While macro economic developments dominate the headlines these days, there's high drama in the world of Web giants.

Yahoo, Tech Ticker's corporate parent, is in serious talks to acquire AOL, reportedly for as much as $10 billion. Henry Blodget reported yesterday the deal could be announced as soon as today, but later backtracked when a Time Warner spokesman denied a deal is "imminent". (Note, he didn't deny a deal is in the works.)

Given Yahoo's falling stock price, there's inordinate pressure on Yahoo's top executives to do something to stem the tide, no doubt including from board member Carl Icahn.

At this point, Microsoft CEO Steve Ballmer is looking like a winner for having walked away from Yahoo last spring, although the possibility of a new (and no doubt lower) bid cannot be discounted.

Meanwhile, Microsoft has been busy successfully lobbying the Justice Department to stop -- or at least modify -- the terms of Yahoo's ad outsourcing deal with Google.

The startup environment of the last few years has had a breathless excitement about fast growing Web 2.0 businesses that were poised to become the next Google. In other words, a startup that could become the next great advertising platform. But as the Valley battens down the hatches for what people are expecting to be a rough time for advertising, service and software based players with existing revenues are looking a little more sexy-- or at least secure.

That bodes well for Brightcove, an online video company that has raised a whopping $91 million in venture capital, and says its revenues are up more than 300% this year. Brightcove's chief executive Jeremy Allaire joined me from Boston to discuss why he believes online video will continue to grow, ad-based or not.

We all know about YouTube and NBC-News Corp owned Hulu, but Boston-based Brightcove may be the next most pedigreed online video company on the horizon. Videos running on the Brightcove platform reach some 135 million monthly uniques. So why haven't you heard of it? Because much like blogging software company Six Apart, Brightcove's value add is powering other consumer brands, not its own.

What Brightcove may lack in brand name, it makes up in business model. While YouTube and others try to figure out an ad model that doesn't disrupt the user experience, Brightcove charges companies for its hosted software and services, much like Salesforce.com. And on Tuesday, it finally unveiled a new suite of those services, aimed at extending its footprint and giving companies far more intuitive online video display, distribution and monetization tools. It's the culmination of a nine-month coding effort. Is it enough to keep Brightcove growing through the downturn?

Silicon Valley has spent much of 2008 watching other cities and sectors experience wrenching pain. Comparatively, we just weren’t feeling it here. And for a place that went through such a brutal economic reckoning eight years ago, that was almost more unsettling, invoking the fear that the anvil was going to drop any moment…

Well, it finally has. Yes, the credit crisis and recession have rippled out to the Valley—impacting our world in many ways:

• Public companies: Many public technology companies have the advantage of plenty of cash and little debt. But they have the disadvantage of Wall Street pressure to slash costs fast when revenues slow. Plus, sinking stocks hit the morale of employees especially hard, as much of their compensation is paid in stock.
  
  Innovation: Expect public companies to move slower and be less aggressive with new products.
  
  Employment: Expect hiring freezes at best, and thousands of layoffs. Hewlett-Packard has already announced cuts, associated with its EDS purchase, eBay announced a 10% reduction Monday, and Yahoo is widely expected to follow suit as soon as next month. Will Google—a company that’s over-hired in the view of many—follow suit?

• Startups: It seems the purse strings have officially tightened in the Valley, and everyone from Sequoia Capital to famed angel investor Ron Conway is telling their companies to raise as much as they can, hoard cash, and find a quick and dirty revenue model.
  
  Innovation: Parodoxically, it will improve, as most true advancements seem to happen in down markets. There are always entrepreneurs and investors willing to fund great new ideas.
  
  Employment: Many startups will fail. But this is part of the natural cycle of Silicon Valley, credit crisis or not.

• Venture Capital: Venture capital is really the only part of the Silicon Valley ecosystem that didn’t experience a shakeout after the 2000 crash. I think that’s about to change, as I wrote about in my BusinessWeek column today. Money managers kept pouring money into venture firms after the crash because it’s considered a long-term, high-return play. VC’s 10-year returns have handily outperformed other investments, thanks to the outrageous gains of 1999 and early 2000. Since then, though, there have only been two years of decent returns, from fourth quarter 2005 to fourth quarter 2007. And now that 1999 and 2000 are close to getting kicked out of the 10-year index— i.e. just when the industry really needs a couple good years — fortunes have fallen dramatically.
  
  The risk? Venture firms barely outperform the broader markets. Venture capital is a very slow moving, long-term business. This correction is still a few years off, and will take a few years to work through the cycle. So unlike ramifications of the credit crisis that hit public companies or startups, the immediate impact isn’t there. But make no mistake—when the lifeblood of the Valley is at risk, the impact will felt.

From All Things Digital, Oct. 8, 2008:

If Microsoft won't take another bite at Yahoo at these amazingly low prices, BoomTown is now thinking of making my own bid for the troubled Internet company.

Shares of the much-pummeled Yahoo dropped once again today–and not because of the overall market – but due to worries about its display advertising business. Its market cap is now just $19 billion.

This is, I think we can all agree, astonishing. But not in a good way.

Yahoo fell to a five-year low of $13.20, before rebounding–if you could call it that–to close this afternoon at $13.76, down 82 cents or 5.6 percent.

Why? Well, two analysts cut price targets, with one holding out the vain hope that Microsoft (MSFT) would rebid for Yahoo (YHOO).

