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In the wake of Microsoft’s unsolicited takeover bid, Yahoo has been searching for a way to appease its disappointed shareholders while simultaneously remaining independent. With its shares down roughly 30% from an offer-driven high, it may be time for the Sunnyvale, Calif.-based Internet services provider to query its own search engine for its next move.

The pressures weighing on Yahoo are three-fold: the Internet advertising market has been hurt by a slowing U.S. economy, billionaire investor Carl Icahn has begun a proxy battle to unseat Yahoo’s board, and the company has apparently lost the opportunity to sell to Microsoft at a significant premium. Since announcing that merger talks with Microsoft ended on June 12, Yahoo shares have fallen more than 20%.

According to Citigroup analyst Jason Bazinet, Time Warner’s AOL segment has had a similarly turbulent 2008, and a deal between Yahoo and Time Warner could provide long-term benefits for both stocks. Bazinet pointed out that the migration to a free AOL service hasn’t gone as smoothly as investors had hoped, the division’s recent acquisition of the social media network Bebo was frowned upon by investors and the dial-up business continues to contract. “The strategic logic (for a deal) is arguably compelling,” Bazinet said, “and the potential financial benefits are sizable.”

Citigroup estimates that a sale of the AOL unit to Yahoo could create $900 million in annual savings from duplicative content payments, sales force reductions, and the elimination of redundant research and development. Additionally, Yahoo would gain display scale and keep its search options open, while Time Warner would gain Internet scale via a passive equity stake in a larger entity by exchanging its advertising business for a position in Yahoo.

Yet, the broker expects a deal to be more positive for Time Warner. Citigroup estimates between 33 cents and $3.45 per share of earnings gains for the media and entertainment company, assuming a bid for AOL between $8 billion and $12 billion. For Yahoo, its share of synergies could be worth between 74 cents and $3.06 per share in earnings, but the transaction would likely remove any remaining Microsoft-inspired premium. Therefore, Citigroup expects Yahoo’s investor reaction to be muted on the purchase of AOL.

“The bottom line is that we think Yahoo and AOL could merge,” Bazinet said in a note to clients. “Although given the potential Microsoft-inspired premium that may still be embedded in Yahoo’s equity, the near-term benefits would seem materially greater for Time Warner than Yahoo.”

Despite gloom-and-doom prognostications, Americans continue to buy and read books. What’s more, the vast majority of readers prefer old-fashioned print books to electronic readers.

A Zogby International/Random House survey of reading habits in the U.S., released last week, found only 3% of respondents owned an electronic book reader. While about 4% of people said they planned to buy one, some 80% of those surveyed said they won’t. Old habits appear to die hard: Some 82% of readers like to curl up with a printed book; a scant 11% of poll respondents said they’d be comfortable reading electronic books or book content online.

That apparently rather tepid interest in newer reading formats doesn’t mean there’s no room for new technology, but it suggests the enthusiasm of first adopters has yet to spread to a broader readership.

Readers are already comfortable buying books online - more than three-quarters of Zogby/Random House poll respondents said they buy books on the Web, but the Internet doesn’t dominate the market. The same percentage said they buy books at chain bookstores, while almost half said they purchase books at independent bookstores.

Amazon recently cut the cost of the Kindle, its e-reader, to $359 from $399. The Kindle was launched in November and appears to have sold well, although it’s garnered mixed reviews. The initial stable of 90,000, instantly downloadable titles available to users has since grown to more than 125,000, and e-book sales have contributed a measurable slice to Amazon’s book revenue: book downloads made up more than 6% of total sales of the 125,000 titles available both in the Kindle library and in ink-and-paper format, Amazon Chief Executive Jeff Bezos said last week.

Amazon is, unsurprisingly, enthusiastic about the Kindle’s prospects. Just Friday the company said Kindle users will have access to an additional 5,000 Simon & Schuster titles this year. And in a recent interview at the D: All Things Digital conference, Bezos told Walter Mossberg he can see the Kindle generating a significant portion of Amazon’s overall revenue some time down the road.

“We’re not trying to displace people’s love of that physical object that is the book,” Bezos said. “That doesn’t make any sense.” Still, he continued, printed books are like horses: people might love their horses, but those who saddle up to get to work are few and far between. Downloading long-form narrative content, he suggested, will eventually become the norm. “The thing to keep in mind is what’s really important is not the container, but it’s the narrative,” he continued. “Long-form reading is important for our society.

Bezos has said the Kindle is “re-igniting a love of reading,” but with Amazon cagey about releasing details of e-book and reader sales, that assertion is difficult to verify. And the Zogby/Random House poll suggests that book readers are more than a little fond of the physical object - the one that’s made of pulp and glue, that is.

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Newspaper publishers might find themselves scanning the help wanted section in the not too distant future - that is, unless they can find a way to cash in on the Internet. More and more consumers are turning to the Web for the day’s top stories to conserve both time and money, leaving the online news providers to soak up advertising dollars that were once reserved for the black-and-white print providers.

