Microsoft wants to buy Yahoo. Yahoo is trying to avoid being bought — at least for Microsoft’s initial $44 billion offer. And both companies are trying to find a winning strategy in the increasingly important business of Internet video.“Video consumption is becoming part of most users’ Internet experience,” says Karin Gilford, VP of entertainment at Yahoo. “The question is, what do you do to differentiate yourself?” Yahoo and Microsoft have both been struggling to answer that question since the February 2005 launch of YouTube. Since then, video viewing on the Net has become an addiction for some: The top 20% of diehard downloaders watch an average of 14 hours a month, according to research firms comScore and Media Contacts. But most of that viewing is happening at YouTube and MySpace, which are controlled by Google and Fox Interactive Media, respectively. (Google and YouTube deliver about 34% of all videos viewed online, according to comScore; Fox and MySpace deliver 6%.) Attracting an audience for video is crucial to both Microsoft and Yahoo, whether the companies remain single or get hitched. Video, says Yahoo veep Cheryl Kellond, “is the fastest growing format in media on the Web, from a consumer and advertising standpoint. We expect it to be about 20% of the display advertising market by 2010.” Kellond says Yahoo is already selling video ads to “over 75% of the top TV advertisers.” Both Yahoo and Microsoft have taken the buffet approach to online video, offering a mix of original content, user-generated clips, movie trailers and content licensed from entertainment companies. Most of Yahoo’s original video content is produced at the company’s studios in Santa Monica and New York. (“All the shows are under five minutes, and the sweet spot is around two minutes,” says Gilford.) Daily shows like “The 9″ try to capture the day’s watercooler buzz in a “Talk Soup” vein. Gilford says Yahoo doesn’t have any plans to develop scripted comedy or drama series, though she wouldn’t rule it out. At Microsoft’s MSN Video site, “our biggest traffic continues to be news-related and celebrity-related video,” writes Reed Price, managing editor of entertainment and video, in an e-mail. The MSN Video series “The Big Debate” asks users to vote on celebs’ coolness; Price says the show is viewed more than 2 million times a week. Price is also hopeful the 2008 Olympics, which MSN will present online in partnership with NBC, will goose traffic. In February, Yahoo paid $160 million to buy Maven Networks, a startup that helps media companies deliver video online and integrate advertising into it. But both Yahoo and Microsoft are still experimenting with advertising formats that will produce the most revenue without alienating viewers. Most common are 15- or 30- second ads that play before a requested video. Yahoo has also started selling a new format that flashes a three-second video ad that “gets a message in front of the user,” Kellond says, before shrinking into a small banner atop the video window. “I expect to see a whole new influx of advertisers jumping into the medium and experimenting with it to understand the results,” Kellond says. If Yahoo’s monthly video audience (36 million viewers) were combined with Microsoft’s (20 million), it would make the conjoined company No. 2 behind Google, according to the latest comScore data, which covers January 2008. The new company, dubbed MicroHoo by Silicon Valley wags, would boast about 56 million unique viewers per month, compared with Fox/MySpace’s 53 million. “The whole Yahoo-Microsoft deal itself is predicated on creating scale, which works across content-aggregation and advertising,” says Will Richmond of the consulting firm Broadband Directions. “But they’ll face pretty significant integration challenges if (the acquisition) goes through.” Already, some execs who’ve tried to cut deals with the companies say the process can be ponderous. “We met with Yahoo early on,” says Rob Barnett, founder of MyDamnChannel.com and a former MTV exec. “We thought we were moving quickly toward a deal, but it slowed with a lot of the corporate shuffling there.” Barnett eventually cut distribution deals with YouTube and MySpace instead. Ultimately, whether Yahoo and Microsoft get together or not, they’ll find themselves fighting for viewers against new players like MyDamnChannel, Vuguru and 60Frames Entertainment, as well as newly energized established players like NBC Universal and Fox, which took the wraps off their joint video site Hulu.com earlier this month.