As Google readies a new TV service to be launched by the end of the year, rival Yahoo is stepping up its own efforts to infiltrate your television set.

Some 3.5 million TVs have already shipped with Yahoo’s Connected TV platform since its debut in mid-2009. The platform lets users install Internet apps, or “widgets,” to do things like watch shows bought through Amazon or rented through Netflix, or browse eBay and Facebook while watching TV. Yahoo announced today that Toshiba will begin shipping TVs with the platform–joining Sony, LG, Samsung, and Vizio.

Yahoo and Google both hope to make advertising dollars through Internet-connected TVs. Such ads would be targeted to TV content. For example, while an app on an Internet-connected TVs could automatically pull up scoring data to accompany a sports broadcast, advertising could show merchandise for the viewer’s favorite team.

Google is working with Intel to create a powerful dedicated TV device featuring Intel’s Atom processors. Yahoo’s approach is fundamentally different–it’s making Internet apps that could work on even relatively cheap TV sets, rather than selling a separate computer-like set-top device. Yahoo also started out working with Intel, but then pivoted to focus on the lower-end chips used by TV manufacturers, such as chips made by Broadcom, ATI, and ARM.

“TVs are designed for video performance, not application performance, and have little internal storage,” says Russ Shafer, a senior director of marketing at Yahoo. “So we developed a very light, cloud-based platform.” Yahoo’s platform can be shipped with almost any TV capable of connecting to the Internet, the cheapest being a model available from Vizio for $299.

“Yahoo was one of the first entrants into this space,” says Colin Dixon, a senior partner with Frisco, Texas-based TDG Research, an analyst firm specializing in digital media. “Getting into the low end was an interesting strategy that gives Yahoo a good lead in terms of getting their platform out there, although I’m not sure user numbers are high yet.”

So far, around 65 TV models running Yahoo’s software are available. As a result, Yahoo is one of the first companies to have data on how TV viewers use Internet apps on TVs. “The most popular apps today are video-on-demand and Facebook,” says Shafer, who adds that users have shown how TV and Internet content can share the screen. “Users can turn to Twitter to add information not featured in a news broadcast as an event unfolds,” he says.

Shafer says that Yahoo’s user research supports the decision to eschew adding a Web browser and keyboard (unlike Google TV). “We’re not trying to force people to do that because it isn’t what people want–Apple is on the same model.” When Steve Jobs unveiled his firm’s revamped Apple TV product earlier this month, he said that Apple’s research had also shown that users want a simpler approach.

Many unknowns remain, though, and only limited lessons can be drawn from the cell-phone app market. “One big difference is that the TV is a shared device, not a personal device; also, maybe 80 percent of phone apps are location-based, which doesn’t translate to TV,” says Schafer.

Kurt Sherf of Parks Associates, a digital entertainment and consumer electronics consultancy in Dallas, argues that consumers are ready for shared apps. When his firm asked people what apps they would use on a TV, many said they wanted a shared calendar that everyone in their household could update and view.

Yahoo is still working out how to serve up advertising using its TV platform, something that Dixon says is “absolutely essential” to any firm developing a connected TV platform. “These companies do not have the advertising part nailed down at all,” he says.

Yahoo’s large online advertising network could potentially supply the inventory, while the TV platform provides ample data with which to target and track the performance of ads, says Schafer. “It brings the Web metrics we’re used to onto the TV,” he says. “You can watch someone’s flow as they navigate inside widgets, you can track what they saw and what’s on and off the screen. Since our users are all logged in, we also have a good idea of their profiles.”

Schafer says Yahoo hasn’t started serving ads on TVs, “but we can get demographics and metrics and are testing out the inventory space internally.” One type of advertising placement being tested is a banner on the toolbar that provides access to installed apps. The producers of the cable TV show Weeds are testing an app that offers a free streaming episode to promote the new season.

Schafer claims that Yahoo’s platform should give advertisers metrics similar to those offered by Google TV. But Dixon points out that it will collect less information than Google TV. “The Yahoo engine doesn’t know what’s on the TV; Google TV devices can know,” he says.

A Google TV device could track whatever content is onscreen at any given moment by monitoring the station a person is tuned into and using the Internet to check TV schedules. However, that’s only possible if the cable, satellite or broadcast provider allows it, says Dixon, something that he expects only satellite operator and Google partner Dish Networks to have agreed to so far.

Yahoo’s hope is that by establishing an early–if relatively low-powered–beachhead in today’s TVs it will be able to ramp up the features of its platform when smarter chips and other hardware appear later. “Awareness of the signal will come over time,” says Schafer.