The new iPod

SEATTLE – Apple Inc. unveiled a minuscule new iPod Shuffle on Wednesday that takes its “smaller is better” mantra to a whole new level.

The third-generation Shuffle, a slim aluminum rectangle less than 2 inches long, takes up about half as much space as the previous version even as it doubles music storage space to 4 gigabytes. To achieve such a tiny form, Apple had to remove most of the buttons from the body of the $79 device and build them into the headphone cord instead.

“Smaller has tended to work very well for us,” said Greg Joswiak, a marketing vice president at Apple.

The trade-off for a sub-$100 Shuffle always has been the lack of a screen to visually navigate through the music stored on the device. The first-generation Shuffle, which launched in 2005, could hold about 240 songs, arguably not enough to warrant a screen.

Now that the device can carry 1,000 songs, Apple has come up with a way for people to identify the music they’re listening to or find songs they want. A new feature called VoiceOver can, at the push of a button, speak the song and artist name or rattle off the list of custom mixes — called playlists — that the owner has loaded onto the device.

Here’s how it works: As you synchronize a new Shuffle using an updated version of iTunes, your PC or Mac looks at each track and playlist and creates a small file of a computerized voice speaking the title, artist for playlist name. If a song is in Spanish or Chinese, say, the software figures this out and speaks in the appropriate language. Apple says the device can handle 14 languages.

The new Shuffle, which comes in silver or black aluminum with a shiny stainless steel clip, is set to go on sale Thursday. Joswiak said Apple’s own earphones will be the only option for early buyers, but that other companies plan to make compatible headphones as well as adapters for regular headphones.

Ross Rubin, an analyst for market researcher NPD Group, said there’s no such thing as “too small” for gadget-happy consumers as long as Apple stays focused on ergonomics and provides a way to secure the device and keep it from getting lost.

But people who do buy a new Shuffle will be paying a premium for Apple’s design, he added, noting less-expensive mini-models like SanDisk Corp.’s Sansa Clip and Creative Technology Ltd.’s Zen Stone.

Shares of Cupertino, Calif.-based Apple jumped $3.91, or 4.4 percent, to $92.54 in afternoon trading.

Steve Jobs

SEATTLE – Shares of Apple Inc. fell 4 percent Thursday as investors struggled to parse the latest disclosure from CEO Steve Jobs about his health and his need to go on leave until the end of June.

The 53-year-old Apple co-founder, a survivor of pancreatic cancer who appeared gaunt last year, said Wednesday after the stock market closed that he is stepping away from his daily duties because his health problems have become “more complex.” Apple’s chief operating officer, Tim Cook, will take over.

In contrast, as recently as Jan. 5, Jobs tried to assure investors and employees that he had discovered his weight loss was caused by a treatable hormone deficiency. In that statement, he said he had begun a “relatively simple and straightforward” treatment and insisted he would remain at Apple’s helm.

Jobs’ reversal sent Apple shares sliding to one-year lows in extended trading Wednesday, but by Thursday morning they had recovered slightly, and were down $3.49, 4.1 percent, at $81.84.

Apple’s stock has surged and tumbled over the last year in step with rumors or news about the CEO’s condition. While the top executive’s health is an issue for investors in any company, at Apple the concern reaches fever pitch because Jobs has a hand in everything from ideas for new products to the way they’re marketed.

Jobs co-founded Apple with Steve Wozniak in 1976 at the dawn of the personal computer revolution. He was forced from the company in 1985 but returned as CEO in 1997, slashing unprofitable product lines and helping rescue the company from financial ruin.

Since then, under Jobs’ demanding leadership, Apple has churned out a string of sleek gadgets, from the iMac and the iPod to a new line of aluminum-covered Macbooks and the coveted iPhone. Many investors fear that without Jobs, Apple would not be able to sustain its growth or its high-end minimalist style.

Last week, Jobs said his disclosure of his hormone problem was “more than I wanted to say, and all that I am going to say” about his health. It came on the eve of Macworld, the biggest Apple trade show of the year, at which Jobs traditionally delivered the keynote address to avid fans. In December, Apple said Jobs would not take the stage as usual, stoking more rumors and prompting Jobs’ Jan. 5 letter, which he said he hoped would allow everyone to relax.

The limited amount of information in that announcement and Wednesday’s update left medical experts guessing. Some specialists said Jobs’ past pancreatic cancer could be the problem, given the organ’s role in digestion and nutrition.

