It’s the typically newsless time around Christmas and New Year’s, but for once there has actually been a lot going on at Yahoo.

Last week, the Silicon Valley Internet giant’s typically moribund board decided to move ahead with negotiations to sell part of its stake in China’s Alibaba Group, as well as all of its shares in Yahoo Japan.

While that is still not a done deal, it adds clarity to the Yahoo mishegas, as current leaders there seek to turn around the company’s lagging fortunes.

Now, as Yahoo continues to contemplate a pair of partial investment bids by private equity firms Silver Lake and TPG Capital into 2012, more focus will be on the selection of a CEO candidate to take over, sources said.

While I have floated some names that have been contemplated — such as Hulu CEO Jason Kilar, Juniper CEO Kevin Johnson, former aQuantive and Microsoft exec Brian McAndrews, and board member David Kenny — I have collected some more that seem to be getting the once-over and are being mentioned internally as well as externally.

Sources said that the Nominating and Corporate Governance Committee at Yahoo, which is run by independent director Patti Hart, has been looking for someone with definite public company experience, as well as expertise in large-scale management.

As to talent, candidates seem to be either good at running big platforms, or deeply knowledgeable about advertising and media as well as technology.

Another important criteria, said sources: Someone who is “collaborative” and nonconfrontational. As in, not like the former and very pugnacious CEO Carol Bartz, who was fired in September.

Thus, here’s another trio of candidates to consider, while we wait — and who knows how long that will be given that the Asian activity could have tired out for a bit this usually slow-moving board:

Chris Liddell: The former CFO of Microsoft is an interesting name that just popped up recently, and it makes some sense when you think about the possible mindset of the Yahoo board.

Liddell, who has a charming New Zealand accent, did a short stint, from January of 2010 to March of this year, as CFO at General Motors. Recently married to another former Microsoft exec, he has since been living in New York.

He apparently loves living in the Big Apple.

But when he left GM, Liddell made it clear he wanted to go for a top job next. He was among the candidates for a recent search for a CEO of Time Warner’s Time Inc. (an effort that was run by exec search firm Heidrick & Struggles, which is also conducting the Yahoo hunt).

Known as tough and decisive, he certainly is qualified to deal with complex financial situations, such as the one in which Yahoo now finds itself knee-deep. One knock: Little product or advertising experience.

Laura Desmond: While certainly a dark horse, Desmond has been queried by Heidrick, said several sources.

She is CEO of Starcom MediaVest Group, a subsidiary of Publicis, one of the largest media planning and buying agencies, making Desmond one of advertising’s most prominent players.

Well-known in Yahoo’s key market, she is considered a savvy and smart exec with a wry sense of humor.

I happen to particularly like one line from one of her bios:

“Ms. Desmond’s career has been driven by two caveats: Take intelligent risks and learn more from failure than from success.”

She could learn a lot at Yahoo. (I know, easy jab, but it works!)

David Rosenblatt: The former DoubleClick CEO, who went on to a big ad job at Google after it paid $3.2 billion for the company, is also a long shot, mostly by his own choosing.

The sharp exec is always on the short list of CEO candidates for a lot of big, splashy online jobs, but he seems to want to swim his own way.

Case in point: He was recently named CEO of New York-based 1stdibs, a relatively obscure online marketplace known among antique dealers and interior designers looking for one-of-a-kind furniture, art and lighting.

Yes, that’s right: Fancy lamps.

Rosenblatt also serves on the boards at Group Commerce, Twitter and IAC.

All that Internet ad and e-commerce experience is exactly why Rosenblatt would be one of the better choices for CEO of Yahoo. But, for him, I would guess taking such a job is probably in the life’s-too-short category.

More to come, obvi!

Whatever you want to call him or her — a silver bullet, the cure or, as I like to say, the last unicorn — Yahoo’s ever-seeking and never-deciding board has now renewed its focus on finding a new CEO.

Also on the docket: Working on a deal to sell back at least some of its stake in its twin Asian assets — Yahoo Japan and the Alibaba Group — back to the companies. A partial sale of stock back could placate the often tense situation among the partners.

What is clear is that the two bids from private equity firms are now in an undetermined circling pattern — due to a variety of concerns around shareholder unrest (Occupy Yahoo looms for 2012).

Therefore, the idea of bringing in said fantasy leader to perhaps finally be the one to revive the long-troubled company has returned to the forefront of action, according to numerous sources both inside and outside the company.

The concept in short, said people familiar with the situation: Hire some compelling and entrepreneurial CEO to get the company moving again from a product point of view, do a massive organizational overhaul and help settle Yahoo’s thorny Asian issues.

While a number of names have been rumored in reports — such as Google business lead Nikesh Arora, who is actually not likely to leave his top post at the search giant — sources said the board has been targeting a number of candidates, including Hulu CEO Jason Kilar.

Others on Yahoo’s wish list include Juniper CEO Kevin Johnson and online advertising entrepreneur Brian McAndrews, who sold aQuantive to Microsoft. There are several others also being considered.

Sources said Kilar has met with Yahoo board members about the offer, but his hiring would be a long shot.

It’s an interesting — if complex — gambit to bring in Kilar, who has had his own wrangles with the multi-owner structure of the premium video service over the years.

Kilar’s status at Hulu has been in question ever since it was put on the block, then removed and then — well — who knows.

Hulu’s owners — News Corp., Disney and Providence Equity Partners, along with Comcast (which is a now a passive investor) — did not like the offers it got from various bidders, including Yahoo.

While the media giants have made noises about wanting to keep a stake in distribution, their commitment to that remains unclear.

The situation has put Kilar — who already had tense relations with the service’s shareholders — in limbo until a valuation is determined next year. Without going into the complex details, Kilar has a large equity stake that could be liquid in April, related to certain rights held by Providence.

It is well known that Kilar has been concerned the team that built Hulu gets some sort of payout for their work. In fact, many years ago, Hulu was seen as a possible IPO candidate.

What’s not in question is Kilar’s talent at creating a cohesive team and a compelling product — especially with an advertising and media focus — and the need at Yahoo for a vibrant leader to encourage innovation and discourage its rapidly increasing attrition issues.

The search for a new Yahoo CEO — which is being led by director Patti Hart, and is being conducted by Heidrick & Struggles — had been mostly sidelined until recently, as the board solicited bids for a partial investment from PE firms.

Two emerged, from Silver Lake and TPG Capital, which had wanted to pay from $16.50 to $18 a share for a stake of just under 20 percent in what is called a PIPE (Private Investment in Public Equity) arrangement.

But the low price, and worries about lawsuits and even a proxy fight related to such a deal, have slowed down the momentum significantly, said sources.

Instead, Yahoo has told bidders it will get back to them in the coming weeks about the direction it will take. Thus, the focus on lining up CEO candidates and plans related to reviving Yahoo.

Some of those possible execs have put their hand up, while others — like Kilar — are being solicited. In addition, some still think that Yahoo board member David Kenny remains an internal option, especially if the board of Yahoo gets a refresh, despite his recent announcement that he has no intention of seeking the job.