Hitting the industry the hardest has been the drop in classified revenue as employers remain in a hiring hold pattern, fueld by macro-economic concerns, while consumers take their listings to the likes of craigslist.com for free. In fact, major classified segments have declined in the double-digit range year-to-date, according to the latest note from JPMorgan analyst Alexia Quadrani. “As ad dollars migrate out of print into digital areas, newspapers are contending with fewer ad pages and less pricing flexibility leading to ongoing low to mid single-digit declines,” Quadrani said.

Circulation revenue has also been on the decline as cheaper broadband connection options have given rise to greater Internet adoption in the U.S. Armed with a faster and more readily-available news alternative (not to mention free), consumers prefer to scan colorful Web pages or get their headlines through an RSS feed, as opposed to thumbing through the traditional sources.

“Near-term, we believe the cyclical headwinds that have beleaguered the (publishing) sector will continue with no significant economic turnaround expected in the short-term,” Quadrani said.

On a long-term growth basis, however, Quadrani acknowledged that Gannett Co. may exceed that of its peers because of its diverse assets, which include small-market newspapers, the USA Today (which earns premium pricing on high color content), online investments such as PointRoll and stakes in CareerBuilder, and high-quality broadcast TV assets that rank No. 1 and No. 2 in news in several important markets.

It was the poet George Santayana who observed, “Those who cannot remember the past are condemned to repeat it.” These are wise words to remember Wednesday, as talks between the Screen Actors Guild (SAG) and the Alliance of Motion Picture and Television Producers (AMPTP) ended without an agreement in principle. Though this doesn’t guarantee that there will be an actor’s strike like the recent Writers Guild of America (WGA) strike, an agreement between SAG and AMPTP would’ve eliminated that threat.

BMO Capital Markets, in a research note titled “Ugh!” said that the issues preventing an agreement were related to DVD sales and digital (online) distribution - the same issues that were debated (and decided on) with the WGA and Director’s Guild.

In other words, SAG members are pushing for more money from DVD sales and online distribution than were allotted to the other guilds, and the AMPTP obviously isn’t eager to forfeit any more of its profits than it already agreed to. BMO said that “increased DVD participations are unacceptable” to the studios and that SAG leadership “appears entrenched on non-negotiables.”

What would happen if actors went on strike, other than 100% employment in L.A.’s menial job sector? Well, as in the WGA strike, television programs might have to be suspended until the strike ended (film production wouldn’t be affected for a few months more).

This isn’t necessarily bad for the studios. During the WGA strike, studios coped by showing reruns and relying on “reality” TV shows, which dropped development costs. BMO said that the costs fell faster than shortfalls in advertising or film revenue, “helping improve both short-term and long-term financials.”

Though nothing that this isn’t “an infinite scenario,” the firm said it was powerful enough for the studios to not change the economics of the business by an unreasonable amount.

With this in mind, the studios might be the only one gunning for a repeat of the WGA strike, which lasted from November to February and is estimated to have cost Los Angeles’s economy up to $2.1 billion. Maybe SAG should brush up on its history before condemning everyone to repeat a past where the only beneficiaries will be the opposition.

If investors were to Google “current economic environment” a variety of results would pop up, and few of them would paint a very rosy picture: write-downs, headwinds, liquidity pressures, and lower earnings forecasts. Google may return the dire descriptions, but that certainly doesn’t mean it has to conform to them.

Shares of the Mountain View, Calif.-based search engine provider spiked 19% to $534.40 Friday after Google’s first-quarter adjusted earnings topped Wall Street’s consensus by 20 cents a share; total revenue rose 42% compared to the year-earlier quarter. The results were a long way from the slowing growth and margin compression that Stanford Group spoke of in early February, with revenue from Google-owned sites up 9% over the fourth quarter and Google’s partner-site-generated revenue up 3% over the fourth quarter.

Jefferies & Co., the same firm that downgraded shares of Google to hold from buy on Feb. 1 and slashed its price target to $600 from $725, reinstated its buy rating on Friday.

“First-quarter results attest to Google’s superior market position and execution that delivered strong sequential revenue growth that defies the economic environment,” Jefferies analyst Youssef Squali said in a note to clients.

In February, data tracker ComScore Inc. published a report that claimed a 7% decline in Google’s January “paid clicks,” or the number of times Internet users clicked on ad-supported links, and said the data was relatively flat compared to the year-earlier period. The news, which hinted at slowing growth and potentially a weak first quarter, sent analysts rushing to cut estimates. Lehman Brothers cut its price target on the stock to $644 from $714 and RBC Capital Markets lowered its target to $675 from $725.

Cantor Fitzgerald analyst Derek Brown on Friday reiterated his buy rating and $750 price target, saying the stronger-than-expected quarter made a “mockery of the Street’s intra-quarter ComScore-data-induced fears.”

“[W]e believe this was another impressive quarter that few, if any, companies (in almost any sector, let alone the Internet) have been able to Match,” Brown said. “We fully recognize that the party at Google has to end some time. Yet, we see no clear signs of that.”

Think of Time Warner’s America Online and images of a little yellow running man and the sounds of a dial-up modem come to mind, not a Web site that offers email, online radio and financial news. That’s unfortunate for the New York-based media and entertainment conglomerate that in August 2006 bet the other way, with management choosing to shift away from its Internet service provider business and instead focus on reducing costs and growing advertising revenue.

