Now we know it wasn’t just a rumor all these months. Microsoft (MSFT) has been seriously thinking about swallowing up Yahoo (YHOO) since way back in 2006. In what would be by far its largest acquisition ever, the software behemoth Friday morning abruptly offered $44.6 billion in cash and stock to absorb the Internet’s Number 2 brand and all that goes with it. The offer - made when Yahoo’s share price had reached a two-year low - will be hard for Yahoo’s board to resist because the company’s financial outlook doesn’t instill much confidence. Luckily for Microsoft, it is probably paying half what it would’ve had to shell out a year ago, which is the main reason we’re seeing it happen now.

Still this will be a new experience for Microsoft and will bear watching. Back in the early ’90s, the last time Microsoft tried to acquire a household name - Intuit Corp., the maker of Quicken and Turbo Tax personal financial management software - the deal got shot down by government regulators because it would have effectively snuffed out competition. This time the competitive landscape includes Google (GOOG), the greatest high-tech sensation since, well, Microsoft. If anything, the combination of Microsoft and Yahoo will likely enhance competition for Web services and online advertising placement, so don’t look for the Feds to throw up a roadblock.

The end of MSN?

If the deal goes through, Microsoft will absorb a well-known brand as well as many tens of millions of users in one fell swoop. (Granted, most of them are already Microsoft customers by virtue of using PCs.) It’s sort of like when Hewlett Packard acquired Compaq. Most likely one of the brands will have to go, and one would think that in this case Microsoft would have to jettison its MSN Network, which has always been an also-ran even as other Internet brands rose from nowhere.

Yet the Yahoo that Microsoft is acquiring is in many ways a shell of what it once was. Not only has Google redefined the business of Internet search and ad-supported web services, it has accumulated financial resources that the slower-growing Yahoo could only dream of. And in this day and age, competitive advantage on the Internet depends as much on how much computer capacity you can amass as it does on new website bells and whistles. Microsoft and Google are locked in the equivalent of an “arms race” building up computing and storage capacity to accommodate more and more of the world’s web-based computing activities. Yahoo simply couldn’t compete on this scale all alone. Indeed Yahoo needs Microsoft’s protection and resources simply to survive as a brand, while Microsoft needs Yahoo’s Web-savvy to help it keep up with the ever quickening metabolism of high-tech.

Some grouchier geeks than me predict the transaction will turn out to be the equivalent of Time-Warner’s disastrous “merger” with AOL. But it really is a deal of a different color. Microsoft already participates in many of the businesses that Yahoo is in, while AOL broadened Time-Warner (TWX). And given how rudderless Yahoo appears to be, there’s absolutely no chance it would take over the management of Microsoft, much less displace the stock symbol as AOL did to TWX. Finally, Microsoft is buying when Yahoo is at its nadir rather than when it was ridiculously overvalued. Besides, when you think about it, what other company might make Microsoft’s short list to buy to stay in the game with Google. AOL? Spare me.

Most of what you read about this deal talks about the extraordinary $15 billion valuation it implies for this latest Internet/Web 2.0 sensation. But there have to be reasons beyond price and greed for Facebook’s decision to go with Microsoft (MSFT).

An important one might be cultural, in the technological sense. Facebook has aspirations of becoming a software “platform” for web applications. Microsoft, the purveyor of Windows, knows the software platform business model inside and out, and knows just as well the technical and political imperatives for supporting independent application developers. That had to be a factor if Facebook is truly serious about its stated ambition. Google (GOOG) talks a good game, but it doesn’t really have much experience supporting independent application software developers.

As a Facebook user myself, I know that the applications are a big part of the attraction of the site, and certainly make it a more alluring advertising medium than a simple, social network. Because it is so versatile, it’s the kind of site that people spend lots of time with, and it refreshes constantly, which makes it an especially rich target for new kinds of interactive advertising.

And don’t forget that Microsoft just recently introduced its new Unified Communications strategy, which will integrate in software the phone, conferencing, email and IM communications that previously have been handled by separate applications and infrastructures in a corporate network. Think about it. What is a typical company today, but a specialized kind of social network? There is tremendous potential for a company like Microsoft, which already provides the productivity tools that most corporate workers use, to try to merge useful aspects of social networks into tools for workgroups and into new kinds of HR applications for controlled social environments.

And the new “unified directories” that Unified Communications strategies propose which, minute-by-minute, are able to recommend the best way to contact someone among the many means available, function a lot like a social network. Addresses and phone numbers will become of secondary importance, because the unified directory will know who’s available and by what means. Implement that in a “corporate” social network that includes both employees and customers, and you can eliminate a lot of wasted time and effort in that most basic of business activities — communicating.

