Web 2.0 bandwagon? Wikis, in essence, are web sites that anyone can add to or edit. What gives them potential as revenue-generating vehicles is that communities actively participate in their creation.

Such an audience could represent the ultimate in targeted advertising. “A very focused wiki could be quite valuable to marketers,” said analyst Greg Sterling of Sterling Market Intelligence. So far, however, wikis have yet to grow to the level that would interest most marketing firms.

Carving a Wiki Niche

PB Wiki, founded in 2005, is a scrappy startup with a total of $2.3 million in funding. It has six employees, including its founder, David Weekly, and several engineers.

The company has carved out a niche among educators and small business people, said Mr. Weekly. Its basic tool is free to users, but upgrades require subscriptions. Mr. Weekly said he’s growing revenues at 20 percent a month.

WetPaint is a free, advertising-supported wiki service. Most of its sites are created by groups of enthusiasts around a particular topic—say, dogs or Britney Spears. Its CEO, Ben Elowitz, said there are more than 200,000 WetPaint wikis, with new ones being added daily.

Several other wiki-building sites are out there, but most—such as Twiki and Socialtext—aim squarely at a business audience. Recently, Google acquired its own wiki-building site, JotSpot—a sign that big Internet companies recognize the power of such tools.

Everyone’s pretty sick of hearing about Web 2.0 these days. Most can barely stomach the thought of another me-too social-networking idea.

Not Mohr Davidow Ventures partner David Feinleib.

Mr. Feinleib shared some thoughts recently with Red Herring on the well-explored category he’s still enthusiastic about. He shared his views on where he thinks the industry is headed and what he looks for before committing to a new startup.

Meeting at the California Cafe in Palo Alto for lunch, we discovered there were no available tables, leading him to joke, “Things are back—you can’t get a lunch reservation anywhere good anymore.”

So we sat outside and discussed the current state of the industry.

A former entrepreneur himself, Mr. Feinleib defends his sunny view of the investment climate. His background includes founding Centeris in 2004, a venture-funded company providing interoperability software for mixed Windows and Linux environments, and co-founding Consera Software—acquired by Hewlett-Packard in 2004—while an entrepreneur-in-residence at Ignition Partners.

Before Consera, he was CEO of onDevice, which was acquired by Keynote Systems in 2001.

Red Herring: Where is Web 2.0 heading, and will the ad-supported model they’re chasing ever really pay off for most of them?

David Feinleib: Revenue is growing for many of these companies. So you have to believe that the advertising model can work. People are spending tons and tons of money on online advertising. They key is, you have to have a lot of traffic if you’re a destination site for it to work. The other way to make money … is to build advertising infrastructure companies. I also have seen several companies succeed with the “freemium” model [where users sign up for free but then are offered upgrades at a cost]. So there are multiple ways … to approach this, and pick up an angle.

RH: So this isn’t like the last bubble in your view? Why not?

DF: Everyone is online now. They’re not just testing it out [as they were during the last bubble]. Nowadays, everyone uses Craigslist. Everyone uses eBay, and has a Paypal account. And everyone knows about online communities like MySpace. So with all of that a given, it’s now possible to monetize what people are doing online.

Also, there’s a different entrepreneur mindset than what we had before. The old aspiration was just raise a whole lot of money, and then say, “We’ll figure out something to do with it.” The new aspiration for an entrepreneur is to build a site people will really use. And they are very capital efficient.

RH: What about on the VC side? With so few exits these days, how are you guys going to make any money?

DF: If you look at the IPO pipeline for this year it’s not bad. There was even an IPO pipeline last year. One of our companies is Shutterfly [a photo sharing service that went public in September 2006, raising $87 million]. We believe there will be more.

A new site claiming to be the Web 2.0 answer to party planning launched this month. Its founder is now working Sand Hill Road in search of venture backing for the start-up.

Matt Douglas, founder of Natick, Massachusetts-based MyPunchbowl.com said he believes there is room in the competitive space now dominated by Evite, the party invitation site owned by Barry Diller’s IAC/Interactive Corp.