Apple’s overall secrecy and its history of keeping information about Jobs’ health under wraps is only increasing the speculation. The company waited until after Jobs underwent surgery in 2004 to treat a very rare form of pancreatic cancer — an islet cell neuroendocrine tumor — before alerting investors. That type of cancer is easily cured if diagnosed early, unlike the deadlier and more common adenocarcinoma.

And last summer, Cupertino, Calif.-based Apple insisted Jobs’ weight loss was due to a common bug.

The New York Times reported Thursday, citing two undisclosed people familiar with Jobs’ condition, that Jobs was not suffering from a recurrence of cancer, but that his body was having trouble absorbing food.

Apple spokesman Steve Dowling would not elaborate on Jobs’ condition or what he discovered in the past week.

“They’ll tell you the least they can tell you,” longtime industry analyst Roger Kay of Endpoint Technology Associates said. “They’re trying to have it both ways, to protect their guy’s privacy and feelings and at the same time somehow signal the market.”

Cook, who ran Apple for two months in 2004 when Jobs was recovering from his cancer surgery, is seen as one of Jobs’ most likely successors, along with Apple’s top marketing executive, Philip Schiller. American Technology Research analyst Brian Marshall — who last week predicted Jobs would step down this year — said Wednesday’s announcement tips the bets in Cook’s favor.

“The company has been soft-signaling to the Street for a while now that Steve Jobs is not going to be CEO forever,” he said. “This will be sort of a trial period for Cook to be chief executive.”

Cook, 48, lacks Jobs’ charisma and showmanship, but is seen as a solid pick.

“Tim Cook is a very experienced and highly regarded chief operating officer,” said Calyon Securities analyst Shebly Seyrafi. “He’s qualified.”

AP Business Writer Andrew Vanacore in New York contributed to this report.

Phil Schiller, senior vice-president of worldwide product marketing for Apple, speaks during the Macworld Conference & Expo keynote address Tuesday in San Francisco.

SAN FRANCISCO – Apple Inc. is cutting the price of some songs in its market-leading iTunes online store to as little as 69 cents and plans to make every track available without copy protection.

In Apple’s final appearance at the Macworld trade show, Apple’s top marketing executive, Philip Schiller, said Tuesday that iTunes song prices will come in three tiers: 69 cents, 99 cents and $1.29. Record companies will choose the prices, which marks a significant change, since Apple previously made all songs sell for 99 cents.

Apple gave the record labels that flexibility on pricing as it got them to agree to sell all songs free of “digital rights management,” or DRM, technology that limits people’s ability to copy songs or move them to multiple computers. Apple had been offering a limited selection of songs without DRM, but by the end of this quarter, the company said, all 10 million songs in its library will be available that way.

While iTunes is the most popular digital music store, others have been faster to offer more songs without copy protection. Amazon.com Inc. started selling DRM-free music downloads in 2007 and swayed all the major labels to sign on in less than a year.

Schiller also announced that iPhone 3G users will be able to buy songs from the iTunes store using the cellular data network. Previously, iPhone users could shop for tunes when connected to a Wi-Fi hot spot.

The iTunes changes marked the highlights of Schiller’s run as a stand-in for CEO Steve Jobs, who used to make Macworld the site for some of Apple’s biggest product unveilings, such as the iPhone. Apple said last month that Jobs would not address the throngs this time because the company plans to pull out of Macworld next year.

Apple shares slipped $1.56, or 1.7 percent, to close at $93.02.

Schiller got a warm welcome from the attendees — who packed the convention hall despite the pall cast over the industry by the economic downturn — especially at the start of his talk, when he thanked them for showing up despite Jobs’ notable absence. He ran seamlessly through his 90-minute presentation, getting applause and oohs from the audience, varying little from the format of slides and demos established by Jobs. And like Jobs, he gushed about Apple’s products being the best in the world.

“Phil did an exceptionally good job in representing Apple,” said Tim Bajarin, president of technology analyst group Creative Strategies Inc.

Lower iTunes prices were Apple’s only nod to the recession — and an oblique one at that, as record labels have been asking for years to set varying song prices. Rather than an inexpensive new Mac to lure budget-conscious buyers, Schiller unveiled a new $2,800 Macbook Pro laptop with a 17-inch screen and the sleek aluminum casing the company debuted with the super-thin Macbook Air.

