Neal Polachek and I had the opportunity this morning to sit down with Mike Galgon, cheif advertising strategist for Microsoft. Galgon was brought on board as part of Microsoft’s $6 billion acquisition of aQuantive, which he cofounded in 1997.

The $6 billion price tag was was roughly 2x premium at the time of purchase, 10X revenue, and almost 50X cash flow. It was also MSFT’s largest acquisition to date (and double what Google paid for DoubleClick), all showing the company has either lost its mind or it sees transformative capability in the Atlas platform. Galgon’s job is obviously to argue the latter and he makes a strong case.

On a basic level, Atlas will bring MSFT’s ad placement capabilities (display, video, text) beyond MSN to cover the remainder of the Web. It will also be important to compete with Google/DoubleClick (which closed on Tuesday). Galgon in fact believes that consolidation and other factors will cause 80 percent of the online ad placement to be covered by Google and Microsoft, while the remainder will be a fragmented mix of local and vertical ad networks.

He argues that Atlas not only extends addressable ad inventory but also display ad targeting capability at an important time. Behavioral targeting is the key here, to move beyond contextual display advertising where growth is flattening, as it is in search. The next growth curve will come with inventory on other devices or media, such as mobile, IPTV and in-game advertising, where MSFT is embedded in various ways (Windows Live Mobile, Massive, Mediaroom).

Search doesn’t hold the opportunity it once did with slowing revenue growth and Google’s dominance in both user and advertiser market share. But these other ad delivery opportunities are where Microsoft sees the “greenfield.” Atlas is the key to sit between this content and advertisers and agencies (aQuantive-owned Avenue A/Razorfish fits well into the equation).

Whether it was worth the premium is still an important question that will have to be proved in time. But I’m closer to believing than I was yesterday.

One big takeaway from the NAA Marketing show last week in Orlando was that newspapers are ready to build up a zillion niche products that allow them to leverage their editorial talents. But not much progress, or even attention, is being paid to local search. It makes you wonder if newspapers are really serious about reaching out to the high volume of small businesses in their communities that have previously relied entirely on Yellow Pages.

The Seattle Times Co., however, is definitely an exception to the rule. Today, it launched “Network Search” across all its newspaper and vertical services, including Seattletimes.com, SeattlePI.com, NWsource.com, NWJobs.com, NWautos.com, NWapartments.com and NWHomes.com. The new search — which is not unlike the “Federated Search” solutions available from Harvest Info and Gannett’s Planet Discover – also incorporates some blogs and other sources.

Developed with FAST Search and Transfer (which is being purchased by Microsoft), Network Search bites the bullet with a single search box.

Many papers have been reluctant to go in that direction because the results would be too generalized. But the end result is that some papers have a dozen or more search boxes. And nobody ever thinks to look for anything on the site. They just go to Google.

One immediate advantage of The Times’ Network Search is that it opens up sponsored search advertising in a big way — something that has been largely hit or miss using third parties. In my limited testing, it works well.

A search for “Dungeness Crabs,” for instance, returns news stories on the harvest and restaurants where you can get them. It also has helpful sponsored search results for several excellent mail-order houses. A search for “Marqueen” has all the reviews and news to the nice boutique hotel in Queen Anne. And helpful sponsored searches for the competition.

A search for “Maria Cantwell,” on the other hand — the only senator I know since she used to do business development for Real Networks — returns her office’s latest news releases and news stories. And then also sponsored links for “Cantwell Hotels” and other things that probably have nothing to do with her. That’s probably the way it should work.

Seattle Times Interactive head Patricia Lee Smith says she believes the site has unmatched local content and “a uniquely local lens” that non-native search engines probably can’t hope to match in the foreseeable future. “This will also be the first of many advertising trials to connect local businesses with online readers via targeted search advertising,” she says.

Smith also promises that the search initiative is going to go deeper and deeper. The search box, for instance, will eventually be introduced on each of the Times Co.’s marketplace sites.

The New York Times‘ David Pogue writes this morning about some of the outcroppings of new innovation at Microsoft, apparent through the newest version of Office Live for Small Business.

The product takes the “Webification” issue to heart by allowing tech illiterate SMBs to get up and running with a suite of tools for developing and hosting a Web site. This includes free hosting, analytics, and more compatibility (Firefox and Mac) and simplicity than previous versions.

In addition to upsells for added functionality to manage operations (track employees, resources, reservations), a good possibility for the product’s positioning is feeding SMBs into online advertising (via adCenter). This is similar to Google’s intended strategy of integrating AdWords campaign management into the workflow of Quick Books’ massive installed base (an integration that arguably hasn’t reached its potential).