In general, this shift should not come has a surprise for the hurry-up-and-wait board of Yahoo, which has struggled over the years to make good choices for the Silicon Valley Internet giant.

That drift has resulted in a downturn in its prospects, even as other companies have surged.

Those troubles were brought into sharp focus in a recent report by new Goldman Sachs Internet analyst Heath Terry, who strafed Yahoo in his “sell” recommendation.

Among the gems by an analyst whose investment bank is currently an advisor to Yahoo on its strategic options:

Yahoo simply faces too many competitive and structural headwinds to believe any kind of meaningful turnaround is possible. While there is significant asset value on the balance sheet and in the company’s large, though increasingly less engaged user base, we continue to believe, as we have since before the first Microsoft offer, that the segment of management driving the company is intent on trying to revive Yahoo as a company, regardless of the cost to shareholders.

And, noting the need for a new CEO:

We would become more positive if we felt there was a likely event in the near term that might unlock the value of the balance sheet assets at Yahoo. While we believe the aggregate value of those assets is above the value reflected in YHOO, in order to be more positive on the stock we would need some proof that management is willing and able to take the steps necessary to unlock that value either through a sale or distribution to shareholders. Meanwhile, the declining profitability of the core display advertising business is masked by a search business that continues to lose share and relies on artificial support from Microsoft. We would become more positive on the core Yahoo business if the company is able to find a new CEO capable of focusing the business on its core advertising and communications opportunities, rationalizing costs, and driving growth. This would require user growth and especially engagement improvements in both online and mobile, improving monetization of advertising inventory, and stabilizing its search business.

In other words: Wanted, one unicorn to work magic against increasingly troublesome dragons. Ability to sparkle a plus.

Apparently, not everyone leaves Yahoo (YHOO) to join Microsoft.

On Friday, sources said, it was announced internally at Microsoft (MSFT) that Karl Siebrecht (pictured here), the former president of Atlas at aQuantive, is joining AdReady at the end of the month as president and COO.

AdReady, based in Seattle, bills itself as an “advertising technology company focused on making online display advertising accessible and effective for advertisers of all sizes.”

The start-up has raised a total of $12 million in venture funding from Bain Capital Ventures, Khosla Ventures and Madrona Venture Group.

Aaron Finn is its current CEO and president, but is apparently giving up one title to Siebrecht.

And–probably no coincidence–aQuantive’s former CEO is Brian McAndrews, who is now managing director at Madrona.

But, sources said, Siebrecht was introduced to Finn through David Rosenblatt, an advisory board member of AdReady–and who competed with Siebrecht as CEO of DoubleClick, which was bought by Google (GOOG).

Also interestingly, Jason Kilar, CEO of premium video site Hulu, is on AdReady’s board.

Oh, it is a small tech world, after all.

Microsoft bought aQuantive–which is now called Microsoft Advertising–in mid-2007 for $6 billion and Atlas was one of its units.

Microsoft is searching for a major executive to run its world-wide online sales, said several sources close to the situation, even as talks with Yahoo about a deal to partner in its search and display advertising businesses continue.

“They need to find a way to make money in display,” said one source close to the situation. “Or, I guess, find a way to not lose quite so much.”

The software giant has been trying to build its online business for many years now, spending a lot of money and not getting very much traction.

In its recent quarterly results, in fact, Microsoft’s online services got hit badly, with a 14 percent decline in revenue from a year ago to $721 million. Losses doubled to $575 million.

Sources said Microsoft (MSFT)–which has hired headhunting firm Spencer Stuart to conduct the search–is looking for more execs to turbocharge the situation, with one criterion being that the person hired is “another ambassador to Madison Avenue.”

Last fall, it did that by hiring Time Inc. ad exec Robin Domeniconi to take over as the new VP, U.S., Microsoft Advertising.

That’s why the new sales candidate the company is looking for might only be for someone to lead Microsoft’s international ad sales, since the exec in charge of that business left in December as part of a mass of changes in the wake of the hiring of digital head Qi Lu.

Those changes included the departure of that exec, Global VP of Sales Bill Shaughnessy, as well as its top online ad sales exec, Brian McAndrews, and the rejiggering of its online sales unit.

In that switch, Microsoft said in a press release: “The field sales organizations in the Online Services Group will move to Microsoft’s centralized Sales, Marketing and Services Group led by chief operating officer Kevin Turner. This group, called Consumer & Online, will be led by Corporate Vice President Darren Huston and will include the Global Advertising Sales and Services organization, led by vice president Bill Shaughnessy.”

The move to centralize, according to sources, has been controversial within the company, since it means all sales are being lumped into one megagroup.

That could all change dramatically again if there is any success in the talks Microsoft has been having with Yahoo (YHOO) about outsourcing its online display sales to the Internet giant. The pair have been discussing partnering over search and advertising.

While such a deal might not happen–Yahoo has been especially reticent to separate its search and display businesses–the two sides have been discussing several scenarios in a bid to compete with online giant Google (GOOG).

Among the latest ideas is one in which Yahoo would take over both search and display advertising sales and Microsoft would run the tech behind the scenes.

Such a deal would be a major shift for both companies in their business focus and would also tether them together.

While BoomTown is still gathering information, it looks like longtime Microsoft exec Yusuf Mehdi (pictured here), who is now in charge of marketing, online audience business development and product management for MSN and the search properties, will get more added to his portfolio, including overall business development for the online properties.

Mehdi, whose current title is SVP of the Online Audience Business, could also eventually get purview over programming for MSN too, said several sources.

Both those business units currently (and somewhat inexplicably) report to Satya Nadella, the SVP who heads engineering for Microsoft’s search, portal and advertising platform group.

Nadella and Mehdi are the two key execs who report to Qi Lu, a former Yahoo tech star who was recently hired as president of Microsoft’s online services group

What that means for MSN’s Corporate VP Erik Jorgensen and the GM of its Global Media Group, Greg Nelson, who report to Nadella, is unclear.

But it appears that the Microsoft (MSFT) online group is essentially being split into two clear parts: Engineering, and business and content operations.

Advertising sales, which had previously been under now-departed Microsoft exec Brian McAndrews, has been moved to Microsoft’s centralized Sales, Marketing and Services Group, led by chief operating officer Kevin Turner.

The changes are interesting, given all the behind-the-scenes talks that are now going on between Microsoft and Yahoo (YHOO) and Time Warner (TWX) online unit AOL over their search and search advertising businesses.

Microsoft has been seeking to take over search for both Yahoo and AOL, with its CEO Steve Ballmer recently in talks with both companies, in order to give it a decent market share in its ongoing quest to compete with Google (GOOG) in search.

Right now, Google dominates that market with an over 70 percent share, while Microsoft has just under 10 percent.

Microsoft is announcing its second-quarter earnings today, and many expect it to also announce layoffs, due to the tough economic environment.

