By MIGUEL HELFT

With its share of the Internet search market in steady decline and its pursuit of an alliance with Yahoo in doubt, Microsoft is taking a new approach to jump-starting its search engine: offering rebates to people who use it to find and buy some products.

Microsoft executives said the program, called Live Search cashback, is part of a plan to come up with new approaches to areas of the search business where they see opportunities to make inroads against Google, the market leader.

The new program focuses on searches for products to be bought online, which Microsoft executives said account for roughly a third of search queries and a majority of search advertising revenue.

“This is a very big part of the $20 billion search market,” said the chairman of Microsoft, Bill Gates, at an advertising conference run by the company. “Make no mistake, we are about having the best search, having the best results.”

Some innovations in the business model of search, like Live Search cashback, “will help drive that,” he said.

Live Search cashback is essentially a marketing effort by Microsoft to promote its search service, which lags far behind those of Google and Yahoo in popularity. On Wednesday, the research firm comScore reported that Google’s share of all searches in the United States grew once again in April, to 61.6 percent, from 59.8 percent in March.

Google gained at the expense of Yahoo and Microsoft, which experienced declines in search share, Yahoo to 20.4 percent, Microsoft to 9.1 percent.

Google has put marketing dollars into some of its services, but it has managed to dominate in search while spending virtually no money to promote its search engine. Google declined to comment on the Microsoft announcement.

Microsoft said that 700 merchants offering more than 10 million products have agreed to participate in the program. They include Barnesandnoble.com, Circuit City, eBay, Foot Locker, Home Depot and Hewlett-Packard.

“It is a great opportunity for buyers who come to eBay,” said Matt Ackley, vice president for Internet marketing and advertising at eBay. “And it is all about driving demand for our sellers.”

EBay is one of the largest buyers of search advertisements on Google and other search engines. Mr. Ackley said that if Microsoft’s program was effective, eBay might shift some of its advertising dollars to Microsoft from Google.

In most cases, Microsoft will determine the amount of the rebate that shoppers will get. On a Samsung digital camera that costs $90 to $107, rebates range from 2 percent to 5 percent.

“Microsoft’s issue is lack of consumer share,” said Bryan Wiener, the chief executive of 360i, a digital marketing agency that specializes in Internet search. “This is an interesting effort to try to motivate consumers to use Microsoft without cheapening the process.

“Will the incentives be enough?” he said. “Time will tell.”

As part of the program, Microsoft is also unveiling a new business model that allows search marketers to pay for ads only when people buy a product, rather than when they simply click on an ad.

Microsoft said this so-called cost-per-action model would give advertisers more precise returns on their marketing budgets. Google already offers a program that allows advertisers to tailor their bids on keywords based on the number of actions, or conversions, they get.

Microsoft also said that it had integrated Farecast, a travel Web site that Microsoft acquired in April, into Live Search cashback. The Live Search cashback service was built on technology developed by Jellyfish, a start-up that Microsoft acquired in 2007

By KELLY OLSEN

SEOUL, South Korea - Microsoft Chairman Bill Gates said there will be a vast shift in Internet technology over the next decade as he met Tuesday with South Korean President Lee Myung-bak.

“We’re approaching the second decade of (the) digital age,” the software mogul and philanthropist told Lee at the start of their meeting at the presidential Blue House, according to a media pool report.

“The Internet has been operating now for 10 years,” Gates said. “The second 10 years will be very different.”

Microsoft Corp., the South Korean government and South Korean companies are investing $313 million in information technology for vehicles, games and education, according to a Blue House statement.

Microsoft and automakers Hyundai Motor Inc. and Kia Motors Corp. announced earlier Tuesday a deal to use Microsoft’s in-car software, which allows people to control music and telephones with voice commands.

The company has a one-year exclusivity deal on the software with Ford Motor Co. in the U.S., but that expires in November. Fiat also has been selling cars with the software.

“We’re doing some very interesting work on automobile software,” Gates said after having dinner with Lee. “That’s a really wide open area where some very exiting things will come out of.”

