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Microsoft, while entertaining an alliance with News Corp. or other options, would rather buy Yahoo on its own, Reuters reported Sunday, citing a source close to the company.

In addition, an unnamed source told Reuters that News Corp. is talking to Yahoo directly about a tie-up, though the source didn't share details.

Microsoft's attempt to acquire Yahoo has spawned a flurry of possible alliances and counter-alliances, none of them confirmed by the companies except a partnership under which Yahoo will test use of Google's search ads.

Updated 8:10 AM PDT with Wall Street reaction.

In rapid-fire succession Wednesday, the Microhoo buyout brawl had Yahoo throwing a one-two punch at Microsoft, with a swift comeback punch from the folks in Redmond.

And the crowd, or should I say the investors, liked what they saw. Yahoo's stock ended the day up slightly as the first punch came in toward the end of the trading day, and has continued to climb in early morning trading Thursday, following news events from last night.

Here's a quick blow-by-blow.

Yahoo looks to Google and AOL
Yahoo kicked things off . That gave investors a bit of excitement, as they envisioned the hook-up would give a nudge to Microsoft to raise its current bid.

That was quickly followed with reports that Yahoo and AOL were on the verge of doing a deal on terms that had been speculated upon over the past two months--Yahoo absorbing Time Warner's AOL and the media giant getting roughly a 20 percent stake in Yahoo.

Two new wrinkles in this long-rumored deal were its supposed imminence and word that Yahoo would come up with enough funds to lure investors with a stock buyback--worth several billion dollars, with a price in the range of $30 to $40 a share, according to a report in The Wall Street Journal.

Microsoft mashup with News Corp.?
Soon, another development emerged, with The New York Times reporting that Microsoft and News Corp. were in tentative discussions on a joint bid to buy Yahoo. The report noted that the deal would mash up Microsoft's MSN and News Corp.'s Fox Interactive Media unit, which oversees MySpace, with Yahoo.

A Yahoo-Google-AOL deal could prompt Microsoft to raise its bid, something it has resisted since announcing its unsolicited cash-stock offer back on Feb. 1, with an initial value of $31 a share. The deal price is currently valued at $29.24 based on Wednesday's close.

Microsoft, meanwhile, is hoping to keep Yahoo investors focused on its offer and the notion that it's "the one" to hook up with Yahoo. In addition to the option to raise its offer price to clinch the deal, Microsoft may find a Yahoo-News Corp.-Microsoft deal will be equally attractive to investors as a Yahoo-Google-AOL operation.

And given that Microsoft over the weekend issued a three-week deadline to Yahoo to do a deal with the software giant or face a hostile proxy fight and direct plea to Yahoo investors, proxy solicitors say the pitch and pace will be greatly accelerated between the two companies.

"It's an accelerated strategy," said Rachel Posner, senior managing director for proxy solicitation firm Georgeson Inc. "There'll be multiple road show meetings with investors in a single day, repeated calls to investors, and follow-up meetings."

She added that the topic of discussion will no longer be just about price and terms of a Yahoo deal, but now also ways in which Yahoo could bring other strategies to the table.

One gauge of investor sentiment is Yahoo's share price, of course.

Said Posner: "Investors vote with their pocket."

What Wall Street thinks
Wall Street weighed in Thursday morning, and the consensus seems to be this: a higher bid for Yahoo, and a Microsoft victory.

"We continue to believe reaching a mutual agreement with Microsoft would be the best way for Yahoo to potentially extract a higher Microsoft bid (likely $32 to $35)," analyst Heather Bellini of UBS said in a research note Thursday.

Bellini termed an AOL-Yahoo transaction as "unlikely." She noted that Yahoo may face a tough time convincing a majority of its shareholders that an AOL transaction--even with a $35-a-share buyback--would be more attractive than Microsoft's offer.

"(Yahoo's) shares likely would pull back once the buyback is done," Bellini noted. "The (AOL) deal likely also includes outsourcing search to Google, which stands in stark contrast to management's strategy that combined search and display (advertising) are critical to long-term success."

As for a Microsoft-News Corp.-Yahoo deal, Bellini points out that the integration risks could outweigh any financial benefit the Redmond giant would receive by having News Corp. help offset some of the costs of a Yahoo acquisition.

Mark Mahaney, an analyst with Citi Investment Research, meanwhile, views Yahoo's Google announcement as an "aggressive response" to Microsoft's looming deadline and possible proxy fight.