He also unwrapped new versions of two software packages for Macs, including the iLife multimedia programs. For instance, iPhoto ’09 can recognize faces and sort photos based on who’s in them. GarageBand ’09 includes videotaped, interactive music lessons given by Sting and other musicians. Apple added more professional video editing features to iMovie ’09.

Apple’s answer to Microsoft Corp.’s Office productivity suite, called iWork, also got a makeover, including zippy new ways to add animation between slides in the Keynote presentation software. And Apple unveiled a “beta” test version of a Web site for sharing documents, iWork.com. Unlike Google Inc.’s online documents program, however, Apple’s version does not allow people to edit documents in a Web browser.

Apple said the thin new 17-inch aluminum-cased Macbook Pro, which joins an existing 15-inch model, will start shipping at the end of January. Perhaps the biggest twist is the laptop’s battery, which is designed to last longer on each charge — up to seven or eight hours — and work after more charges than older batteries. But like Apple’s iPod and the super-slim Macbook Air, the battery will be sealed inside and the owners won’t be able to remove and replace it themselves. Instead, they’ll have to spend $179 to have an Apple store expert swap in a new one.

Jobs’ decision not to attend Macworld sparked a new round of fears that the CEO, a survivor of pancreatic cancer who has seemed gaunt in recent appearances, was in worsening health. To put the questions to rest, Jobs said Monday he is getting treatment for a hormone imbalance that caused him to lose weight, and urged Macworld attendees to relax and enjoy the show.

And after the Tuesday keynote, in which nothing purely new was disclosed, the company’s decision to substitute veteran salesman Schiller for master showman Jobs seemed even less questionable.

SEATTLE – In its latest move to increase Internet search traffic, Microsoft Corp. has turned to an old rival, Sun Microsystems Inc., for marketing help.

Under the terms of a deal being announced Monday, Sun will promote a Microsoft toolbar for the Internet Explorer browser to U.S.-based Web surfers as they download Sun’s Java software — which is required to view some Web sites. The toolbar has a built-in box for queries to Microsoft’s Live Search and buttons that give people access to MSN content.

“We need to provide more volume to our advertisers,” said Angus Norton, a senior director in Microsoft’s Live Search group. Microsoft ranks a distant third in the Web search market behind Google Inc. and Yahoo Inc.

Sun and Microsoft have competed bitterly on several fronts. In particular, Sun was one of the most prominent antagonists in Microsoft’s long antitrust battles. In 2004, Sun reaped nearly $2 billion in a patent and antitrust settlement payout from Microsoft.

Sun and Microsoft did not disclose the financial details or the length of their new deal. It comes as Sun is struggling mightily, having posted a $1.7 billion loss in its most recent quarter.

Through the agreement with Microsoft, computer users installing the Java software will be able to check a box to get the MSN toolbar, too. (As the programs download, Sun also opens a window promoting OpenOffice programs — a free competitor to Microsoft Office software.)

Sun has struck similar deals with Google and Yahoo in the past. The Yahoo agreement, which offers a Yahoo search toolbar to people who use the Firefox browser, will continue, but the Google deal is ending, said Sun’s vice president of Java marketing, Eric Klein.

Microsoft is trying several ways of getting unstuck from third place in the search market.

After Redmond, Wash.-based Microsoft dropped a bid to buy Yahoo in May, it vowed to invest in its own search technology and spend money on deals aimed at attracting more Web surfers.

The most prominent deal so far calls for Hewlett-Packard Co. to make Microsoft’s search engine the default on all PCs shipped in the U.S. and Canada, starting in January. HP will also include a browser toolbar on those computers.

Microsoft is focusing on toolbars and default settings because, according to Norton, 35 percent of Web searches are conducted from the browser’s address line, built-in search boxes and add-on search toolbars, as opposed to a search provider’s Web page.

Sony Corp. Chief Executive Howard Stringer

SEATTLE – Computer makers are recalling 100,000 laptop battery packs made by Sony Corp. after 40 reports of overheating, according to a U.S. Consumer Product Safety Commission notice Thursday.

The voluntary recall applies to certain Sony 2.15Ah lithium-ion cell batteries made in Japan and sold around the world in laptops made by Hewlett-Packard Co., Dell Inc. and Toshiba Corp.

Some incidents involved smoke or flames, according to Sony. Twenty-one of the reports claimed minor property damage, and small burns were reported in four cases.