Tthe start-up also joins an increasing number of niche Web companies that are attempting to take advantage of the advertising possibilities online. And, as with the last dot com bubble, many of these companies are finding that it’s more difficult to become profitable than it appears on the surface.

The Ajax-powered MyPunchbowl site aggregates all of the elements of party planning that a person might think of—from searching for local reviews on karaoke machine providers, to photo uploading, to sending out invites. Mr. Douglas also plans a social networking element to the service, providing post-party networking abilities for those shy souls who failed to get the phone number of the attractive guy or gal across the buffet table.

“We saw a gap in the party planning market,” said Mr. Douglas, who said he got the idea after a frustrating experience attempting to put together his yearly Groundhog Day party.

Clean cut with a ready smile, Mr. Douglas projects all the enthusiasm of an entrepreneur who believes in his product. He’ll have to use this smile quite a lot in the coming months as he seeks funding from the venture community.

He aims to raise about $2 million, most of which is needed to begin ramping up the marketing side of the business. He plans to generate revenues through a combination of advertising and partnerships with party supply companies. So far, he said, he’s spoken to several interested VC firms.

Some industry observers say MyPunchbowl fills a hole that is not fully covered by Evite. “The fact that there’s only one competitor means there’s an opportunity here,” said analyst Greg Sterling.

If the site can maintain its uncluttered appearance, it may appeal to viewers who don’t like the advertising on other similar sites, said Mr. Sterling. He said that the fact that the company has a built-in viral marketing component may also help it to get off the ground. At the same time, he said, it could be difficult to dislodge entrenched player Evite.

And, as with the last dot-com boom, so many sites claiming to have found a new way to do business rise and fall before they have even had a chance to be tested. In addition, said Mr. Sterling, the company may fall into the all-too-common category among Web 2.0 start-ups—interesting, but more of a feature than a potential standalone company.

Mr. Douglas is unruffled by these criticisms, saying that if the feature is successful enough, it will make the company an attractive takeover target.

The party industry is growing at a significant rate. Last year, U.S. spending on party supplies, such as balloons, pinatas and gift wrap came to $10.2 billion. Armed with such statistics, Mr. Douglas says his idea just might float.

In a decision that could have wide implications for social networking online, a Texas judge dismissed claims that MySpace had acted with negligence and fraudulent conduct by allowing a 13-year-old girl to set up a profile that later led to her being sexually assaulted.

Attorneys for the girl, named in the case as Julie Doe argued that MySpace should be held responsible for the fact that her profile led her to be contacted and later assaulted (see MySpace Slapped with Sex Suits).

The decision was handed down February by Sam Sparks, U.S. District Judge in the Western District of Texas.

The decision states, in part: “MySpace had no duty to protect Julie Doe from Pete Solis’s criminal acts nor to institute reasonable safety measures on its website. If anyone had a duty to protect Julie Doe, it was her parents, not MySpace.”

The Texas attorney for Julie Doe vowed to appeal the decision, and said he plans to refile the fraud aspect of the suit in a California state court. He also said many more such lawsuits are in the works.

“MySpace’s legal argument is they have no duty to protect children. We completely disagree with that and feel that other courts will agree with our position that they do have a duty to protect children,” said Adam Loewy, partner at Barry & Loewy.

A spokesperson for MySpace said the company applauds the decision.

“This decision reaffirms that under federal law Internet sites like MySpace cannot be held liable for content posted by, or wrongdoing committed by, individuals who visit our site,” said the spokesperson who declined to be named.

MySpace’s parent, News Corp. acquired the social networking site in 2005 for $580 million. Since then, it has been battling criticism that the site is a magnet for sexual predators.

The spokesperson added, “MySpace has always been concerned about what happened to Julie Doe because we take the safety and security of our community very seriously.However, a law suit against MySpace was not the appropriate way to redress any harm to her. We will continue to work to make our site even safer by creating new features and educating our users about online safety."

The suit is one of several that are working their way through the court system.