"As such, we believe this will increase pressure on Microsoft to increase its $31 offer price," Mahaney said. "Arguably, a worst-case scenario for Microsoft would be a full Google search outsource decision by Yahoo."

Updated at 10 p.m. with details from the New York Times.

Are Microsoft and News Corp. locking arms for a joint bid for Yahoo?

That would be something.

According to a report Wednesday in the Wall Street Journal, the two industry titans are in "serious talks" over such a deal.

And a New York Times report lays out the type of mashup that is being considered by the software and media companies.

Under a deal, Microsoft's struggling MSN would be joined with News Corp.'s social-networking site MySpace, as well as Yahoo, according to the Times report.

Although the Journal characterizes the talks as "serious," the Times notes they are in a "sensitive stage," and many miles have yet to be traveled before such a deal gets to the finish line.

While terms of a transaction have not been hammered out, the Times cites some sources speculating that News Corp. may throw cash into the deal and its Fox Interactive Media unit, which oversees MySpace.

Ironically, just last month, News Corp.'s Rupert Murdoch said he had no plans of getting into a bidding war over Yahoo with Microsoft. Talk about a cliche: If you can't beat them, join them.

The day-by-day, nearly hour-by-hour, developments involving Yahoo since Microsoft on Saturday issued a three-week deadline for its reluctant target to do a deal is enough to make your head spin--from the Legg Mason investor offering support to Yahoo should Microsoft lower its bid to Yahoo looking at a two-week test for Google search ads to the never-ending noise that Yahoo is looking at doing an asset swap/investment with Time Warner's AOL.

One thing is for certain as the days count down to the three-week deadline: the volume of noise is going to get even louder and more frequent...

MySpace.com parent company Fox Interactive Media, a unit of News Corp., announced late Thursday the creation of an "Audience Network" unit.

Adam Bain, who was previously the company's executive vice president of technology and production, will lead the new unit.

The unit's charter, according to a company statement, "will be to optimize monetization across FIM's content network and for third-party publishers," leveraging the company's ad technology that can target ads based on interests. The new unit will combine advertising technology, ad operations, and performance sales efforts into one unit.

The news comes on the heels of an announcement earlier Thursday of MySpace's new music service. It also comes as the company is expected to miss its revenue targets, as was reported earlier on TechCrunch in a report anticipating the reorganization.

TechCrunch, and later The Wall Street Journal, also reported the expected departure of the company's chief revenue officer Michael Barrett.

In addition to MySpace, other FIM networks include Photobucket, IGN Entertainment, and FOXSports.com.

MySpace is essential for independent artists. Every band I've played with in the last five years has had a MySpace page, and it completely changed how we did things compared with the pre-Internet days. Getting gigs, maintaining mailing lists, fliering--all of those formerly labor-intensive tasks could be accomplished by sitting in front of a computer. One group I played with got 90 percent of our gigs through other bands on our friends list. Another had a couple dozen teenage fans who'd come to every all-ages show when they read about it on our MySpace page. (We were all in our late 30s and 40s and had no idea that ska would appeal to that demographic.)

A truly killer MySpace music service would let users buy downloads and merchandise from any act on the site.

(Credit: MySpace)

But there was always a major gap: if we wanted to sell downloads, CDs, or anything else, we had to guide fans to another site or service, such as our own home page with a PayPal account or CDBaby.

Today, MySpace announced a deal with three of the four majors (EMI is sitting out for now) to offer DRM-free MP3 downloads, ringtones, and merchandise through the artist pages on MySpace. This is long overdue: the music industry needs to go where their fans already are, and with 30 million people regularly listening to music on the site, it's a mystery why the labels haven't tried to reach these folks before now.

But major label acts are a small part of the MySpace experience. The only reason you ask The Police or Death Cab to be your "friend" is to show off your impeccable taste to your real friends, the individuals and small-time artists who you're actually connected with. These are the folks who leave individualized comments on your page and send you instant messages, and their gigs appear right alongside Radiohead's on your home page. MySpace is the ultimate long tail site for musicians, where bar bands and small-town heroes can appear in the same context as the biggest bands in the world.