Sony blamed two factors for the defects: adjustments on its manufacturing line from October 2004 to June 2005, which may have affected the quality of cells in certain production lots; and a possible flaw in the metal foil for electrodes.

The company said no reports have been filed for batteries made after 2006, and noted that the recalled units are a small fraction of the more than 260 million it has shipped over six years.

This also pales in comparison to the recall of nearly 10 million of a different model of Sony batteries in 2006 and 2007, which affected almost every major PC manufacturer, including Dell Inc. and Apple Inc.

In this batch of problematic laptops, the bulk of the 35,000 affected computers in the U.S. were sold by HP between December 2004 and June 2006, according to the safety commission, including HP Pavilion, HP Compaq and Compaq Presario models.

Some Dell Latitude and Inspiron models shipped between November 2004 and November 2005 are also covered by the recall, as well as some Toshiba Satellite and Tecra laptops sold from April 2005 to October 2005.

An additional 65,000 of the flawed batteries were sold outside the U.S. The PCs and separate batteries were sold directly by the computer manufacturers, electronics stores and online retailers worldwide, not by Sony.

Sony said its own Vaio laptops don’t use the battery in question. Last month, however, the company recalled 440,000 Vaio notebooks worldwide because of a wiring flaw that can cause overheating.

The safety commission said PC users should remove laptop batteries immediately and contact the manufacturer to request a replacement. Details, including laptop model numbers and contact information for Dell, HP and Toshiba, have been posted on the commission’s Web site.

Shares of Sony rose $1.52, or 7.2 percent, to close at $22.65 Thursday amid broader market gains.

———

On the Net:

Recall details:

http://www.cpsc.gov/cpscpub/prerel/prhtml09/09035.html

Question about Jobs’ health deflected

Macintosh and iPod sales helped boost Apple Inc.’s fiscal third-quarter earnings 31 percent, beating Wall Street’s expectations Monday, but investors pummeled the stock after Apple issued soft guidance for the current quarter.

Steve Jobs, Apple’s chief executive, did not join the conference call with investors as he commonly does, prompting an analyst to inquire about his health. Jobs has survived pancreatic cancer.

“He has no plan to leave Apple,” Chief Financial Officer Peter Oppenheimer responded. “Steve’s health is a private matter.”

Cupertino, Calif.-based Apple earned $1.07 billion, or $1.19 per share, 11 cents ahead of Wall Street’s expectations, according to a Thomson Financial survey of analysts.

Revenue jumped 38 percent to $7.46 billion, ahead of analysts’ average view for $7.37 billion in sales.

Apple said it shipped more Macs in the quarter than ever before — 2.5 million, up 41 percent from a year ago, with desktop shipments growing faster than laptops. Apple also said iPod sales jumped 12 percent.

Oppenheimer said sales from U.S. stores rose faster than revenue overall, despite economic turmoil wrought by the domestic mortgage and credit crises.

He also teased forthcoming “state of the art new products that our competitors just aren’t going to be able to match,” but told investors he could not give any details.

“The quarter was a home run,” Oppenheimer said in an interview earlier Monday, but at first glance, investors disagreed. Shares sank $10.40, or 6.3 percent, to $155.89 in after-hours trading, after gaining $1.34 to close at $166.29.

Investors might have been spooked by Apple’s conservative outlook for the current fourth quarter, though the company often shoots low. Apple predicted profit of $1 per share on $7.8 billion in sales, well short of Wall Street’s expectations. Analysts had been expecting Apple’s fourth-quarter earnings to reach $1.24 per share on $8.32 billion in sales.

They may also have been eyeing a drop in Apple’s gross margin, which fell to 34.8 percent from 36.9 percent in the year-ago quarter. During the call, Apple noted that the margin was actually better than expected, helped in part by better commodity prices and stronger sales of higher-margin products.

SEATTLE – Starbucks Corp. said Tuesday it will close 600 company-operated stores in the next year, up dramatically from its previous plan for 100 closures, a sign the coffee shop operator continues to struggle with the faltering U.S. economy and its own rapid expansion.

Seventy percent of the stores slated for closure had opened after the start of 2006, the company said in a statement.

To put it another way, Starbucks is closing 19 percent of all U.S. company-operated stores that opened in the last two years, Chief Financial Officer Pete Bocian said during a conference call.

About 12,000 workers, or 7 percent of Starbucks’ global work force, will be affected by the closings, which are expected to take place between late July and the middle of 2009, spokeswoman Valerie O’Neil said.