In the wake of the changes at Microsoft’s online division, a senior advertising sales exec, Bill Shaughnessy (pictured here), is set to leave his post, the company confirmed.

The departure was first reported in Ad Age, which said Shaughnessy’s future plans were undetermined and, in fact, noted it was unclear why the longtime Microsoft (MSFT) staffer of 15 years was leaving.

BoomTown found the answer looking at the very bottom of the press release announcing the hiring of former Yahoo (YHOO) tech exec Qi Lu as head of its online services group:

“As part of today’s announcement, several teams will move to further align resources. The field sales organizations in the Online Services Group will move to Microsoft’s centralized Sales, Marketing and Services Group led by chief operating officer Kevin Turner. This group, called Consumer & Online, will be led by Corporate Vice President Darren Huston and will include the Global Advertising Sales and Services organization, led by vice president Bill Shaughnessy.”

The move to centralize, according to sources, has been controversial within the company, since that means all sales are being lumped into one mega-group.

Shaughnessy has worked on a range of MSN properties, as well as for the Windows group.

In his most recent job, he worked closely with Brian McAndrews, the top online ad sales exec at Microsoft, who announced he was leaving the company on the same day Lu was hired.

McAndrews had been a contender for the digital head job.

According to a Microsoft profile of him, Shaughnessy was global VP of sales, marketing and services, “responsible for the business leadership and management of its international business operations outside of the United States, including the Greater Asia region. His responsibilities include sales, marketing, business development, programming and regional and country management.”

With so many more ex-Yahoos out there now that the most recent layoffs have taken place, BoomTown put out feelers to a range of them to ask whom they would like to run the company they no longer work for.

After all, who better than to pick a new CEO than an ex?

The response I got was swift and varied wildly, depending on which way the ex-Yahoo felt the company should go, including quite a few who thought Yahoo needed to sell itself off completely.

Some considered Yahoo (YHOO) a media and advertising company, for example, while others thought of it as a more Web tools outfit. Still, others considered it a turnaround situation, requiring a wholly different kind of CEO.

Perhaps therein lies the problem–it is still hard to define precisely what Yahoo is and is not, even for its ex-employees.

In any case, here are some of the best suggestions:

1. The Media Mogul

“I think they need to sell to a media company,” said one ex-Yahoo, who posits the move needs to be drastic enough to truly reset Yahoo.

In this scenario, search gets sold to Microsoft (MSFT) and Yahoo’s online content is combined with media assets of a big entertainment and news conglomerate.

That would make the leader of Yahoo one of the following: Bob Iger of Disney (DIS); Rupert Murdoch/Peter Chernin of News Corp. (NWS); Jeff Zucker of General Electric (GE) unit NBC Universal; or Les Moonves of CBS (CBS). (News Corp. is the owner of this Web site.)

2. The Insider

A lot of votes here for former Yahoo COO Dan Rosensweig and not so many for current President Sue Decker.

Why? Several ex-Yahoos mentioned a need to refocus intently on products and the need for a product-obsessed leader, but one who also knew Yahoo well and could get things moving without needing a lengthy learning curve.

“Since Dan R. left, I think there’s been a definite void (at the senior exec level) on the product/consumer expertise and advocate front,” said another ex-Yahoo.

Other execs mentioned are former Yahoos Jeff Weiner and Jeff Mallett.

But several also pointed to board member John Chapple, who is the one most insiders say they are guessing will be the next CEO, especially since he has been reaching out to Yahoos on many levels and asking questions.

3. The Microsoftie or Googler

The new top name here is obviously recently departed online ad exec Brian McAndrews, former CEO of aQuantive, whom many think would be a strong pick and would focus the company on advertising.

In addition, most of those leaving–including several technical people–all seem to agree that Yahoo needs to get out of the search business, and pronto.

Said one engineer: “I hate to say this, but as good as we can be, we cannot compete in the war that is breaking out between Google and Microsoft. And it will only get uglier.”

Other names mentioned in this category include Yusuf Mehdi and Kevin Johnson of Microsoft, as well as Tim Armstrong of Google (GOOG).

4. The Fixer

While there are a lot of different opinions out there among the ex-Yahoos I spoke to, all agree that the company is in need of a sharp operator and someone who can do what it takes to turn the company around quickly.

That means someone like former Vodafone CEO Arun Sarin, whose name has popped up recently, or even nontechie execs known for operational skills.

“We need a decisive leader, given how slowly it takes for things to change at Yahoo, who has a real sense of urgency from the minute he or she gets the job,” said one ex-employee.

Another former exec described it as a “two-step process.” First, the turnaround CEO needs to come in and reorient, focus, and get the company going in the right direction, then a more product-oriented person can be installed under that CEO later.

5. The Holy Grail-Steve Jobs Option

I think the most interesting idea I got from all the many former Yahoos I spoke to was that Apple (AAPL) CEO Steve Jobs swoop in and buy Yahoo.

When I laughed out loud at this notion at first, the exec insisted that it was a feasible idea, given that Apple was interested in expanding its platform beyond its now-popular devices.

It’s an interesting bit of wishful thinking, of course, to imagine a “great leader” to calmly guide the company back to its roots.

Jobs, in fact, memorably addressed a meeting of Yahoo VPs in the fall of 2007. As I wrote then: “Jobs basic message [to Yahoo]: You have great assets–just like Apple did–and now it is all about execution.”

Yes, that tiny little detail.

6. Raise the Yangtanic

Interestingly, pretty much all the ex-Yahoos I talked to–as angry as some are at him for his tenure as a CEO less successful at execution and the ensuing loss of market value at Yahoo–said they did feel there was a need for Co-Founder Jerry Yang to stay around in a significant way.

“Jerry has been a really bad CEO,” said one former employee. “But he could still be an important leader at Yahoo and give the company the kind of inspiration it so desperately needs.”

Not everyone is on board with that.

“I completely disagree that Jerry should stay around. Jerry is one of the main issues at Yahoo and he and [David] Filo must go, as well as most of the board,” said one former Yahoo. “There needs to be free rein for the new CEO to make changes and that won’t be possible if Jerry is still there. Jerry is a nice guy and his heart is in the right place but he has failed as both board leader and CEO and the company needs to start fresh if it is to have a chance.”

Adds the ex-Yahoo: “Steve Jobs would be great, but I think he is busy.”

BoomTown strives to bring readers the very best in internal memo decoding, and this one is just too good to pass up.

Microsoft CEO Steve Ballmer sent a short memo to employees this afternoon about finally hiring someone to head the software giant’s lackluster digital efforts.

That someone, as this column reported earlier today before the official announcement, was former Yahoo (YHOO) tech star Qi Lu. He will become president of the Online Services Group at Microsoft (MSFT), right after the new year.