So I'm not sure that MySpace Music will be a game-changer. Fans of big bands already know where to buy merchandise--the band's Web site, or Amazon's CD section, or iTunes, or their local retail store. Sure, big fans who count major-label acts among their "friends" might now stay within MySpace to buy new songs from these bands, and some MySpace users might discover (and buy music from) new acts via friends of friends. But a lot of fans don't know (or care much about) the difference between major and independent artists, and might wonder why only some acts make their wares available for purchase. The inconsistency will be confusing, and drive users back to the traditional music-buying sites (or free file-trading services, which aren't going away).

The real game-changer comes when MySpace offers a full e-commerce store--downloads, CD sales, the works--to every artist with a musician's page on the site. That way, users would never have to leave the site to buy any music they heard on the site. The challenge would be building the infrastructure, but once things like billing and provisioning downloads are in place for the majors, it might not be much harder to set up a CDBaby-like system for everybody else.

Hulu is finally ready to make a public debut.

The Internet video site created by NBC Universal and News Corp. is officially launching on Wednesday. Up to now the site has been accessible to people on an invitation-only basis. Here's one surprise: the Hulu honchos didn't come up with a better name.

Nonetheless, the site that began five months ago with a meager menu of content is now offering a far wider selection of movies, current hit TV shows, as well as some syndication favorites.

Among the feature films are The Usual Suspects, Requiem for a Dream, and Ice Age. Some of the TV shows that Hulu will offer include Dirt, The Incredible Hulk, Babylon 5, Studio 60 on the Sunset Strip, Welcome Back Kotter and The Dick Van Dyke Show.

Hulu will also offer NBA and NHL highlights and archived footage from past NCAA championship basketball games.

While recent studies shows strong consumer interest in long-form online video, Hulu will become the most ambitious test yet of whether the public is interested in watching full-length movies and TV shows on the Internet.

The company is not going into this alone. Hulu said in a statement that it will offer free videos from more than 50 top broadcast and cable networks, movie studios and Web content providers when it launches.

It looks like News Corp. won't be Yahoo's knight in shining armor, after all.

News Corp. does not plan on fighting Microsoft over Yahoo, Rupert Murdoch told investors at the annual Bear Stearns media conference.

"We're not going to get into a fight with Microsoft, which has a lot more money than us," Reuters reported.

Yahoo has snubbed Microsoft's unsolicited $41.4 billion takeover bid as undervalued. To thwart Microsoft, Yahoo had been talking to News Corp. about possibly combining MySpace.com and Yahoo, according to reports.

Yahoo also has reportedly been talking to Time Warner about combining with its AOL division, but so far, nothing of substance seems to have emerged from that, either.

Microsoft could go hostile with its bid and try to install its own candidates on Yahoo's board. Yahoo delayed the deadline for Microsoft to offer up its slate in order to buy more time. But it appears that the would-be suitors aren't interested enough.

Jerry Yang dished out a letter to shareholders on Wednesday and much of the language was similar to that in his e-mail to employees.

But News.com readers who bashed Yang for the absence of CAPITAL LETTERS in his previously posted e-mails should take note that the shareholders have CAPITAL LETTERS in their Yang letter.

In his letter regarding Microsoft's unsolicited bid, Yang states: "I wanted to reach out to you personally to let you know why your board of directors, after a careful review by Yahoo's management along with our financial and legal advisors, believes that Microsoft's proposal substantially undervalues Yahoo and is not in the best interests of our stockholders."

"More importantly, I want you to know that your board is continuously evaluating all of Yahoo's strategic options in the context of the rapidly evolving industry environment, and we remain committed to pursuing initiatives that maximize value for all our stockholders."

Yang goes on to note the company has more than $2 billion in cash, giving it flexibility to execute its game plan for growth, as well a strong brand name and No. 1 ranking in online display advertising.

Psst, Microsoft, taking note of this...

If Rupert Murdoch decides to start a bidding war for Yahoo--that's the rumor du jour on Silicon Alley Insider--then we've truly entered the realm of the bizarre.

Not that it can't happen. I've been around this industry too long to underestimate the potential for bad decision making. Ego and daring often trump sound judgment. I won't devote more space revisiting the litany of corporate bungles that were originally hailed as strategic coups by the business elite. You can read my position on the wisdom of a Yahoo-Microsoft combination in my Friday column (click here).

Murdoch's business acumen speaks for itself and News Corp. is a terrific franchise. Like any of their rivals, it's keen to expand both audience and advertising reach. But would a pair-up between a huge media company and a technology company--one with a big online media component--work out? We've been there before. It's called AOL-Time Warner.