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Yahoo! Snipes at Microsoft

The CEO says Redmond had 'no chance' at a search partnership.

Yahoo!

(YHOO)

chief Terry Semel is staying the course even as the most popular site on the Web faces heightened competition from

Google

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(GOOG) - Get Report

and

Microsoft

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.

During a breakfast meeting in New York Thursday, Semel emphasized that Yahoo!'s efforts in search have come a long way in a short time. He also argued that Yahoo! had no choice but to provide information to Chinese authorities that some critics say has led to the jailing of dissidents.

Semel used the talk, which was moderated by

New Yorker

magazine writer Ken Auletta, as a chance to make a few digs at Microsoft's plans to spend huge amounts of money to improve its struggling MSN unit. In addition, he argued that Yahoo! continues to enjoy a competitive advantage over its rivals because of its huge user base.

Though Yahoo! lags behind Google by a wide margin in search, MSN trails them both. The software giant wanted to partner with Yahoo!, something that Semel likened to being asked to give up an arm.

"My impartial advice was to say that you have no chance," he says.

Microsoft ended its relationship with Yahoo! to run its search engine and struck out on its own. The Redmond, Wash., company recently shocked Wall Street when it announced plans to spend $2 billion in fiscal year 2007 to expand beyond the desktop.

The notion of Microsoft buying Yahoo! "never came up," Semel says. Microsoft is reportedly considering such as an acquisition, though Semel cautioned that his employees might not like being under the control of the world's largest software company.

Yahoo! has questioned market research data that shows it losing market share to Google, which has concerned investors. The company entered the search business in 2003 with the $1.6 billion acquisition of Overture, which, at the time, was a sizable bet.

"If we had failed, we would have had serious problems," Semel says.

On China, Semel emphasized that the company is mindful of the worries about dissidents. Yahoo! routinely provides information to governments around the world who subpoena it. The company often doesn't know the identity of particular users.

Yahoo!'s original-content initiatives also came up during the discussion. Earlier this year, Yahoo! scaled back the plans of Lloyd Braun, the former ABC television executive, to develop original video programming because the offerings were too similar to TV shows, Semel says. That change reportedly caused a rift between Semel and Braun that has since been resolved.

"Why should Yahoo! do television?" he said. "We don't have aspirations to have 2,000 creative people working for Yahoo!."

Shares of Yahoo! fell 22 cents to $31.87.