A year ago, Audible Magic, a Los Gatos, California-based filtering technology company received approximately one call a month from Internet companies seeking help blocking illegal content from being uploaded to their sites. Nowadays, the phone rings several times a day—and some of the calls are from the biggest name Internet companies.

The onslaught of copyright-protected content that is invading popular social networking sites such as MySpace and YouTube is turning into a major headache for the companies that run them. But it’s been a boon for the handful of technology companies providing audio and video filtering technologies. “A lot of Web 2.0 and social communities… are looking to ensure that they are legal and are not going to get sued,” said Vance Ikezoye, CEO of Audible Magic, which recently licensed its technology to MySpace.

Over the last few weeks, this obscure field has hit the front pages big time. YouTube has been ordered to take down 100,000 illegally uploaded clips, and other media companies have come out swinging against it in the process (see: Could YouTube be Napsterized?).

In its takedown notice against YouTube, Viacom’s general counsel and other top executives argued that the video sharing site has the filtering technology it needs to block copyrighted materials from being uploaded to the site—and that it just isn’t using it. Yet, those in the industry say it’s entirely possible that foolproof video filtering is beyond its grasp, for now. “Filtering is ridiculously hard,” said Chase Norlin, CEO of Pixsy, a video search service based in San Francisco, California.

Viacom is one of several big media companies that has begun a backlash against San Bruno, California-based YouTube for allowing copyright-protected content to be uploaded to its site. A recent lawsuit brought by some of the top media firms, including News Corp., Viacom, Sony, NBC Universal, Time Warner, and Disney was brought against two companies accused of facilitating uploads of copyright protected TV shows and movies (see: Big Media Piles on Google).

In the suit, the companies accuse YouTube’s parent company, Mountain View, California-based Google, of seeking to do business with the pirate companies, EasyDownloadCenter and TheDownloadPlace. The situation has become an embarrassment for Google, and comes at a time when the company is also dealing with bad press associated with the Viacom takedown notices.

All of this has left social networking sites of various sizes scrambling to block unwanted content.

This past Monday, MySpace announced it had licensed Audible Magic’s digital fingerprinting technology to aid the social networking giant in handling an upsurge in illegal content that has been invading the site. With the program’s launch, MySpace becomes the largest Internet video site to offer free video filtering to copyright holders.

Audible Magic, a privately held company that was founded in 2000, is best known for its filtering of music online. It has a database of over 6 million unique songs that it can identify. The technology can be used not only to find pirates, but to enable revenue-sharing programs that companies put into place with content providers, said Mr. Ikezoye. Audible Magic is also working with major studios to harness the technology to identify copyright protected TV shows and movies, he said.

Phil Leigh, analyst at Inside Digital, told Red Herring Monday that while Audible Magic is known for its comprehensive database of music fingerprints, a corresponding database of video fingerprints doesn’t exist yet. He questioned how well MySpace’s filtering and blocking technologies will work when it comes to video content, while acknowledging that it will probably keep unlicensed songs off the site (see: MySpace Blocks Copyrighted Videos).

This leaves a space open for companies that say they do have the answer. Alex Laats, CEO of Cambridge, Massachusetts-based start-up Podzinger has technology he says would be very useful to sites like YouTube. Podzinger searches videos for specific pieces of text, finding words and phrases within the audio of the clips. The technology is sufficiently advanced that it can show exactly where a word of phrase occurs in the audio, said Mr. Laats. “We can keep out what companies don’t want or shouldn’t have,” said Mr. Laats.

He said he’s tried to convince YouTube to license his technology, though so far no dice.

Like Audible Magic, Podzinger’s technology can be used to prevent illegal uploads, as well as to facilitate existing, legal arrangements between entities, he said.

Such arrangements are likely to be the future for sites such as YouTube, which must eventually come to terms with big media if it wants to survive—most likely through revenue sharing agreements.

The top four Internet companies—known as the “four horseman”—all reported fourth quarter 2006 earnings over the past two weeks, and both Wall Street and Silicon Valley were abuzz with the results.