As the tenets of Webification go, one of the benefits of being the one to bring small businesses online in the first place is to establish the trusted relationship to then be the provider of choice for their evolution to paid online advertising. Through this version of Office Live for Small Business, it’s apparent that Microsoft gets this. The proof will be in the execution.

Amid all the noise about Microsoft and Yahoo!, one of the unanswered questions has to do with MS’ intent toward the recruitment business – a business that actually has some relationship with Microsoft’s core enterprise solutions (as opposed to its less established interests in social networking and arguably, search).

As Ken Doctor points out, HotJobs comes as part of the package when you buy Yahoo!. As recently as June 2007, however, Microsoft acquired a 4 percent share in rival CareerBuilder – probably to cement its technology and advertising ties with the site, and with its owners: Gannett, Tribune and McClatchy.

Is a rollup of CareerBuilder and HotJobs possible? Alternatively, would Microsoft opt out of its interest in CareerBuilder, and instead form a duo with Monster, an independent, publicly owned entity with its own newspaper ties? Indeed, just thinking of Microsoft in the recruitment space makes me wonder: Should local media concerns be owning these incredibly complex, technology-driven verticals?

Today’s big news is Microsoft’s unsolicited takeover bid for Yahoo!. The $44.6 billion bid represents a 62 percent premium on Yahoo!’s closing stock price yesterday, which was affected by Yahoo!’s depressing earnings announcement, in which Yahoo! said it would lay off 1,000 workers to “re-accelerate” growth.

For 2007, Yahoo! reported a net profit of $660 million, down 12.1 percent as Yahoo! boosted marketing and development spending by 25 percent in an effort to catch up with Google. Yahoo! has a market capitalization of about $25 billion, compared with more than $300 billion for Microsoft.

Already, Yahoo!’s stock price is up 45 percent, which should be some solace for the execs — many departed — holding options, who have been watching their value fall precipitously.

Microsoft’s bid, of course, did not come from out of the blue. Earlier last year, Yahoo! broke off merger talks, so one assumes this new offer won’t be automatically accepted. Our guess is that other bidders will not enter the picture, unless Yahoo! solicits a “white knight.”

One thing we believe is that the “cultural” issues between Yahoo! and Microsoft are not as pronounced as they have been in the past. Yahoo!’s culture has changed enormously in recent years as it has struggled against Google, and it no longer seems to have such strong identity issues.

Going forward, the real question is who’s best positioned to compete with Google. According to comScore, Google’s share of the global Web search business stands at 77 percent, followed by Yahoo! at 16 percent and Microsoft at less than 4 percent.

Another question is who can get by the tough regulators at the EU (we don’t anticipate significant U.S. problems). Our view is that a Microsoft/Yahoo! merger would strengthen the competitive picture against Google, so regulators would ideally welcome it. Indeed, just a few weeks ago we stopped using the politically correct language “and Yahoo!” when talking about local search. Google is that far ahead.

Microsoft’s Aggressive Steps

What’s clear is that Microsoft plans to take the steps necessary to match up with Google. It has been extremely aggressive as of late with both the aQuantive purchase and the $300 million investment in Facebook. From a Microsoft point of view, Yahoo! is clearly its single best growth injection.

The focus here, of course, is on search. But search is just a piece of the puzzle. Yahoo! also brings to the table its instant messaging service, news access with audio and visual feeds, and personalized Web pages. For business, it offers several services aimed at helping companies boost their presence on the Internet. It has stakes in or owns several other companies, including online shopping with alibaba.com, Flickr for photo blogs and Kelkoo, which compares prices.

Generally, it is conceded in the industry that Yahoo! — including Yahoo! Local — has a first rate social platform. Yahoo! also has developed a relationship with hundreds of newspapers for its HotJobs recruitment service that has extended into display advertising and search. The newspaper consortium appears to be doing fairly well with Yahoo!, although it recently opted to go with Zillow for real estate.

A Closer Look at Integration Issues

An integration of Yahoo! and Microsoft assets is so complex and daunting that we believe little would quickly change. Globally, integration will be hampered by the companies’ respective partnerships, which are intertwined and deep.

The complexity of retaining Yahoo! consumer usage is another major concern. We view the integration of the ad platforms to be similarly complex, but perhaps not as daunting. We would note, however, that the merger would benefit from MSN Search’s longtime relationship with Overture, now known as Yahoo! Search Marketing. AQuantive is still separate, so bringing back-office operations together will be less sticky and tricky.