Thus, let us try to read between the lines:

What Steve wrote: From: Steve Ballmer
Sent: Thursday, December 04, 2008 1:39 PM
To: Microsoft–All Employees (QBDG)
Subject: New Leader of Online Services Group

Search, advertising and online services are critical to Microsoft’s long-term strategy. To succeed, we need the right talent. Today, I’m pleased to announce that Qi Lu will join Microsoft as president of our Online Services Group. Qi will oversee all efforts in search, our online advertising platform, and all of our online information and communications services. Qi will join Microsoft on Jan. 5 and report to me.

Translation: Really, taking five months to pick someone to head Microsoft’s most critical arena for the future is not a long time. If you’re counting in dog years, that is! Woof!

But, I digress, we have a winner and, best of all, he’s from Yahoo, costing us $39.9 billion less than it would have cost to get Lu with the whole company.

What Steve wrote: Qi is one of the most respected technical minds in the industry. He comes to Microsoft after 10 years at Yahoo, where he most recently served as executive vice president of engineering for all of Yahoo’s search and advertising development efforts. Before joining Yahoo, Qi was a researcher at IBM’s Almaden Research Center. He has a doctorate in computer science from Carnegie Mellon, and he holds 20 U.S. patents.

Translation: Did I mention that Lu is from Yahoo? Let me say it again: Yahoo. The YAHOO that refused to take our $31 a share offer. That Yahoo. The Yahoo where–at one time–engineers would never consider leaving the Jedi forces of Silicon Valley to join the Death Star.

Jerry Yang, I am your bother.

Also, did I mention 20 patents?

What Steve wrote: Qi’s combination of deep technical expertise, proven leadership capability and broad business knowledge is rare in our industry. There is no one better qualified to guide our work to reinvent search and online advertising.

Translation: By “reinvent,” I mean, stop the endless flow of cash out of Microsoft pockets, even as Google (GOOG) is minting money in the basement of that irksome Googleplex in the search business.

If Lu manages not to lose, say, $3.23 trillion dollars, I will consider it a job well done!

What Steve wrote: While I’m excited that Qi is joining Microsoft, I’m sorry to share the news that Brian McAndrews has decided to transition out of the company. Brian came to us with the acquisition of aQuantive in 2007. Since then, he has helped build a world-class business in online advertising that provides a solid foundation for future growth. I have great respect for the important contributions Brian has made to Microsoft, and I wish him the very best in the future.

Translation: OK, so I dragged my feet on this selection process long enough to make Brian feel really badly, given he wanted the job too.

But, he’s an “ad” guy and Microsoft’s track record with those who don’t consider pocket protectors the height of fashion is, shall we say, rocky.

But don’t feel bad for Brian–Microsoft bought aQuantive for $6 billion last year, and he was CEO. You do the math.

Of course, it would be deeply ironic if Brian suddenly was in the running for the now-open Yahoo CEO job and I was facing him over the negotiating table over the search deal Microsoft has been salivating over, despite trying to seem only mildly interested.

Brian, honey, don’t take it personally that I went for the geek. It’s in my DNA.

What Steve wrote: On Monday at 4 p.m. Pacific Time, Qi will join me at Café RedWest for an Employee Town Hall. I encourage you to attend or to watch the webcast. If you have questions for Qi or me, please send them in advance to and we’ll try to answer as many as possible.

Steve

Translation: Free nachos and unintelligible discussions about algorithms for all!

Microsoft moved up its official announcement of former Yahoo (YHOO) tech star Qi Lu to be the head of its Online Services Group.

BoomTown reported on the selection earlier this morning.

As part of the changes, Microsoft digital ad head Brian McAndrews, who had also wanted the job, is leaving.

Here’s the full announcement from Microsoft (MSFT):

For Immediate Release
Dec. 4, 2008
Microsoft Appoints Dr. Qi Lu to Run Online Services Group
Yahoo! veteran to oversee Internet offerings for consumers, advertisers and publishers.

As part of today’s announcement, several teams will move to further align resources. The field sales organizations in the Online Services Group will move to Microsoft’s centralized Sales, Marketing and Services Group led by chief operating officer Kevin Turner. This group, called Consumer & Online, will be led by Corporate Vice President Darren Huston and will include the Global Advertising Sales and Services organization, led by vice president Bill Shaughnessy.

Former Yahoo tech star Qi Lu (pictured here) is poised to take on the big job of being Microsoft’s top digital executive, according to several sources inside and outside the company.

The appointment could be announced by Microsoft as early as next Monday.

A variety of details is still being ironed out, though, including whether the well-regarded techie Lu will be “paired” with another executive at Microsoft (MSFT) with more general business experience.

While Lu has managed large teams while at Yahoo (YHOO) and also huge projects, he does not have advertising sales and media experience that will be a big part of his purview at Microsoft.

In that job, he will be the boss of three strong digital execs at the software giant: Satya Nadella, the SVP who heads engineering for Microsoft’s search, portal and advertising platform group; Yusuf Mehdi, whose online services portfolio includes marketing, online audience business development and product management for MSN and the search properties; and Brian McAndrews, the SVP for the advertiser and publisher solutions group.

That executive partner could be some higher-ranking Microsoft exec or even CEO Steve Ballmer himself.

Elevating McAndrews is also a possibility, as he has also wanted the digital chief job and could decide to leave after not getting it. (He also would not be a bad choice for Yahoo’s new CEO.)

McAndrews was the CEO of aQuantive, an ad company bought by Microsoft for $6 billion last year.

As I have previously written, Lu would be a different choice for the post than many had expected.

In picking a serious tech-oriented executive over a more media-centric one, a dichotomy that Ballmer has been puzzling over, according to several people with whom he has spoken, he is clearly staking out an even more head-on fight with Google (GOOG).

But since a lot of Microsoft’s future rests on winning in the search and search-advertising space and trying to catch up with its techtastic Silicon Valley archrival from way back in the race, Lu is also well suited for the position.

Lu was EVP of engineering for the Search and Advertising Technology Group at Yahoo, where he ran all development initiatives for its search and monetization platforms. He was at Yahoo for a decade.

Importantly, Lu will definitely be a draw in bringing in top talent to Microsoft, especially from Yahoo.

Microsoft already grabbed another top Yahoo search exec, Sean Suchter recently.

And it is reportedly in a competitive bidding war with Google right now for yet another top Yahoo engineer.

Ballmer (pictured here), who led the now-defunct takeover bid for Yahoo and who has indicated a strong interest in buying only Yahoo’s search assets, could almost be seen as bypassing it all by sucking the talent right out of the place instead.

That might be a good move, since Yahoo’s board, while under intense Wall Street pressure to do so, is still debating whether to strike a deal with Microsoft to sell off its search and search ad business for massive guaranteed ad revenues.

While board member Carl Icahn has been pushing that deal, others on the board are still dubious that decoupling search from Yahoo is the right strategic move and believe it could leave the company at the mercy of Microsoft.

Yahoo might already be, especially if it keeps losing critical engineering talent to Microsoft. Being able to convince talent like Suchter and Lu to switch is a very bad sign.