In other words, there is enormous potential for synergies between Facebook’s so-called “social graph” and Microsoft’s ubiquitous involvement in the everyday activities of most office workers; much more so than Facebook would ever have found with Google, which looks at the social network primarily as one more billboard for its advertising.

Oh, and as long as we’re talking about cultural affinities, there is also that Harvard drop-out connection. . . .

Do you think Google (GOOG) is overstepping its bounds in its attempts to influence the FCC’s radio spectrum auction, as Brent Schlender argues in today’s column?

Did you ever sit down and add up how much you shell out in subscription fees and monthly service bills to maintain your digital lifestyle? Recently, I did just that for a column I was writing for the latest issue of Fortune and after tallying it all up I was, to quote myself, “shocked and awed. . . .stupefied. . . . then queasy.” You’ll have to read the column to find out what that number is, but the good news is that CNNMoney.com (which includes fortune.com) is free.

Anybody else out there getting weary of paying a monthly bill for what seems like every little thing? Just wondering.

The current state of the technologies and business models for getting Hollywood movies onto your TV set at home “on demand” via the Internet is sort of like the weather in Kansas. Wait another day and things will be completely different. Take for instance Apple (AAPL), the one company beyond the cable providers that seems to have gotten some traction in figuring out this inevitable business.

Yesterday, and I mean that figuratively, Apple’s strategy was all about selling movies much like they sell music, rock videos, and TV shows on the iTunes Music Store. But the selection of movies Apple could sell was limited, and the price was pretty steep (up to $14.99) given the quality of the product you download — less-than-DVD resolution, no menus or ancillary features, no multiple languages, and no closed captions or subtitles. Part of the reason for selling stripped down versions is that the bandwidth of existing broadband services isn’t fat enough to efficiently deliver a limitless quantity of digital bits. But also it’s as if the studios were afraid that selling full-featured, full-quality downloads would cannibalize their very lucrative existing DVD sales and further encourage outright piracy, much like how the music industry business model has been discombobulated by downloads and the sharing of “ripped” music. It’s a legitimate fear.

So today, according to published reports, Apple is trying to persuade Hollywood to experiment with renting movies on-line, sort of like a virtual Blockbuster (BBI) or Netflix (NFLX). For $2.99 a pop. It’s more than kind of interesting, because in the past, Steve Jobs has pooh-poohed the notion of renting digital content via a subscription service. He has always preferred the idea of simply selling content outright so that there are no strings attached.For now renting movies from Apple would still be a somewhat cumbersome process, requiring lots of digital storage space at home and time-stamp and locking technologies to limit the life and usability of the films you download. Apple TV, the company’s half-baked first stab at bringing digital media to the living room, still needs some work before it is the ideal online video delivery mechanism, and, of course, the whole concept depends on cable and DSL companies providing enough bandwidth to create an aesthetic experience that equals popping a disc in the DVD or Blu-Ray or HD-DVD player.

But still, this is big news. The rental of videos is a proven business model — to wit Blockbuster and Netflix and the cable carriers’ own video-on-demand services. (Netflix already offers a limited video download rental service, only for Windows PCs.) Besides, practically speaking, most people get enough out of one viewing of a movie. If you aren’t a collector or an obsessive, do you really need to own your own copy of a movie? It just makes sense to offer rentals. And it would seem to be good for Hollywood, too.

Of course, we’ll have to wait and see if Hollywood will buy into this, because, with the exception of Disney, Apple hasn’t had much whole-hearted support even for selling movie downloads online. The movie studios, arguably, are run by more sophisticated business people than those who run the music companies. Their products are more complex to finance and make and market and distribute in a timely fashion. And they’ve been pretty adept so far at finding ways to benefit from exploiting subsequent new recording formats sell people new copies of what they already own. These people aren’t dumb.

But once everything is available to be streamed or downloaded in all its HD glory, that will be the last format change for a long, long time. The studios know this and don’t want to screw up the transition as the music industry has. They also know that by every other measure, this should be the heyday for both industries, with hundreds of millions of new people around the world each year becoming prosperous enough to afford digital entertainment as the economies of countries like China and India boom. If they botch it, it will have been their own fault. Allowing Apple to help them make renting movies online a routine process would be a giant click in the right direction.

Yesterday I noted that Bill Gates was giving the commencement address at Harvard today, and a transcript of that speech is now available here. A video feed of the event also will be available from the same page, but at this moment isn’t up yet.

I haven’t even had time to read the speech or view the video myself, but my colleagues at Time worked with Gates to prepare a couple of special stories related to the event. The founder of Microsoft (MSFT), who had been knighted by Queen Elizabeth in 2005, finally gets to claim he has that Harvard degree.