O’Neil said most employees will be moved to nearby stores, but she did not know exactly how many jobs will be lost. Starbucks estimated $8 million in severance costs.

In total, the company forecast up to $348 million in charges related to the closures, $200 million to be booked in the fiscal third quarter ended June 30. Starbucks reports third-quarter results at the end of July.

The 500 additional stores set to be closed had been on an internal watch list for some time. They were not profitable, not expected to be profitable in the foreseeable future, and the “vast majority” had been opened near an existing company-operated Starbucks, Bocian said.

Some analysts had wondered whether Starbucks’ explosive growth in the U.S. would come back to haunt it as the market became saturated.

But before Tuesday, the company avoided acknowledging that saturation was an issue, and pinned weak financial results and adjustments to new store openings on the economy.

During the call, Bocian said that between 25 and 30 percent of a Starbucks shop’s revenue is cannibalized when a new store opens nearby, and that the closures should help return some of that revenue to the remaining stores.

Bocian said there aren’t a material number of stores left on the watch list, but that the company will hold remaining stores to the same standards.

Starbucks still plans to open new stores in fiscal 2009, but on Tuesday it cut that number in half to fewer than 200. The company did not adjust its plan to open fewer than 400 stores in 2010 and 2011.

“We believe we still have opportunities to open new locations with strong returns on capital,” Bocian said.

During the conference call, the CFO echoed concerns about the economy expressed by Chief Executive Howard Schultz in May, when the company attributed a 28 percent drop in profit to less traffic from U.S. consumers who were feeling the pinch of higher food and gas prices.

At the end of March, there were 16,226 Starbucks stores around the world. The company operates 7,257 of those stores in the U.S. and 1,867 abroad; the remaining 7,102 locations are run by partners who license the Starbucks brand.

Shares of Seattle-based Starbucks jumped 78 cents, or 5 percent, to $16.40 in after-hours trading after losing 12 cents to close at $15.62.

Gates

REDMOND, Wash. – On his final full day at Microsoft Corp., Bill Gates went on stage to reminisce with his longtime friend Steve Ballmer, and neither man could hold back tears as Ballmer handed Gates a large scrapbook as a farewell present.

Gates, who is stepping back to focus on his philanthropy, sat with CEO Ballmer in a Microsoft conference room and meandered through moments in Microsoft’s history. They stopped to get in a few good digs at IBM Corp., whose first personal computers were loaded with Microsoft’s DOS operating system before IBM adopted its own operating software and their relations strained.

“They went off with OS 2, we were left with good old Windows, and sure enough the David versus Goliath story came out with the right ending,” said Gates, eliciting laughter from the crowd of 830 Microsoft employees.

Gates, who founded Microsoft with Paul Allen in 1975, admitted that Microsoft has faltered along the way, and certainly isn’t perfect today.

“When we miss a big change, when we don’t get great people on it, that is the most dangerous thing for us,” Gates said. “It has happened many times. It’s OK, but the less the better.”

Gates, who will remain Microsoft’s chairman on a part-time basis, said he would still take on Microsoft projects picked by Ballmer and two other executives who have assumed most of his day-to-day tasks, Craig Mundie and Ray Ozzie.

One of those will be Web search, where Microsoft lags far behind Google Inc. and Yahoo Inc. in market share. With an acquisition of Yahoo now again apparently off the table, Gates threw his weight Friday behind a strategy of assembling a team of smart people and combining Microsoft’s own breakthroughs with what competitors are already doing.

“Search is the place where people probably really think, will Microsoft ever do anything there? We’ll be the very best,” Gates said. “That is in full motion.”

Gates also reinforced his intent to stay out of the company’s day-to-day affairs.

“I do think with my not being here full time there is some opportunity that people will really step up. There’s somewhat of a vacuum created there,” he said. “I have got to get out of the way, and let that new thing step in there.”

The most poignant moments came when Gates dropped out of technology prognostication mode — the coming switch to using ink, voice and gesture to interact with computers, for example — and shared candid and sometimes self-effacing banter about his early days with buddy Ballmer.

Freshman year at Harvard, Gates said, “I was in this dorm up at Radcliffe, where the anti-social math types hung out. I belonged there.”

He was introduced to fellow freshman Ballmer by a mutual friend. On their first outing together, they went to the movies to see an unlikely back-to-back showing of “Singing in the Rain” and “A Clockwork Orange.”