Both eBay and Yahoo—two companies whose stock prices have been hammered in the past year—experienced sweet redemption this earnings season. Solid earnings and positive news buoyed both companies’ stock prices. But search giant Google failed to impress investors despite nearly tripling its earnings. And while online retailer Amazon pulled off a solid holiday season, analysts were jumpy about its long-term prospects in light of competitive pressures and ongoing high costs.

Yahoo jumps for joy

Yahoo released its earnings last week in the wake of a massive reorganization and the ouster of several top executives. Yet, the Sunnyvale, California-based Internet giant impressed analysts when it announced it would be releasing its long-awaited Panama advertising service sooner than expected. This puts it in line to make progress against rival Google.

Including stock option expenses and excluding certain taxes, Yahoo reported fourth quarter earnings of $229 million, or $0.16 per share, compared to earnings of $191 million, or 0.13 per share, during the same period a year earlier. Those results edged out the consensus analyst estimate of $0.13 reported by Thomson Financial.

The Street responded by boosting Yahoo’s stock price by 5 percent after the announcement January 23. The stock has remained buoyant, trading at $28.87, or 7.5 percent above its pre-earnings level. (See: Yahoo Sees Hope in New Ad System)

Bidding for eBay

San Jose, California-based auction giant eBay capped off a difficult year with earnings that beat analysts’ estimates by three cents a share. The auction giant’s shares were bid up more than 13 percent after eBay on January 24 reported fourth-quarter profit surged 24 percent.

San Jose, California-based eBay reported net income of $346 million for the quarter, up from the $279 million logged a year ago. Excluding one-time adjustments of $431 million, or $0.31 per share, on revenue of $1.7 billion in the quarter, the company beat the survey of analyst estimates from Thomson Financial for earnings per share of $0.28. That compares with $340 million, or $0.21 per share, on revenue of $1.33 billion a year ago. (See: eBay bid up)

It’s still Googly

Search giant Google, despite positive earnings news for the past quarter, failed to impress investors. Its stock price dropped slightly after it released its numbers—which showed that the Mountain View, California-based company’s revenues soared 67 percent and its profit nearly tripled, once again beating analysts’ expectations.

Google’s strong quarter came as the search giant continued to take market share from rivals such as Microsoft and Time Warner’s AOL. Google posted net income of $1.03 billion in the quarter, compared with $372 million a year ago. Excluding one-time adjustments, its earnings were $997 million for the quarter, compared with analysts’ consensus expectations of $911 million.

On that basis, Google reported earnings per share of $3.18, ahead of the consensus of estimates expecting $2.92 per share. Google reported $3.21 billion in revenues for the quarter. Excluding traffic acquisition costs in the quarter, revenue was $2.23 billion. This just barely beat Wall Street estimates of $2.2 billion.

The company’s stock price dropped nearly 2 percent in after hours trading following its announcement this Wednesday, January 31. As of midday Friday, the stock was trading at $480 per share, $21 below the more than $501 per share price prior to Wednesday’s earning’s announcement. (See: Google Profit Nearly Triples)

Amazon Orders up Gains

Seattle, Washington-based online retailer Amazon managed to stay ahead of analysts’ expectations due to a successful holiday season—driven in part by sales of electronics, movies and video games when it announced its earnings this Thursday, February 1. It posted fourth quarter net income of $98 million, or $0.23 per share, compared to $199 million, or $0.47 per share during the same period a year earlier. The company reported sales of $3.99 billion, compared to $2.98 billion for the year-ago period. Analysts surveyed by Thomson Financial had expected fourth-quarter net income of $0.21 per share on sales of $3.77 billion.

The lower earnings were largely caused by an additional tax burden of $130 million last quarter. However, analysts still questioned whether the company can keep its spending in check, even as Jeff Bezos, Amazon CEO argued that costs have been lowered. Net margins at the company continue to hover around 4 percent, down from earlier levels and still far below the double digits analysts said they are hoping to see. The company’s stock price dropped about 4 percent in midday trading Friday, the day after earnings were released, to $37.08 per share. (See: Amazon Beats Street)