Silicon Alley Insider has an interesting piece about Yahoo's obsession with all-things-Twitter. And at the end they have an even more interesting strategy. "Yahoo should work to be a better place to use Twitter than Twitter.com."
This sounds a lot like the winning strategy Yahoo used to best CNN and MSNBC in web news in the 2004 timeframe. With My Yahoo they became the place to go to find out what's new on CNN and MSNBC, and of course on Yahoo.
This kind of embrace is a perfect prelude to competing with Twitter. First, develop a base of people who use Yahoo as their interface for Twitter, and then gradually add features that only work Yahoo-to-Yahoo.
Twitter could add those features too of course, but they might not, since they believe (incorrectly, imho) that the 140 character limit and URL-shortening are part of the magic of Twitter.
Yahoo, or anyone else who adopted this approach, could capture the users who would like to have a bit more space to express their ideas.
Silicon Alley Insider has an interesting 