Here’s something to watch for today (that’s Thursday, June 7). Bill Gates, perhaps the world’s most famous Harvard dropout — and certainly the richest — will be the principal speaker at the afternoon exercises of Harvard’s 356th Commencement. Over the years the Microsoft (MSFT) founder and his wife have given millions of dollars in gifts, campus buildings, and grants to his almost-alma-mater, and now he’ll have the chance to give a fresh crop of graduates a piece of his mind.

It will be interesting to compare what Bill tells the Harvard grads with the avuncular advice offered by Steve Jobs, another famous dropout, when he addressed Stanford grads in June of 2005. Will it be the commencement speech equivalent of one of those Mac vs. PC ads?

Likely not. The biggest thing in Gates’s life these days isn’t a business rivalry with Jobs or the Google Boys; it’s the Bill and Melinda Gates Foundation. With an endowment of $30 billion and the promise of nearly that much more gradually coming in as Warren Buffett liquidates his Berkshire-Hathaway (BRK.A, BRK.B) fortune, Gates has the opportunity to change the world all over again. Talk about a second act.

Next year, he plans to step aside from any operating involvement in Microsoft and focus his attention on the foundation, so the Harvard grads are catching Gates at a pivotal moment. Sort of like the time he decided to go ahead and drop out and start a company, back in 1975. I’m sure his comments will be both heartfelt and enlightening.

June this year seems loaded with symbolic anniversaries. Paul McCartney turns 65 and finally can say he has outlived his cutest song. “Sgt. Pepper’s Lonely Hearts Club Band,” the Beatles’ album that Rolling Stone calls the greatest of all time, was released 40 years ago last Friday, and still sells millions of copies a year.

And today marks the 30th birthday of two unforgettable tech icons–the Apple II , the world’s first million-seller computer, which began shipping on June 5, 1977; and the first appearance on a product of the winsome, rainbow-colored Apple logo (AAPL).

Apple would go on to sell nearly 6 million of the machines –which were also the first consumer-oriented computers to sport color graphics — effectively inventing the PC industry. Another young company called Microsoft supplied the most popular programming language for the device. So far ahead of the curve was Apple that it had the PC market practically to itself for more than four years, until IBM finally entered the fray with its monochromatic Personal Computer in August of 1981. Even then, it would be several years before the IBM PC could support color graphics.

As significant as the Apple II was, the distinctive Apple logo with its missing bite was a masterstroke of marketing design that was loaded with subtle symbolism. Previously, the company — which only had been in business for about 14 months and sold a much more rudimentary computer called the Apple 1 — used a logo that looked like it could grace the cover of a rock concept album, or perhaps the frontispiece of a 19th century history book. It was an engraving that showed Sir Isaac Newton sitting under the tree, with a glowing apple poised above his head. The marketing slogan that went with it was just as quaintly pretentious: “Newton…’A Mind Forever Voyaging Through Strange Seas of Thought…Alone.’

To his credit, Steve Jobs realized that Apple needed a flashier, more poignant and modern logo, so he asked the company’s publicist, the Regis McKenna group, to come up with a new one. A young artist named Rob Janov created the design that would become one of the world’s most recognized trademarks, once Jobs was finished fussing with it.

Now, of course, the rainbow colors are gone, but the floating silhouette in white hovers like a harvest moon as the backdrop to every Apple publicity event, and a steely gray version is the first thing that greets you when you turn on a Mac. It remains one of the most memorable logos since Coca-Cola’s stylized script.

Has it really been 30 years?

It’s all too easy to read too much into a deal, but still, you gotta wonder about Elevation Partners’ big investment in Palm (PALM). The $1.9 billion private equity firm ponied up $325 million to buy 25% of the maker of the Treo smart phone. But more interesting was the fact that Elevation partner Fred Anderson, the one-time chief financial officer and director of Apple (AAPL), and Jon Rubinstein, Apple’s former head of hardware engineering, will join Palm’s board as part of the deal.

Even more interesting is the timing — Elevation’s investment comes just a few weeks before the much hyped launch of Apple’s iPhone, a product that Steve Jobs is touting as the company’s most insanely great new product since the Macintosh. Elevation’s investment also comes just weeks after Anderson reached a settlement with the SEC over his alleged role in backdating stock options while still at Apple (AAPL). Anderson, who denied any wrongdoing, paid a fine, and also issued a vaguely antagonistic statement disputing Apple CEO Steve Jobs’s account of the options backdating. Clearly Anderson felt he had been thrown under the train.