The integration of Hotmail with Yahoo! Mail is a bigger problem. We wouldn’t anticipate any near-term effort to integrate those two properties. Another area of overlap is in mapping. Yahoo! Maps has significantly greatly market share, but Microsoft has been pumping even more money into its Virtual Earth service and would likely become the merged company’s new standard. Another area of overlap is in mobile, where Yahoo! Mobile services have done well, but would run into Microsoft’s forced synergies on the WINce operating system.

(This post was coauthored by Matt Booth and Peter Krasilovsky.)

Microsoft Canada Co. and Yellow Pages Group Canada announced that Microsoft Virtual Earth mapping software is now available on YellowPages.ca. The software licensing deal allows YPG to provide a more robust map experience for users. It will also enable the publisher to push the mapping technology to its various online properties and eventually create additional advertiser opportunities.

Three areas of development, according to Jean-Pascal Lion, YPG’s vice president of marketing, include “creating more layers within the maps to allow for advertising opportunities, maps to plot advertiser locations and map-based search similar to Google Maps via one of its stable of owned domains, Maps.ca.”

While no dates have been established for the launch of these initiatives, it is clear there is a sense of urgency to get these functions up and running to not only take advantage of the revenue opportunities but also to help increase traffic to YPG’s affiliated sites.

The Virtual Earth mapping will also be added to the recently announced Profile Plus pages offering. The Profile Plus product offers advertisers the following components:

1. A dynamic 30- to 60-second video profile of the business
2. A photo gallery where advertisers can showcase up to 10 photos
3. Business details, including location and contact information, hours of operation, products and brands, methods of payment, map and directions, etc.

The addition of a more sophisticated and increasingly accurate mapping program certainly improves the depth of the Profile Plus page and can only enhance its usage and relevancy with consumers. One interesting benefit is the ability of YPG’s Trader property to take advantage of the Virtual Earth mapping technology. This is an interesting move, allowing product searches to now include photos, maps and driving directions, which makes locating products a much easier process for users.

While currently ranked as the eighth most visited site in Canada by comScore, YPG is definitely working feverishly to improve its traffic and the quality of the user experience on its site. Maps are more for the benefit of users than advertisers; however, this move into offering a more robust mapping service should help YellowPages.ca, Trader Canada and all YPG’s affiliated sites generate more traffic and ultimately benefit its advertiser base.

Interactive Local Media: 07 is ready to roll Nov. 28-30 in L.A. That’s next Wednesday through Friday!

The show, which is being produced in partnership with SES Local, has attendees from all over the world. One exec told me he is coming on Wednesday, taking the red eye to New York that night due to a prior commitment, and flying back on Thursday night for the final day.

Attendance-wise, we have the biggest sign-up list for a Kelsey event since the mid-1990s. Almost everyone that we have slotted will actually be there. While the agenda has been tight for some time, with 70-plus speakers, here are some last minute adds:

• Christophe Maire, a cofounder of Nokia’s Location-Based Experience Development, is set for Day 3. HOT DISCUSSION TOPIC: Nokia’s $8.1 Billion purchase of NavTeq.

• Laurel Gilbert, from Microsoft’s Atlas division, is speaking on our localizing national advertising panel. HOT DISCUSSION TOPIC: How Microsoft will use Aquantative to transform itself into a true Web advertising giant.

• Doug Kilponen from MerchantCircle is speaking on the localized shopping panel. MerchantCircle just received a $10 million cash infusion from IAC and others. HOT DISCUSSION TOPIC: Best Practices for Signing up Small Businesses.

• Claudia Poepperl from mobilePeople is set to provide a demo of the London-based company’s cutting-edge social mobile technology.

We are also expecting a drop-in from a top executive of a company that’s been in the news, but we can’t say much more about it. And speaking of news, there are lots of interesting news announcements that will drop around the show as well. So, will we see you in L.A.? Here is the registration page.

Amazon yesterday launched a $399 electronic black-and-white e-reader called “Kindle” that can quickly download books and customized versions of newspapers, magazines and blogs over a limited-use free EVDO network. Seven newspapers are included in the first batch of content: The Wall Street Journal, The New York Times, The Washington Post, Seattle Times, San Francisco Chronicle, Atlanta Journal Constitution and San Jose Mercury News.

Subscriptions are generally $5.99 a month, with The WSJ priced at $9.99 and The New York Times at $13.99. Daily editions are kept for up to seven days. Books are generally priced at $9.95. There is also a selection of blogs to subscribe to for 95 cents a month and up. You can also e-mail MS Office files to yourself, or anything else, for 10 cents a pop, but Amazon is not playing up the always-on network capabilities beyond the fact that it isn’t Wi-Fi and its spotty reception.