Before he left Yahoo earlier this year, Lu was on the staff of the IBM Almaden Research Center, and worked at both Carnegie Mellon University and Fudan University in China (he also got degrees from both places).

And, in the kind of cred Microsoft likes, Lu holds 20 U.S. patents.

He left Yahoo after becoming dissatisfied with all the turmoil there, quitting in June, without another job lined up.

There has also been speculation that Lu would take a position as CTO of Facebook or even return to China for a tech job.

The well-respected Lu certainly has a multitude of choices, but the chance to lead money-laden Microsoft’s digital efforts–as it suits up for battle with Google–has been perhaps too hard to resist.

BoomTown has been poking around to try to figure out who Ballmer would choose for the digital head, ever since the man who used to be in charge, Kevin Johnson, departed in July for Juniper Networks (JNPR), after the software giant’s takeover bid to buy Yahoo failed.

I raised Lu’s name in a post several weeks ago as Ballmer’s top choice.

Several people close to the situation say the aggressive CEO has been keeping the deliberations close to the vest.

On an interesting side note, another one of Lu’s reports at Microsoft would be Harry Shum, corporate vice president of Search Product Development, who was his classmate and friend at Carnegie Mellon.

Please see this disclosure related to me and Google.

Here’s part of an internal memo BoomTown obtained about some small, but interesting, changes at Microsoft’s MSN unit, sent out by the GM of its Global Media Group, Greg Nelson, which is under the leadership of–well, frankly–a confusing panoply of execs.

Essentially, Nelson now reports to Satya Nadella, SVP of the Search, Platform and Advertising Group (think engineering and search) and Erik Jorgensen, Corporate VP of MSN (think business and other stuff).

In addition and apropos of nothing, Yusuf Mehdi serves as SVP of the Online Audience Business and Brian McAndrews is SVP of the Advertiser & Publisher Group.

Also, there is a Windows Live group that does mail, communications and groups too, and a lot of other digital bosses too numerous to mention.

You can see why I have been haranguing Microsoft (MSFT) CEO Steve Ballmer for a little digital clarity, especially around its consumer digital businesses and brands. But Microsoft–like a lot of tech-born businesses–loves to overdesign!

Ballmer has been searching for an overall head of that business to sort it all out since Kevin Johnson left in July, whose massive duties were divvied up.

While he has looked at a lot of execs from inside and outside the company, I recently posted that Ballmer’s latest quarry is former Yahoo tech star Qi Lu.

Only Ballmer knows for sure, many have told me, keeping his decision-making on the issue close to the vest.

But, as many insiders and outsiders familiar with the business have noted to me, whoever takes that role as its digital guru has some very hard decisions to make in all its arenas, from search to advertising to content.

There has been no share growth in search for Microsoft, for example, where archrival Google (GOOG) dominates, even as there have been billions of dollars of investment in data centers and engineers.

And it will fall to the person Ballmer ultimately selects as digital head to figure out what to do next.

Microsoft’s failed attempt to buy Yahoo (YHOO) was one way of dealing with the many issues Microsoft is facing, as well as its current interest in buying Yahoo’s search business.

In any case, here are some new changes at MSN, in Nelson’s words:

· Network Programming, led by Rob Bennett–This group will prioritize investments against Network priorities, shape audience strategy, set Network standards, and sponsor cross-network initiatives.

· Chief of Staff, Eva Corets–This role is responsible for driving team processes and business rhythm, and assisting with prioritization of network projects and interaction with cross-division and cross-Microsoft teams.

Yesterday, BoomTown opined that Microsoft was nearing a decision on who would become the head of its digital efforts.

And, according to several sources and some puzzling by me–if an agreement can be reached–I think that Microsoft (MSFT) CEO Steve Ballmer’s top choice is former Yahoo tech star Qi Lu.

While this is by no means a done deal, Lu is just the kind of top tech exec that Ballmer and Microsoft would warm to over a more media-centric choice like former Yahoo COO Dan Rosensweig or former AOL head Jon Miller.

Lu was EVP of engineering for the Search and Advertising Technology Group at Yahoo (YHOO), where he ran all development initiatives for its search and monetization platforms. He was at Yahoo for a decade.

If Ballmer manages to pull off the hire of Lu–on the heels of already grabbing another top Yahoo search exec, Sean Suchter, which I reported on yesterday–the aggressive exec could almost be bypassing a Yahoo search partnership he has long sought by sucking the talent right out of the place instead.

Ballmer is like Edward in “Twilight,” attracting top-notch search execs to Microsoft’s Redmond HQ, as if they were geek versions of Bella.

Lu would be a different choice for the post than many had expected, with a much more technical background than one in online media or advertising sales.

But since all of Microsoft’s future rests on winning in the search and search advertising space and trying to catch up with its archrival Google (GOOG) from way back in the race, Lu is also well suited for the position.

If Lu takes the job, he will be the boss of three strong digital execs at Microsoft: Satya Nadella, the SVP who heads engineering for Microsoft’s search, portal and advertising platform group; Yusuf Mehdi, whose online services portfolio includes marketing, online audience business development and product management for MSN and the search properties; and Brian McAndrews, the SVP for the advertiser and publisher solutions group.

Lu is known as as solid manager, but he is also called a very nice man and unusually humble for a tech star by many, which could be a good influence on Microsoft.

Before Yahoo, Lu was on the staff of the IBM Almaden Research Center, and worked at both Carnegie Mellon University and Fudan University in China (he also got degrees from both places).

And, in the kind of cred Microsoft likes, Lu holds 20 U.S. patents.

He left Yahoo after becoming dissatisfied with all the turmoil there, quitting in June, without another job lined up.

Since he left Yahoo, there have been rumors that he might be headed to Microsoft, but not in such a prominent job.

There has also been speculation that Lu would take a position at Facebook or even return to China for a tech job.

The well-respected Lu certainly has a multitude of choices, but the chance to lead money-laden Microsoft’s digital efforts–as it suits up for battle with Google–is compelling.

BoomTown has been poking around to try to figure out who Ballmer would choose for the digital head, ever since the man who used to be in charge, Kevin Johnson, quit in July, after the software giant’s takeover bid to buy Yahoo failed.

Several people close to the situation say Microsoft’s Ballmer has been keeping the deliberations close to the vest–perhaps because so many of those he has targeted have declined to consider the job.

But this week, many sources both inside and outside the company have told me that Ballmer is close to announcing his choice.

Annoyingly, one source has decided to play a digital version of “The Da Vinci Code” with me, dribbling out clues–more technical than media, very well liked in Silicon Valley, humble–about the candidate, which he wanted me to solve as if I were Robert Langdon and on the hunt for the progeny of Jesus.

Well, my solution is in: Microsoft’s most promising digital Holy Grail is Lu.

On a related note, bizarrely, the day after this column broke the story about Lu’s leaving Yahoo, I caught him by accident in the background of a video I was doing at a Harvard Business School event honoring Facebook’s Mark Zuckerberg.