Rubinstein, meanwhile, who was instrumental in developing the iMac, the PowerBook, the Power Macintosh, and the iPod, retired quietly a little over a year ago, on April Fools Day, 2006 — the 30th birthhday of Apple. Interestingly, about six months before that, he gave a rare interview to the Berliner Zeitung in which he threw water on the idea of converging a cellphone and an iPod media player into a single device — basically what is now the iPhone. “Is there a toaster that also knows how to brew coffee?” he asked. “There is no such combined device, because it would not make anything better than an individual toaster or coffee machine,” Rubinstein argued. “It works the same way with the iPod, the digital camera or mobile phone: it is important to have specialized devices.”

Strange words, considering that Apple’s iPod group was already working on what would become the iPhone. Stranger still, when you look back and see that Apple publicly announced Rubinstein’s upcoming “retirement” less than three weeks after that interview. I think you can safely surmise that Ruby, who had been with Jobs for more than 15 years at both NeXT and Apple, wasn’t on the same page with his boss.

And now we find both Anderson, who without a doubt is disgruntled by his treatment by Jobs, and Rubinstein, the mastermind of Apple’s hardware strategy, are both throwing in their lots with Palm, one of the companies most threatened by the iPhone. That’s like Roger Clemens and Derek Jeter retiring from the Yankees, and then turning around signing on with the Red Sox, just so they can torment their old teammates. Well, maybe that’s a slight exaggeration. Palm is more like the Kansas City Royals.

I’m not saying Anderson and Rubinstein are necessarily joining Palm just to help it try to torpedo the iPhone. Neither one is taking an operating role. But still, it feels like there has to be more to this deal than meets the eye.

On Wednesday during an appearance at the Wall Street Journal’s D 5: All Things Digital conference, Steve Ballmer, the CEO of Microsoft (MSFT), took the wraps off the company’s latest incarnation of the Windows PC. I’m talking about “Surface,” a table-top PC introduced this week that resembles more than anything one of those old sit-down Ms. PacMan video games that were the rage in bars 30 years ago. It’s another new “form-factor” that Microsoft’s skunkworks cooks up every few years or so in hopes of creating a new genre of Windows-based computer hardware — like the tablet computer around 2000, or more recently, the Origami project to define a handheld PC that is bigger than a smartphone, but half the size of a laptop. I haven’t seen very many of either of those out in the real world, but, well, let’s just say they are interesting ideas.

Surface is a user-interface marvel employing a horizontal touch screen about the size of a small desk, on which you use your hands to physically manipulate objects in much the same way that you use your fingers to navigate around Apple’s iPhone. You can mess around with a virtual stack of photos, or point with your finger to locations on a map to trigger pop up information, or use hand gestures to navigate through 3-d lists of just about anything. It’s fun to fool around with, especially if you like digital finger painting. Come to think of it, I think it would be a great addition to any kindergarten classroom. But, initially, at least, it’s targeted at the hospitality industry — more specifically hotel concierge desks and slot machine salons in casinos.

One of the demo applications was a moving, video jigsaw puzzle. Well, jigsaw is a bit of an overstatement–all the pieces are shaped like square tiles, but because the image is constantly changing it’s easy to lose track of what piece goes next to which. Consequently it is a clever and surprisingly challenging concept for a parlor game. And as everyone knows, Bill Gates loves to play parlor games. Especially bridge.

Seeing that puzzle stirred recollections of another bit of Gates lore that I came across while reporting a cover story for Fortune back in the mid-1990s. This was shortly after Bill got married to Melinda French, but before they had kids and moved into their rambling post-modern computerized mansion on Lake Washington — the one with the trampoline room. That house has always been off limits to reporters, but for this story we managed to arrange a photo shoot on a Sunday evening at his previous home, a more modest lakefront Colonial not far away.

The photographer and the Microsoft PR people and I arrived while Bill and Melinda were away at some fund raising event so we could scout out photo-shoot locations. While the house manager escorted us around, I noticed a couple of identical, partially assembled jigsaw puzzles on the breakfast bar. “What’s the purpose of those?” I asked. The house manager, a hip-looking guy with a Master’s degree whose duties included maintaining all the computer gear, and supervising maintenance and renovations, and managing the rest of the household staff, let out a little chuckle. “C’mon. Why are you laughing?” I asked.

“Take a wild guess,” he said, clearly not wanting to violate the privacy of his employers, but unable (or unwilling) to just change the subject. I thought about it for a minute, and then asked: “I know Bill’s a competitive guy, but do they race at making identical jigsaw puzzles? Aren’t you supposed to cooperate when you do that?” The house manager chuckled again, and then obliquely allowed that, yes they did race. “I think Melinda usually wins,” he added.