Ballmer, who has famously danced and jumped around stage at conferences, described a similarly silly and uninhibited Gates that evening.

“So we come back from the movie, we’re kind of dancing, we’re both kind of playing Gene Kelly, and some guy wrestles me to the ground in our dorm,” Ballmer said. It fell to Gates, who hardly qualifies as burly, to fend off the fellow student.

Ballmer also gave Gates grief about leaving for vacation in the middle of Ballmer’s job interview, and forgetting to pack a tie for their first meeting with IBM.

Gates, playing up his absent-minded professor side, cracked up the employees in attendance — they won a seat at the event in a lottery — when he said Microsoft was so central in his life that he often found himself driving to its campus even when he was supposed to be headed somewhere else, like delivering his kids to school.

When it came time for Ballmer to make his public farewell to Gates, he joked about the inevitable inadequacy of a thank-you gift, and presented him with a large scrapbook embossed with Gates’ signature. Then, the tears came.

“We’ve been given an enormous, enormous opportunity. And Bill gave us that opportunity,” Ballmer said, his face reddening. “I want to thank Bill for that.”

As the employees rose to their feet, Gates swiped at tears of his own.

In this photo provided by Microsoft, Microsoft CEO Steve Ballmer, left, talks to employees as chairman Bill Gates looks on, during a farewell event celebrating Gates' years at Microsoft, on his last day as a full-time employee, at company headquarters in Redmond, Wash., Friday.

REDMOND, Wash. – On his final full day at Microsoft Corp., Bill Gates went on stage to reminisce with his longtime friend Steve Ballmer, and neither man could hold back tears as Ballmer handed Gates a large scrapbook as a farewell present.

Gates, who is stepping back to focus on his philanthropy, sat with CEO Ballmer in a Microsoft conference room and meandered through moments in Microsoft’s history. They stopped to get in a few good digs at IBM Corp., whose first personal computers were loaded with Microsoft’s DOS operating system before IBM adopted its own operating software and their relations strained.

“They went off with OS 2, we were left with good old Windows, and sure enough the David versus Goliath story came out with the right ending,” said Gates, eliciting laughter from the crowd of 830 Microsoft employees.

Gates, who founded Microsoft with Paul Allen in 1975, admitted that Microsoft has faltered along the way, and certainly isn’t perfect today.

“When we miss a big change, when we don’t get great people on it, that is the most dangerous thing for us,” Gates said. “It has happened many times. It’s OK, but the less the better.”

Gates, who will remain Microsoft’s chairman on a part-time basis, said he would still take on Microsoft projects picked by Ballmer and two other executives who have assumed most of his day-to-day tasks, Craig Mundie and Ray Ozzie.

One of those will be Web search, where Microsoft lags far behind Google Inc. and Yahoo Inc. in market share. With an acquisition of Yahoo now again apparently off the table, Gates threw his weight Friday behind a strategy of assembling a team of smart people and combining Microsoft’s own breakthroughs with what competitors are already doing.

“Search is the place where people probably really think, will Microsoft ever do anything there? We’ll be the very best,” Gates said. “That is in full motion.”

Gates also reinforced his intent to stay out of the company’s day-to-day affairs.

“I do think with my not being here full time there is some opportunity that people will really step up. There’s somewhat of a vacuum created there,” he said. “I have got to get out of the way, and let that new thing step in there.”

The most poignant moments came when Gates dropped out of technology prognostication mode — the coming switch to using ink, voice and gesture to interact with computers, for example — and shared candid and sometimes self-effacing banter about his early days with buddy Ballmer.

Freshman year at Harvard, Gates said, “I was in this dorm up at Radcliffe, where the anti-social math types hung out. I belonged there.”

He was introduced to fellow freshman Ballmer by a mutual friend. On their first date, they went to the movies to see an unlikely back-to-back showing of “Singing in the Rain” and “A Clockwork Orange.”

Ballmer, who has famously danced and jumped around stage at conferences, described a similarly silly and uninhibited Gates that evening.

“So we come back from the movie, we’re kind of dancing, we’re both kind of playing Gene Kelly, and some guy wrestles me to the ground in our dorm,” Ballmer said. It fell to Gates, who hardly qualifies as burly, to fend off the fellow student.

Ballmer also gave Gates grief about leaving for vacation in the middle of Ballmer’s job interview, and forgetting to pack a tie for their first meeting with IBM.