Management bet correctly that Internet advertising revenue would grow in the coming years, but the company might have underestimated its ability to take market share from the top players in the game. Early signs, however, seemed to vindicate Time Warner’s approach - it reported an 18% increase in AOL’s advertising revenue to $2.23 billion in 2007 compared with $1.89 billion a year earlier.

Sanford C. Bernstein & Co. , however, put a damper on AOL’s revenue growth party Tuesday, telling its clients in a note that AOL’s advertising revenue growth is now slowing and the business faces a $932 million revenue headwind at the start of 2008, assuming the average revenue per user dips 2.8% year-over-year to $18.14.

“As such, AOL will need to do one of two things to just maintain profit: continue to take deep reductions in the ISP cost base, or accelerate advertising growth,” Bernstein said. “On both of these fronts, we do not see meaningful near-term opportunities.”

So if AOL can’t keep making meaningful cost cuts and it can’t accelerate advertising growth, Bernstein recommends that Time Warner sell the business entirely, and fast. The firm estimates that Time Warner’s stock is currently discounting an AOL value somewhere between $4 billion and $10 billion, while Bernstein’s sum-of-the-parts analysis suggests AOL is worth between $12 and $20 billion .

“Divesting AOL would allow strategic buyers to provide a valuation floor while freeing Time Warner investors and managers to focus on other content assets,” Bernstein said. “After trying plan A, Time Warner management should move to a plan B, which ends the corporate nightmare that was TWX-AOL.”

Apple Inc.’s iTunes is turning up the volume.

The online music store has beat out Best Buy Co. to become the nation’s number-two music retailer behind Wal-Mart Stores Inc. as measured by unit volume, market research firm NPD Group said Tuesday. iTunes climbed into second place because of the amount of music it sold during 2007. And, that’s just not digital music - that’s all music, including music in the physical CD format.

However, NPD’s latest Digital Music Study also revealed that more and more Americans are hitting pause on their CD purchases. The firm estimates that one million consumers dropped out of the CD buyer market in 2007, and that 48% of U.S. teens didn’t buy a single CD during the year (versus 38% in 2006).

Instead, tech-savvy music lovers used online music stores such as  iTunes - which allows users to purchase both individual tracks and full albums - to acquire music. According to NPD, the number of consumers who bought digital music legally through pay-to-download sites grew by five million to 29 million in 2007, while the number of consumers who used illegal peer-to-peer file sharing reached a plateau of 19%.

“The continued growth in legal download sites ins encouraging, yet the industry struggles to improve the value of each digital customer,” Russ Crupnick, entertainment industry analyst for the NPD Group, said.

While the amount of music consumers purchased in the U.S. rose 6% in 2007, NPD said a sharp increase in legal digital download revenue could not offset the decline in CD sales, which ultimately resulted in a 10% overall decrease in music spending.

“With so many baby boomers and gen-Xers entering the market, there are certainly opportunities to sell more digital albums, promote older catalog titles, or create bundles that will raise revenues,” Crupnick said. “In the near term that’s going to be the best means available to narrow the gap on dwindling CD revenues.”

Leading Chinese search engine Baidu.com issued a disappointing revenue outlook Wednesday night, but no one seems to be worried. Shares rallied as much as 7.4% to an intraday high of $280.44 on Thursday and remained up 2% in Thursday afternoon trading — despite a 1.3% drop in the Nasdaq Composite. Analysts continue to like Baidu, and in fact, RBC Capital Market’s Stephen Ju upgraded the stock to outperform from sector perform, suggesting that investors should focus on the long-term.

The story about Baidu is never complete without Google Inc., and that’s exactly what makes investors bullish. Baidu will continue to “dominate” the Chinese search market , Ju said, and over the longer-term, the company should add another growth driver as it monetizes its non-search traffic through display and other formats. As we exit the first quarter and enter the second-quarter, “very few companies on the Internet enjoy every secular, macro, and seasonal factor working in their favor and fewer still have Baidu’s growth profile,” he said.

Piper Jaffray’s senior search analyst Gene Munster estimates Baidu currently has between 70% to 75% market share, while Google has 15% to 20% market share. The cultural advantage of Baidu will help it maintain high market share over at least the next two years, said Munster. “Our belief is that while Google is a threat to Baidu, Baidu’s greater awareness of the Chinese culture creates results most suitable for the average Chinese person.”

A recent research report by consulting firm Pearl Research also suggests that Google still has a tough battle ahead in China. Based on interviews with those in Chinese youth demographic, Google continues to struggle with lower user awareness, compared to Chinese search engine Baidu, the report noted. Google’s Chinese name and domains are still not widely recognized by some Chinese youth: One young female interviewee said, “Well I never knew about [Google.cn]…but why would I use an American search engine to find out things in China?”

“Baidu’s lead is mostly a result of its Chinese brand, early market entry, strong entertainment functions and other youth-friendly features,” said Allison Luong, Managing Director of Pearl Research.