Lee, a conservative former construction CEO, swept into office in February with a vow to boost economic growth through deregulation and increasing foreign investment.

In the Blue House statement, Gates was quoted as saying that new deals would boost South Korea’s economic growth by as much as $6.9 billion over the next five years.

Gates, at a later event sponsored by South Korean television network SBS, talked about the future of software and human interaction in the next decade.

“We can expect that the variety and quality of software will accelerate in the years ahead,” the Microsoft co-founder said.

Gates added that “natural interaction” between hardware and software was finally becoming possible, citing as an example speech commands to computers.

“The whole environment will be very, very different,” he said.

Microsoft also said Tuesday that it will invest $280 million to build a research and development center in China’s capital Beijing, and will double the number of its full-time research staff in China to 3,000 in three to five years.

(Bloomberg) — Yahoo! Inc., the world’s second most popular Internet search engine, plans to reject Microsoft Corp.’s $44.6 billion unsolicited takeover offer, the Wall Street Journal reported, citing a person familiar with the situation. The board decided the price “massively undervalues” the Sunnyvale, California-based company, and Yahoo may face risks because regulators could oppose the combination, the newspaper said today. On Feb. 1, Microsoft offered $31 a share in cash and stock for Yahoo. The company wants at least $40, or more than $12 billion more than Microsoft offered, the Journal said.

Chief Executive Officer Jerry Yang, who said this week that Yahoo is examining its options, may consider a partnership with bigger rival Google Inc. or ways to wrest a higher offer from Microsoft. Yahoo’s failure to crack Google’s dominance in search led to eight straight profit declines and cut the stock’s value in half in the two years before the offer.

“Yahoo still has one of the largest brands on the Internet,” Bill Tancer, general manager at researcher Hitwise Pty. in San Francisco, said in an interview before the report. “It confines Google to continue to grow their revenue from a single revenue stream, which is search.”

Yahoo directors, who met over the past week to weigh the offer, will send a letter to Redmond, Washington-based Microsoft on Monday that outlines its position, the Journal said.

“The board is continuing to evaluate the proposal,” Yahoo spokeswoman Tracy Schmaler said today after the report. “We’re not commenting beyond that.” Microsoft spokesmen Frank Shaw and Bill Cox didn’t immediately return calls.

Higher Bid

Yahoo is betting Microsoft won’t take hostile measures to win the bid, the Journal said, even though the software maker has indicated that is a possibility. A person familiar with the matter said this week that Microsoft may seek to oust Yahoo board members should they reject its offer.

“Microsoft reserves the right to pursue all necessary steps to ensure that Yahoo!’s shareholders are provided with the opportunity to realize the value inherent in our proposal,” Microsoft CEO Steven Ballmer said in a letter to Yahoo’s board that was made public on Feb. 1.

Yahoo rose 16 cents to $29.20 yesterday in Nasdaq Stock Market trading and Microsoft added 44 cents to $28.56.

The offer is 62 percent more than Yahoo’s stock price before the bid. The shares have climbed above the value of the cash-and- stock bid, showing shareholders expect a higher price. Microsoft plans to let investors choose cash or stock, at a ratio that will end up being about 50-50.

$34 to $37

Microsoft shares have declined since the bid, lowering the value of the stock portion and pushing the total value of the deal to about $29.08 a share. Microsoft may have to bid $34 to $37, said UBS AG’s Heather Bellini, the top-ranked software analyst by Institutional Investor magazine.

Since the bid is half cash and half stock, Microsoft may fix the offer at $31 before pursuing an increase, so the value doesn’t decline with its shares, she said.

Yahoo is getting financial advice from Goldman Sachs Group Inc., Lehman Brothers Holdings Inc. and Moelis & Co., according to two people familiar with the matter. Spokespeople for Goldman and Lehman declined to comment and a Moelis representative didn’t immediately return a phone call.

Morgan Stanley and Blackstone Group LP are counseling Microsoft.