You can see him at 4:14 minutes in the video, laughing at me, as I bother Greylock Partners VC David Sze and make a bad pun related to former Yahoo exec Jeff Weiner’s departure from Yahoo.

Here’s that video:

Please see this disclosure related to me and Google.

At least Yahoo got one day of stock euphoria, on the news that its CEO, Jerry Yang, was stepping down, before Microsoft CEO Steve Ballmer dropped yet another bomb on the troubled Internet giant by saying once more with feeling that he is not at all interested in buying it.

Yahoo (YHOO) stock plummeted on the news, dropping below $10 a share to close at $9.14, down $2.41 or an astonishing 21 percent.

While lack of interest in acquiring Yahoo is a sentiment that Ballmer has expressed more times than Alaska Gov. Sarah Palin said “maverick” in the presidential campaign, Wall Street continues to hold out hope that Microsoft might swoop in and make a new takeover bid for all of Yahoo.

It will not. Let’s repeat. It. Will. Not.

Thus, an obviously frustrated Ballmer reiterated his nondesire for Yahoo at Microsoft’s annual shareholders meeting, near its Redmond HQ today.

“We are done with all acquisition discussions with Yahoo,” Ballmer said. “We did our best…we’ve moved on.”

And so should investors, stock analysts and hedge fund vultures, who actually contact BoomTown on a daily basis, asking if when I wrote that Microsoft (MSFT) was not interested in buying Yahoo, I actually meant that it was interested.

Not interested means, well, not interested, except when it comes to those who wish fervently for a pop in Yahoo stock.

But the only way that is going to happen is slowly, as Yahoo rebuilds its much-battered business, brick by brick. And that presumably will happen when a new CEO is selected to run Yahoo.

Lucky for Yahoo, what Ballmer has repeatedly also said is that he was very interested in (and said again today) a search partnership deal with the company.

Microsoft essentially wants to take over that part of Yahoo’s business and will likely give it a pretty penny to do so. For all its troubles, Yahoo remains the No. 2 search player, well behind Google (GOOG), but well ahead of Microsoft.

Microsoft execs think grabbing Yahoo’s business will help it gain on Google–good luck with that, but it gets an A for effort!

And it also hopes another reorganization of its digital businesses will help it do so.

Right now, for example, newly annointed digital exec Yusuf Mehdi is deep in the midst of a restructuring of his division.

Mehdi’s online services portfolio at Microsoft now includes marketing, online audience business development and product management for MSN and the search properties, but divisions and execs are being shifted around.

But the big news, of course, will be the person Ballmer selects to be Mehdi’s boss, as well as the boss for Satya Nadella, the SVP who heads engineering for Microsoft’s search, portal and advertising platform group, and for Brian McAndrews, the SVP for the advertiser and publisher solutions group.

While Ballmer has taken his sweet time in picking someone, after Kevin Johnson left his post overseeing the division in late July, sources inside and outside Microsoft have told me the company is very close to picking a new head.

That would be a good thing since Ballmer has worn out his Rolodex trying–he has been turned down by many, including former Yahoo CEO Dan Rosensweig.

While I am trying to ferret out the current choice, sources said the main candidate is more technically oriented and is well known in Silicon Valley.

Please see this disclosure related to me and Google.

The company has been on the lookout for the person to lead its online efforts ever since the exec formerly in charge, Kevin Johnson, headed out in late July, after the Yahoo takeover bid failed.

At the time, Microsoft CEO Steve Ballmer promised a quick search for a Web leader the software giant has so sorely needed.

But, apparently, quick means not-so-quick at Redmond HQ, where Ballmer has had a few other things to deal with (like the vagaries of Windows Vista!). So, he has cast about for more than three months, both internally and externally, for the person who will turbocharge Microsoft’s Web efforts.

Sources said Ballmer continues to look for an external candidate to save the day, as he has been, preferring an outsider to give the division some spark.

And, while well-known Internet figures like former Yahoo COO Dan Rosensweig, former AOL head Jon Miller and former Facebook exec Owen Van Natta have all taken a pass, Ballmer is soldiering on.

New prospects include former Cisco exec and current Joost CEO Mike Volpi, sources said, with whom Ballmer is likely to be chitty-chatting next.

BoomTown likes that choice, given Volpi has both technical and deal-making skills, and he is someone well-liked in both media and Internet circles. In fact, Volpi has also been a favorite of Yahoo CEO Jerry Yang, who would also dearly love to snag the personable exec.

But Joost, the once-hot online video start-up, has just pushed the restart button with its new flash player, and is hoping to live up to its initial hype, especially in the wake of the success of rival Hulu.

So it is not entirely clear that Volpi would leave at this moment.

Other possible outside digital execs with the right experience are few and far between.

If I was making a list, I would include CBS Digital kingpin Quincy Smith (who probably talks too quickly for Ballmer), as well as Google ad head Tim Armstrong, although both are also unlikely to move from where they are ensconced.

Thus, with so few good choices, it might be that Microsoft (MSFT)–as usual–turns inward.

But even that’s in question, given the prospects of the main internal candidate, Brian McAndrews, who came to Microsoft in its acquisition of aQuantive and runs its online advertising business, seem to have dimmed, sources said. But some caution that McAndrews is not out of the running yet.

The other insider with a chance–Yusuf Mehdi–got the job running MSN and other of Microsoft’s online properties.

He is waiting for the digital uber-boss to lead him, as well as McAndrews and also Satya Nadella, the SVP who heads engineering for Microsoft’s search, portal and advertising platform group.

For now, said one source, that appears to be Ballmer. “He’s going to be the digital chief,” joked one exec. “Until he finds someone he likes just as much.”

In any case, here is a recent interview I did with Volpi in London about Joost’s restart:

For all the noise, it’s worth paying attention, because Monday’s outlook will be cloudy, as in cloud computing.

The day will include a speech from Microsoft’s Chief Software Architect, Ray Ozzie (pictured here), and others on, among other topics, its cloud infrastructure service initiatives–designed to match aggressive efforts from Amazon (AMZN) in the space.

There will also be a demo of Windows 7, which will hopefully put an end to the long Vista nightmare when it is eventually released. (To be ahead of the curve, see a video below of Microsoft’s CEO Steve Ballmer and founder Bill Gates showing Windows 7 off at our sixth D: All Things Digital conference in May.)

In all, a Windows geekfest!

Microsoft (MSFT) execs will probably be in a good mood given the decent earnings results the company announced earlier this week for the third quarter. Revenue was up nine percent to $15 billion, even though net profits only increased 1.9 percent to $4.37 billion.

Still, that was a pretty good performance in a down economy, due to strength in Microsoft’s powerful Windows and Office franchises. And despite–as usual–the weakness of its online division.

While the revenue for its MSN, search and advertising network grew to $770 million, or up 15 percent in the quarter, operating losses doubled to $480 million from $267 in the same period a year ago. Search grew more than display advertising, a forward outlook Microsoft that maintained.