"As Yahoo shares decline and Microsoft struggles in its online services business, it is increasingly likely Microsoft will make a new offer," said American Technology Research’s Rob Sanderson.

Sorry to burst your pretty balloon, Rob, but that’s not going to happen, according to my sources at Microsoft.

Instead, Microsoft plans to wait to see what happens in Yahoo’s merger talks with AOL, an online unit of Time Warner (TWX).

As I wrote:

Go to the jump for more.

Click here for more news from AllThingsD.

eBay answered mounting Wall Street concerns about its business by laying off 10% of its workforce and spending $1.34 billion on business to bolster non-core company growth. The soon-to-be acquired companies are Bill Me Later-- a tool for quickly giving online shoppers credit on purchases--and two Danish auction sites. eBay called the moves contrarian plays, and the market wasn't too thrilled.

Scott Kessler of Standard & Poor's Equity Research joined me from New York to talk about the announcements and what he wished eBay were announcing instead.

From ClusterStock, Oct. 6, 2008:

Worried about a protracted legal battle further wrecking the credit markets, banking system, and economy, the Feds have stepped into the fight for Wachovia. The solution? Citi and Wells Fargo may have to share it:

WSJ: Under the leading plan being discussed Sunday night, Citigroup and Wells Fargo would divvy up Wachovia's network of 3,346 branches along geographic lines, with Citigroup getting Wachovia's branches in the Northeast and mid-Atlantic regions and Wells Fargo taking those in the Southeast and California, according to people familiar with the talks. Wells Fargo would also take over Wachovia's asset-management and brokerage units.

Unlike Citigroup's original agreement to take over Wachovia's banking assets, in which the Federal Deposit Insurance Corp. agreed to shoulder potentially hundreds of billions of dollars in toxic loans, the plans being discussed Sunday night don't entail either buyer receiving financial assistance from the U.S. government, according to people briefed on the talks.

The talks ended late Sunday night with no resolution, but were expected to resume Monday morning, according to a person familiar with the matter.

Whatever. All we know is Wachovia CEO Bob Steel has played this thing (and Citi) brilliantly. A week ago, his company was minutes from failure. Now, he has two massive, outraged suitors fighting for the right to carry him off into the sunset.

With the credit squeeze tightening, start-ups in Silicon Valley (and elsewhere) are starting to feel the pinch, and dire predictions for the industry are circulating:

• Jason Calacanis recently predicted "50-80% of the venture-backed startups currently operating will shut down or go on life-support (i.e. 3-4 folks working on them) within the next 18 months."
• TechCrunch warns that start-ups who've failed to raise at least $25 million are at risk.
• "All startups are going to have to batten down the hatches, get leaner, and work to get profitable," says Fred Wilson.
• The New York Times reports: "High-tech entrepreneurs, investors and executives now believe the question is when, not if, the financial chaos will hurt the country's cradle of innovation."

Taking the other side of this doom trade is Howard Lindzon, partner at Knight's Bridge Capital and an early-stage investor in companies ranging from LifeLock to WallStrip and, more recently, ECHOage and StockTwits.

"I'm as bullish as ever on two kids with a laptop" and a great idea, Lindzon says, stressing he only invests in companies with a strong entrepreneur at the helm, a viable product and an existing revenue stream. (He declined to give a view on kids with two turntables and a microphone.)

That said, Lindzon clearly believe start-ups today need to be more judicious with their capital today, not only what's on hand but also how and when they raise it.  See the accompanying video for details.

Watching the Nasdaq drop the most points since May 2000, it's clear Silicon Valley isn't immune from the bank meltdown on Wall Street. Even the mighty Google and Apple weren't safe: Google fell more than 11% today to under 400 for the first time in two years and Apple fell nearly 18%.

There is plenty for tech investors to worry about:

-    The financial sector could slash IT budgets, impacting enterprise players like Oralce, IBM and Hewlett-Packard. At a minimum there are fewer banks to buy up software, hardware and services thanks to the forced consolidation.

-    A worsening economy will very likely hurt every consumer play from Research in Motion to Apple to gaming companies. Already, RBC Capital Markets says 40% of people plan on spending less money on electronics in the next 90 days, the weakest outlook the bank has ever seen. That doesn't bode well for a strong Christmas season.

-    Web companies grappling with a continued deterioration in advertising spending now that the Olympic boost is over and the presidential election has just a little over a month left.

-    The impact a shut down IPO and acquisition market has on an already abysmal year for venture capital returns. Sure, the public markets don't immediately affect startups; that's the advantage of being private. But investors need a return at some point. In sectors that have been overheated in recent years like the Web or clean tech, expect second and third rounds of funding to get tighter if companies aren't showing any progress on revenues. With ad markets shut off and the general economy in turmoil, that's a lot harder to do. Entrepreneur Jason Calcanis recently said the collapsing economy would kill some 50%-80% of startups. You can argue that's just the odds to the early stage startup game, but this economy and its lack of liquidity and confidence certainly doesn't help.

We'll keep an eye on all of these ripples, as shoes continue to drop in this crisis and the Valley picks its jaw up off the floor and actually starts to react. But it's important to realize so far it's a story of ripples in the Valley-a long list of potentially deadly ripples to be sure-but ripples nonetheless. For people who've been in the Valley more than ten years, there's none of the hand-wringing of the last bust when more than 450,000 Valley workers lost their jobs in a little more than a year and the Nasdaq lost three-quarters of its value in just a few years.