Google Possibility

Yang, 39, has resisted letting go of the company he co- founded in 1995 as a graduate student at Stanford University. Initially a way to help people find their favorite places on the Web, Yahoo became the most-visited U.S. Internet site by combining search, news, sports and finance in a single place.

He replaced Terry Semel as chief in June after Yahoo’s share of Web searches tumbled and the company lost sales of banner ads.

Yahoo might seek help from rivals, soliciting other bids or seeking partnerships with Rupert Murdoch’s News Corp. or Google to thwart Microsoft, according to analysts including Stanford Group Co.’s Clayton Moran.

The New York Times reported Feb. 4 that Google CEO Eric Schmidt contacted Yang to suggest a partnership between their companies. A partnership with Google may allow Yahoo to outsource its search service, shedding the costs of running its own search engine and sharing ad revenue with its larger rival.

Google spokesman Matt Furman didn’t immediately respond to an e-mail today seeking comment.

Regulatory Scrutiny

While a search and advertising partnership with Google is an option, it would face stiff regulatory scrutiny, Moran said. News Corp. isn’t interested in bidding for Yahoo, Murdoch said on a Feb. 4 conference call. That means Yang’s options probably won’t pan out, said Andrew Frank, a New York-based analyst at research firm Gartner Inc.

The U.S. Justice Department is “interested” in reviewing the antitrust implications of a Yahoo-Microsoft transaction, agency spokeswoman Gina Talamona said last week. Neelie Kroes, commissioner of competition for the European Commission, said her agency also would scrutinize a deal.

Google has grown faster than Microsoft in every quarter since Google’s 2004 initial public offering as its search engine won more users. Even after CEO Steve Ballmer’s efforts to build a new search engine from scratch, Google outsold Microsoft in Internet ads by 7-to-1 in Microsoft’s latest fiscal year.

Microsoft and Yahoo combined would still fail to seize the lead in Internet search. Google, based in Mountain View, California, got 56 percent of U.S. Web queries in December, which is almost double Yahoo and Microsoft’s shares together, according to New York-based Nielsen Online.

LAS VEGAS — Microsoft founder and Chairman Bill Gates has been giving keynote speeches at Las Vegas conventions, including the Consumer Electronics Show and the now-defunct Comdex, for decades. Before his last CES keynote speech as a full-time company employee, he talked with IDG News Service Executive News Editor Marc Ferranti about his legacy as an innovator, the background behind some of the deals announced at CES this week and directions for Microsoft.

We’ve been tracking your career for some 30 years. One bone of contention has been when people have said that Bill Gates is a business mastermind, but not really an innovator. Can you point out a couple of innovative things you’re particularly proud of?

In terms of what we’re proud of, I think it’s the personal computer that we’re proud of. It was a crazy idea at the time, that we could take the microprocessor and create a software industry around it. There was no software industry. Computing was about big businesses, and what we did in 1975, with me dropping out of school, was to say that we could build an industry that was about empowering people. We could seek out partners to build the hardware. We’d let anyone write software for the work we did, and everything we’ve done, over these 30 years, has been about that vision of personal computing. We were first ones with that vision.

And now we’re tackling the new frontiers. We’re bringing TV, we’re bringing new educational experiences, health experiences, onto this device that empowers people in a new rich way. And so it’s pretty broad, the PC industry and our innovations in it — I don’t think there’s anything in the last 30 years that has had as much impact.

Innovations and Intellectual Property

In the consumer space, since we’re at CES, can you point out some recent innovations Microsoft can leverage in the next couple of years.

Well, the dollars spent on games and Xbox in the U.S. is greater than Sony PS3 and Nintendo Wii combined. Really, that’s because of the innovation in Xbox Live — connecting people up, letting players find each other, matching them, getting video online. It’s a real breakthrough way of thinking about even the future of TV.

We’ve got a million people using our Mediaroom, which is TV delivered over the Internet. Companies like AT&T and 19 other phone companies around the world bet their future on this being the new video platform. And what that means is when you think about news, and you go and use Mediaroom news, you see the things that you care about, the ads are targeted at you.

Look at what we’ve done with Surface, directly touching and manipulating things — that’s gonna be a centerpiece.