And still no digital chief, long promised by Ballmer, in sight either. Sources said that head, who will lead the unit, has still not been selected. (BoomTown is officially beginning to feel sorry for longtime leading internal candidate Brian McAndrews.)

While PDC has never been an online-focused event–this is for the big-dog businesses of Microsoft–it will still be interesting that the event will focus on continued movement toward the cloud.

It’s an inevitable–though decidedly dicey–journey for the software-dependent behemoth. So, the continued transformation should be interesting to watch.

Here is the Windows 7 demo from D6:

While a lot of analysts and pundits have suggested that Microsoft would or should surely jump into the fray–now that AOL and Yahoo are talking merger more seriously, and especially since Yahoo’s stock has dropped in the $14 range–don’t count on it.

In fact, in what has to be the most Zen-like approach it has ever had, sources close to Microsoft’s thinking actually hope that the talks to combine the Time Warner (TWX) unit and Yahoo (YHOO) will work out.

Why? Because, although some think such a merger would leave Microsoft’s digital aspirations out in the cold–since both AOL and Yahoo are now allied with its archrival Google–the software giant sees the pair coming together as yet another chance to get what it really has wanted all along from Yahoo.

That would be Yahoo’s declining but still significant search business and another shot at AOL’s.

Let’s be clear–Microsoft (MSFT) wants nothing else from Yahoo anymore, according to numerous sources, even though it made a noisy and ultimately failed attempt to buy the Internet giant.

It will not be making another bid, sources said, echoing Microsoft CEO Steve Ballmer’s public and internal pronouncements on not revisiting another Yahoo takeover bid.

But Microsoft is hoping that if Yahoo and AOL merge, the new company will see that its fate lies more in its advertising, content and communications businesses, and not in search.

Microsoft is also figuring that regulators will not allow AOL to continue its search ad partnership with Google, a deal that the software giant lost out on. As part of that deal, Google (GOOG) got a five percent stake in the AOL unit.

But, once AOL is combined with Yahoo, execs at Microsoft hope it will give them the in they have been looking for to reignite failed talks with Yahoo over a search deal that Google also won.

That Yahoo-Google deal to outsource some of its search ads is now being studied by the Justice Department, which is seriously considering blocking it. Microsoft hopes it will founder, which it is more likely to do if Yahoo combines with AOL.

Thus, Microsoft just waits.

It will be interesting to see if this snake-in-the-grass strategy will work for Microsoft, which has yet to come up with an effective online strategy in the consumer space and must still find a digital head.

Ballmer continues to want to nab an outside superstar exec for the daunting job–the names of some former Microsoft execs like Brad Silverberg and Paul Maritz have even been raised internally–much to the chagrin of the leading internal candidate, Brian McAndrews.

Now that appointment is starting to feel like a really complex two-step.

Until it all sorts itself out, what a good opportunity to post this most popular of all online videos–101 million plays!–on YouTube, “The Evolution of the Dance”:

Longtime Microsoft exec Yusuf Mehdi (pictured here) is taking over a big part of Microsoft’s online services portfolio–including marketing, online audience business development and product management for MSN and the search properties.

But Microsoft (MSFT) has yet to name an overall digital head for these online properties, which has been promised by Microsoft CEO Steve Ballmer since the departure of Kevin Johnson in late July.

Mehdi is essentially getting a part of the portfolio of Microsoft SVP Bill Veghte, who will now be primarily focused on Windows and Windows Live business groups.

Mehdi was previously the SVP for strategic partnerships under Johnson.

He is now part of a troika that includes Brian McAndrews, the SVP for the advertiser and publisher solutions group, and Satya Nadella, the SVP who heads engineering for Microsoft’s search, portal and advertising platform group. (Both are pictured here, left to right.)

Who will lead this three-headed beast is still unknown–both Mehdi and McAndrews have been considered the top internal candidates to lead the online properties group, which has been struggling for direction after Microsoft’s failed takeover of Yahoo (YHOO).

Yahoo’s shares have plummeted in recent days, as Wall Street has been hard hit, closing at just below $17 a share today, with a market cap of almost half of what Microsoft’s initial offer was early this year.

To stir things up and catch archrival Google (GOOG), Ballmer has reportedly been trying to recruit a superstar exec from outside the company, including Silicon Valley, to no avail.

Time waits for no man–but Microsoft CEO Steve Ballmer seems to be taking an awful lot of it in picking who will head the software giant’s long-foundering digital efforts.

It has been almost two months since Microsoft said it would find someone to helm the part of the business that was run by former exec Kevin Johnson, who left in July after the software giant’s bid for Yahoo failed.

A decision could come at any time, although Ballmer is reportedly intent on getting exactly the right person for the job.

But, by now, most inside the company had expected him to make the most obvious internal choice of SVP Brian McAndrews, who came to Microsoft (MSFT) via its $6 billion acquisition of aQuantive.

McAndrews now runs Microsoft’s Advertising and Publisher Solutions Group.

Longtime digital SVP of Strategic Partnerships Yusuf Mehdi has been seen as the No. 2 candidate. He could also be part of a team that includes both him and McAndrews.

Many sources have said they expect McAndrews to leave if he is not given the top digital post.

But sources also report that Ballmer remains more intent on hiring someone outside the company, with the idea that such a person could better re-energize Microsoft’s moribund Internet efforts and bring in a fresher perspective.

According to sources, his favored external pick has been former Yahoo (YHOO) COO Dan Rosensweig, who has turned down the offer.

Ballmer has also been interested in former Facebook top exec Owen Van Natta, who might be a dark horse in the race.

In addition, Ballmer has previously queried former AOL head Jon Miller, who was in line to be on the board of Yahoo until he was nixed due to a noncompete agreement with the online service’s owner, Time Warner (TWX). Miller told Ballmer he was not interested in the job.

“Ballmer is burning up the Rolodex and coming up empty,” said one person familiar with Microsoft. “But he is still looking outward.”

Other sources said Ballmer (pictured here) might now be considering a more pure-tech exec for the role, rather than a Web exec.

Microsoft’s culture is more technical than not, and such a leader might have an easier time leading the company’s Web efforts.

Yesterday, Valleywag had an intriguing report that well-regarded former Yahoo tech exec Qi Lu, who was its top search scientist, might be headed to Microsoft.

But Lu would be a more powerful weapon in Microsoft’s fight with archrival Google (GOOG) in the search arena than as the company’s overall digital leader.

Then again, nabbing someone like Li could be part of a larger team Ballmer might be contemplating, made up of both external and internal elements.

Time will tell, of course. How much time, though, is anyone’s guess.

There will be a lot of different reactions to the first of Microsoft’s newest series of commercials, featuring Founder Bill Gates playing straight man to comic Jerry Seinfeld.

Set up as a discount shoe-buying skit, Seinfeld helps Gates purchase a pair called “The Conquistador,” and for some Seinfeldesque reason, it’s churros all around.

Actually, it feels a lot like the frequent and excellent Microsoft internal spoof videos Gates does with various celebs.