Gates, playing up his absent-minded professor side, cracked up the employees in attendance — they won a seat at the event in a lottery — when he said Microsoft was so central in his life that he often found himself driving to its campus even when he was supposed to be headed somewhere else, like delivering his kids to school.

When it came time for Ballmer to make his public farewell to Gates, he joked about the inevitable inadequacy of a thank-you gift, and presented him with a large scrapbook embossed with Gates’ signature. Then, the tears came.

“We’ve been given an enormous, enormous opportunity. And Bill gave us that opportunity,” Ballmer said, his face reddening. “I want to thank Bill for that.”

As the employees rose to their feet, Gates swiped at tears of his own.

REDMOND, Wash. – Microsoft Corp. is offering cash rebates when people make purchases after using its search engine as the software maker begins to reveal how it plans to take on Google Inc. following the failure of its $47.5 billion bid for Yahoo.

Analysts and investors have been eagerly awaiting details about “Plan C” after Microsoft acknowledged that its Plan A of going solo was troubled but also withdrew its Plan B — acquiring Yahoo — because Yahoo executives sought more money.

Under the cash program revealed Wednesday, Web shoppers who sign up for an account and buy items found using Microsoft’s Live Search cashback site will receive a percentage of the purchase price deposited into their account.

When the total reaches $5, the shoppers can redeem their “cold, hard cash” via eBay Inc.’s PayPal. Microsoft said the rebates are funded with a portion of the money it collects from advertisers.

So far, more than 700 merchants, including Home Depot and Zappos.com, have listed products on the site.

Microsoft Chairman Bill Gates said in a speech that he believes the cashback program will boost the number of people using Live Search for shopping, at least. More grandly, he predicted it will change the economics of the search advertising market as advertisers shift from paying for click on links to paying for concrete actions, like completing a purchase.

The online advertising market overall has begun to move in that direction with advertisers under increased pressure to deliver results from their spending. Historically, search ads that have made companies like Google Inc. successful are typically sold by the click, which itself was seen as revolutionary compared with the traditional method of paying for ads by the number of viewers.

“It’s exciting. I think years from now you may look back and say, ‘Wow, search started to get a fair bit more competitive,’ and you can look back to that announcement,” Gates said.

“By giving money directly back to the consumer, Microsoft hopes to change the balance of power,” wrote IDC research analysts Caroline Dangson and Susan Feldman. They predicted that if Microsoft’s effort is successful, advertisers will sink the bulk of their advertising into such rebate programs.

This isn’t the first time Microsoft has resorted to buying search traffic. The software maker has tried offering large companies software and services credits for every employee who used Microsoft’s search engine at work.

Microsoft also developed a collection of free games last year that triggered a Web search with every play. Players could rack up points and exchange them for prizes, including software, Xbox consoles and Zune media players.

The tactic — more common among fledgling or niche search engines trying to make a splash — may not make much of a difference, if the past efforts are any indication. The corporate bounty program remains in pilot phase and the games only temporarily boosted its search share.

Danny Sullivan, editor of the search news site SearchEngineLand.com, said in a recent interview that he recommended Microsoft pay people to use Live Search — as an April Fool’s joke. Microsoft, however, is under very serious pressure to come up with a way to boost search market share.

In the absence of a coherent Plan C, Microsoft is said to have revived talks with Yahoo Inc. about a more limited search and advertising deal, but executives barely mentioned the Y-word during the two-day annual conference for advertisers and ad agencies at its headquarters in Redmond.

Gates’ closing keynote left the impression that improving its own search engine over the coming years is, in fact, its Plan C. Live Search cashback is a “good illustration of what we’ll be doing,” Gates said. “We’re about having the best search, the best results … but also, some of these innovations in the business model will help excite that and drive that.”

Also on Wednesday, Kevin Johnson, president of Microsoft’s platforms and services division, said Microsoft does not currently have its eye on buying any single company, and that it plans to build its digital advertising business in-house, helped by past acquisitions.

The Web site describing the Live Search cashback program is up and details were reported Wednesday in the Seattle Post-Intelligencer and The Wall Street Journal.

SEATTLE – Washington Mutual Inc., the country’s largest savings and loan, is close to landing a $5 billion cash infusion from private equity group TPG and other investors, a person familiar with the matter said Monday.

Wall Street cheered news that WaMu may join a growing list of battered financial institutions that have secured much-needed cash since the credit crisis began last summer. Shares jumped 32 percent, or $3.26, to $13.43 in midday trading.