The difference between Amazon’s reader and previous electronic editions from Olive Software and others is this one is expressly designed for portability. The downside is that it is in B&W and doesn’t readily enable rich advertising or multimedia. It is telling that Olive enabled these extras, but never caught on: People didn’t want to pay extra to be tethered to their PC (or apparently, for any other reason).

Reading a paper on the Kindle is probably better than reading headlines on a cellphone, but not as good as reading the fully graphical online edition on an iPhone. Still, it makes you think how far newspapers have come in the past five years or so. I might like it on a commuter train, where Wi-Fi isn’t readily available and space is tight. More than 200 testers for Amazon have left reviews of their experience on the Amazon site, and they are generally positive. Of course, they weren’t paying for the subscriptions, or the device, which is the price of a low-end laptop.

Will there ever be a reader that makes a newspaper palatable and profitable? For more than 20 years, newspaper companies have spent tens of millions of dollars, if not hundreds of millions, trying to develop an ideal device. Microsoft has also been in the game, forming a partnership with several newspapers for its tablet devices. Since Vista’s launch, the tablet has become more realistic because it doesn’t require so much software downloading. But it is unlikely there are many users for it.

I like the idea of Kindle, and I hope Amazon gets around to sending me a review copy. But I bet Kindle won’t really catch on as a newspaper reading device. And its inability to support advertising makes it nothing but a premium news product. Some people will try it out, but if any of the local papers have more than 300 subscribers a few months down the line, I’d be surprised.

The numbers are looking very, very good for the Interactive Local Media:07 conference in L.A. Nov. 28-30. Internally, we think this one is a record breaker. Register and book the hotel while you can. The latter tends to sell out.

In recent weeks, we’ve been putting the final touches on the program. For instance, we’ve added Facebook’s Chamath Palihapitiya, who is VP of product marketing. Here’s a snippet about Chamath from Fast Company’s cover story this month:

“Palihapitiya, 31, is tall and whippet thin, with elegant manners and a ready smile. A former electrical engineer, born in Sri Lanka and raised in Canada, he ran AOL’s instant-message group, then jumped to the venture fund Mayfield. He is part Sand Hill Roadster and part freethinker.”

Other notable adds include ShopLocal CMO Bob Armour, Scott Ferris from Microsoft’s Atlas division, LA Times.com’s Robertson Barrett, and City Voter’s Josh Walker. There is also a brand-new Local Mobile panel, featuring Gary Roshak, who has migrated from Marchex to Yahoo!, Jeff Torgerson at InfoSpace, and Collin Holmes at V-Enable.

Also, take a look at the SES side of the show. Google Local head Eric Stein, Zorik Gordon from Reach Local, and Topix head Chris Tolles are just some of the great execs SES is bringing in. Kevin Heisler and Kevin Newcomb are moderating the SES panels.

The Kelsey Group also has its LinkedIn networking set up for the show. We’ve got dozens participating already. Once you register, you should sign in for that, too (even if you haven’t used LinkedIn for a while). See you in L.A.?

I am not a New York City person anymore, in great measure because of the challenge of getting from one location to another. So when I do have to go to New York, I try to cover as much ground as I can. Recently I was able to arrange four meetings in the city on one day and discovered from my colleague Joe DeBlasio the wonders of HopStop. The idea is a simple one and makes personal local search and mapping incredibly easy. You type in your starting destination and address (like Penn Station) and then enter where you want to go. HopStop tells you how to get there by subway or bus along with easy-to-follow walking directions to make sure you get on the right subway.

Since this was new to me, I did a little homework and discovered that similar services are available in a variety of places, including Japan and London. I did my searching in advance and printed out all the directions, but I might have been in a bind if I had had to make a change. It is clear to me that this is the perfect service for a mobile application, and I’m sure it would have worked just fine with my BlackBerry. Accessing HopStop mobile tells you how you can get “subway directions when you’re on the go,” using PDA, SMS or HopStop Voice, which allows you to call a toll-free number and speak your address. Currently HopStop covers New York, Boston, Washington, San Francisco, Chicago and areas around New York City.

It still has a long way to go to be perfect, but when you are trying to figure out what subway line and stop is best for you to come up somewhere near your above-ground destination (and you dislike NYC cabs as much as I do), this is a wonderful service. Here’s my concern: The entrepreneur who started this may decide to expand too quickly. It is a normal issue with people who think they have a great idea and then decide that they need to be in as many cities as quickly as they can in order to beat the competition. This was both Microsoft’s and Knight Ridder’s thinking when they expanded their city guides before they had demonstrated the value in a few markets first. If this business is managed well, I believe it will be very successful.