I can go on and on, there’s so much that has to do with making it natural, bringing these things together and integrating them. We’re the company that’s doing the walk — a lot of business focus but enough consumer focus that, from the biggest game phenomenon in the world to the biggest instant messaging thing, we have a lot of success that represents the innovation we’re put into it.

With increasing competition from abroad, innovation is of increasing importance to American companies. What’s your thinking around the link between innovation and intellectual property?

Well, we’re a company that’s based in the United States, but obviously we’re drawing on engineering talent from all over the world. We’ve got an unbelievable research group in China, we’ve got an unbelievable research group in India, and we’re delivering to consumers all over the world as well. And we file for intellectual property in all of these countries. They’re all in different stages in terms of copyright, or patents, and it tends to be a pretty complicated area.

Other countries look at what’s going on in the United States and they say they’d like their engineers to have those same opportunities, those same incentive systems, and so there really is a sense of progress in that. It’s just one of the elements that make sure people are willing to take risks and keep the innovation in this industry the fastest of any industry in the world.

New Year, New Deals

You’re going to be talking here about new partnerships for Microsoft’s MSN, Xbox Live and Mediaroom IPTV services that will provide more content to drive Microsoft’s consumer entertainment strategy. Can you talk about what you needed to do — on the technology side and on the business side — to make these deals happen?

XBox Live is attracting virtually all the content people because of the volume we’ve got there, and they see this group of very engaged users spending a lot of hours and finding new media in that environment, so that’s made it easy for us. Our announcement with NBC on the Olympics is about our innovations in Silverlight, where you can view interactive content, multiple video streams, so it’s really a perfect match for the Olympics where you have all this different content and yet different people care about different parts of it.

As your consumer entertainment strategy comes to fruition, how will your business model change from what it has been in the past? Can you quantify goals for advertising-generated revenue?

We’ve seen good growth in our advertising revenue. That’s an area where Google’s the leader and we need to be very innovative to drive the scale. A huge partnership with Viacom is helping us with that. We’ll be signing up more partners around the world. Taking the advertising platform to scale is very valuable for things like the search property we offer.

We participate in a lot of business models. We have consumer software like games that you buy on a one-time basis. We have things that you can pay as a monthly fee, that we run up in our servers, as more of a service type model. We have some software we give away for free. And so, ads are coming in as a big, strong component but I don’t see it replacing the others. We need all modalities to be strong.

Philanthropy and Curiosity

In your philanthropic work, you’ve focused on fundamental health issues for the developing world. In the tech sector, there have been efforts such as the OLPC, and Microsoft’s efforts to reduce prices in developing countries. But there’s been criticism about these efforts. People have been saying, well, a $200 laptop isn’t going to do a kid much good if he doesn’t live to age five. With this in mind what do you think technology companies — that need to make profits — can do to spur development in emerging markets?

Companies make their contribution by both giving some cash to broad areas but also by having their products in their area of expertise be tailored and donated to people who are poor. So in the case of Microsoft, we went and got involved in putting PCs in libraries. We went to Chile to put PCs in the libraries there, so by having a really robust machine connected to the Internet, going through the training, working with the government, getting all the pieces right — we learned how to do that in the United States — those projects were incredibly successful.

So while I admit for my Foundation the top priority is health, Microsoft is about software. It’s got a product, that’s what the company knows. And that’s where, in its activities around the world, its helping educators, it’s helping kids who have curiosity, and I think that’s fantastic for Microsoft to do that.

I’m taking the success that Microsoft had and putting tens of billions of that into the basic needs where breakthroughs can be made — and there, we’ll be using software. We’ll be using mobile phones, we’ll doing data gathering, so we’ll be using software as a tool to do it. I wish every company was doing as much as Microsoft is to take their expertise and look into that developing world and see what role they can play . We’ve had great impact, great success, and it helps us attract better employees. It makes our employees feel good because we were founded on the idea of empowerment. We’re not just talking about it, we’re out in over a hundred countries delivering it in a significant way.