The investment would give TPG, formerly Texas Pacific Group, a mix of common and preferred stock, totaling less than 25 percent of WaMu’s outstanding shares, according to the person, who asked not to be named because the deal has not been announced. TPG would also get a seat on WaMu’s board.

Other investors include existing WaMu institutional shareholders and other private equity groups, the person said.

The Wall Street Journal reported the deal in Monday editions.

Shares of the Seattle-based thrift have come under heavy fire as problems in the housing and credit markets have deepened. WaMu’s stock shed nearly 70 percent in 2007, and the sinking value of WaMu’s mortgage portfolio and soaring loan-loss provisions — the amount it socks away to cover bad loans — led to a $1.87 billion fourth-quarter loss.

If the deal goes through, WaMu will be one of the first retail banks to accept billions in outside funding, with hopes of distancing itself from the subprime crisis. So far, it has been mostly investment banks holding huge positions in bad mortgages that are roaming hat in hand.

Merrill Lynch & Co. announced in January it would take $6.6 billion from three foreign investment funds. Morgan Stanley sold a portion of itself to China Investment Corp., an investment arm of the Chinese government, for $5 billion in December. And in November, Citigroup Inc. took $7.5 billion from the Abu Dhabi Investment Authority in exchange for up to 4.9 percent of its equity.

Banks are also issuing new shares to boost capital. Last week, Lehman Brothers Holdings Inc. raised $4 billion in a stock offering and Swiss bank UBS AG announced plans to seek $15.1 billion.

Executives have said fallout from the mortgage crisis would continue to slam the company’s finances through 2008, and said up to $8 billion more will be needed this year to cover future loan losses.

As of Friday, WaMu’s stock had fallen another 25 percent in 2008. Cuts to its credit ratings erased a brief moment of investor optimism sparked by a positive comments from Chief Executive Kerry Killinger at a Wall Street conference in January.

At the time, Killinger said WaMu had enough cash and access to loans to get through the fiscal year.

Late last year, the thrift dismantled its subprime mortgage operation, closed more than half of its home loan centers and sales offices, shut down call centers and eliminated more than 3,000 jobs. It also shuttered WaMu Capital Corp. and stopped selling mortgage-backed securities.

The company slashed its dividend and raised $2.9 billion in a December stock offering. At the time, analysts said they did not believe that was enough to carry the thrift through the fiscal year.

Killinger’s $14.4 million in compensation last year, despite the huge losses and dividend cuts, has angered some shareholders.

CtW Investment Group, a part of the Change to Win federation of unions that advocates on behalf of workers’ investments in pension funds, has asked shareholders to oppose the re-election of two WaMu board members at the annual shareholder meeting on April 15.

The two, Mary Pugh, chair of WaMu’s finance committee, and James Stever, chair of its human resources committee, “bear responsibility for Washington Mutual’s failure to recognize and act in a timely manner on the risks to shareholder value presented by the housing bubble, and for attempting to insulate executive bonuses from the consequences of this risk management failure.”

Other proxy advisers have joined CtW’s campaign, including RiskMetrics Group’s ISS Governance Services, Glass Lewis & Co. and Egan Jones Proxy Services.

SEATTLE – Microsoft Corp. must pay more than $140 million for infringing on software patents owned by a Michigan-based technology company, a federal appeals court has ruled.

Z4 Technologies Inc. sued Microsoft and Autodesk Inc., maker of drafting software, in 2004, claiming the technology they used to activate newly installed software and deter piracy infringed on patents created and owned by David Colvin, the owner of privately held z4.

Commerce Township, Mich.-based z4 argued that Microsoft’s Windows XP and Office 2003 suite of productivity software used its patented method of asking computer users to supply two passwords, or authorization codes, before they could fully use new software.

The technology in question also can be used to deactivate software.

In April 2006, a federal jury in East Texas ordered Microsoft to pay $115 million to z4, plus attorney fees and $25 million for willful patent infringement. Microsoft, which had argued that the patents were invalid, appealed the decision.

The jury also ordered Autodesk to pay $18 million to z4.

On Nov. 16, the U.S. Court of Appeals for the Federal Circuit, which considers all patent appeals, upheld the lower court’s decision in its entirety.

Microsoft spokesman David Bowermaster said Windows Vista and Office 2007 are not affected by the appeals court decision. Bowermaster also said the company does not have to make any technical changes to Windows XP or Office 2003.