I have always liked them a lot and I like this one too, as it is quirkily charming (or is it charmingly quirky?).

But I am not sure the Gates-Seinfeld kibitzing will really get a lot of people talking about Microsoft (MSFT) products, as is the marketing goal.

And they surely are no where near as spot-on as Apple’s famed PC-Mac guys commercials, which are memorable and witty and deliver the message that Apple (AAPL) products are better.

What might be more effective, of course, at least in the Internet arena, is for Microsoft to get off the stick and lay out its next Web strategy clearly, especially in the wake of its failed attempt to acquire Yahoo (YHOO), and name the digital chief it said it planned to.

Several sources with knowledge of the situation expect an internal choice to helm the part of the business that was run by former Microsoft exec Kevin Johnson, who left after the software giant’s bid for Yahoo failed.

Although an external star coming in would be CEO Steve Ballmer’s top choice, I would guess, top internal contenders are Brian McAndrews, who came to the company via its $6 billion aQuantive acquisition, and longtime exec Yusuf Mehdi, who was Johnson’s strategy guy.

(BoomTown votes for a combination of both to make it extra complex!)

In any case, if it is serious about taking on rival Google (GOOG) in the online ad space and becoming at least the No. 2 player in the market, Microsoft has to move sooner than later and definitely much faster and it has a lot of options.

With Yahoo’s stock circling the drain, closing yesterday at $17.75, will Microsoft think about another bid for even a part of the Internet company?

Or will it try, as it claims, to get truly serious about building its business organically with programs like Live Search cashback, a deeper focus on vertical search improvements in places like video, images and mapping, and more content on its MSN sites?

Or should it be aggressively looking around for other properties to purchase to bolster its Web assets, such as the company that owns the Ciao price comparison and online shopping sites in Europe, for which it just forked over $500 million?

Of course, Microsoft will likely keep trying all of these, although I hope not in the muddling way it has behaved for far too long.

Johnson was entirely right in his internally controversial concept that being one of the top players on the Web is key to Microsoft’s future, even more than its lucrative Windows software hegemony.

(If you want to read an interesting take as to why, don’t miss New York Times columnist Joe Nocera’s “Does Windows Still Matter?” post yesterday).

And with Google’s new foray into the browser business this week, Microsoft surely has to be certain that it does not lose in the one place it does dominate.

In other words, Microsoft has a lot of work ahead of it, well beyond amusing us with Gates doing a thankfully hands-free adjustment of his boxer shorts.

In any case, you should see that, so here’s the first Gates-Seinfeld commercial:

I suppose that’s the reason Microsoft is not loaded for bear and headed back down to Sunnyvale to make another play for Yahoo right now.

Not even after Jerry Yang orchestrated activist investor Carl Icahn’s defenestration, by inviting him on the board at Yahoo (YHOO), where he will be 100 percent silenced.

Not even after the stranger-than-fiction shareholder vote miscount (oops–we thought no meant yes!).

Not even after Yahoo stock’s consistent flirting-with-the-teens price.

Not even after its second-quarter results made it clear that it’ll be an uphill battle for Yahoo management to achieve the aggressive financial plans outlined when the Internet company was fending off Microsoft’s takeover bid.

So while opportunity is surely knocking for Microsoft (MSFT), especially if it wants to reach its stated goal of competing with Google (GOOG) in the online space, the software giant prefers not to answer the door right now.

Sources close to Microsoft’s thinking say the company is waiting for the right time, when Yahoo’s stock price is even lower and when Wall Street completely gives up on management, to figure out the next move.

Instead of acting, according to sources, and taking more flak for those actions, the whole brain trust up there is taking a breather and biding its time.

(In fact, many top Microsoft execs are on vacation, which is why August is a good time for Yang–who is himself headed to China for the Olympics–not to worry about a hostile attack.)

The strategy? Sitting in the grass–waiting, watching and making plans.

But, in truth, Microsoft cannot really make plans–except for the vague we’ll-keep-coming-and-coming in the online search and display business motto–until it decides the best way to reach its intended goals.

The first order of business, of course, remains the selection of a digital czar, which was promised by Microsoft CEO Steve Ballmer after top exec Kevin Johnson quit unexpectedly several weeks ago.

As BoomTown previously reported, the top inside contender is SVP Brian McAndrews, who came to Microsoft via its pricey $6 billion acquisition of aQuantive.

And Microsoft’s future-of-software guru Ray Ozzie remains a favorite choice of the troops.

But, sources said, Ballmer is still interested in a possible high-profile outsider coming in to shake things up.

The problem is, most such execs see the job for what it is–a potential tar baby that will only muck their careers up and produce no easy victories.

“Who wants the headache?,” said one outside exec who has been contacted by Microsoft. “While there might be upside there, the downside is much more significant.”

Thus, sitting very still for now might, indeed, be Microsoft’s best choice. It certainly is a lot less messy.

But there is a movement afoot among its developers and other execs at Microsoft (MSFT) to push for Chief Software Architect Ray Ozzie (pictured here), who replaced Founder Bill Gates in the job just over two years ago.

Ozzie’s role at Microsoft has been to think the big thoughts about where computing is going, and he has been integral to the company’s vision of providing “software plus services.”

Essentially, that boils down to Internet-accessed software–which is Microsoft’s longtime cash cow–a kind of mash-up that plays to the company’s strengths.

But some think there is no bigger puzzle for Microsoft to finally solve now than to figure out how to finally succeed in the online space.

Microsoft’s online unit lost $1.2 billion in the past fiscal year, double what it lost in 2007, with quarter after quarter of disappointment, even as rival Google (GOOG) and Microsoft’s acquisition quarry Yahoo (YHOO) have raked in the profits.

That’s why some think Ballmer should put Ozzie in charge. With a long history of being a strong product exec, he also is a well-respected leader throughout Microsoft and, perhaps more importantly, the tech industry.

“We need a real star to shake up the status quo,” said one Microsoft employee, in a sentiment voiced by many BoomTown spoke to. “Ballmer has to put someone who can command the attention and respect of all the parts of Microsoft, which just can’t seem to get it together in our online business.”

But Ballmer (pictured here), said other sources, might be loathe to remove Ozzie from his overall tech guru role and place him in such a grinding and potentially thankless job.

There are other internal candidates at Microsoft for the opening, which was just created after the sudden departure of Platforms and Services Division President Kevin Johnson earlier this week.

With Johnson’s departure, Microsoft announced it would break up the unit into two parts. One will be a Windows/ Windows Live group, headed by Ballmer and run by a trio of execs, and the other will include online services such as search, MSN and online advertising.

There are several insiders quite interested in taking on that daunting task, said sources.

They include Senior Vice President Brian McAndrews, who runs Microsoft’s Advertising and Publisher Solutions Group and who came to the company via its $6 billion acquisition of ad firm aQuantive. He is widely seen at Microsoft as having the leading edge for the position.

Strategic Partnerships SVP Yusuf Mehdi, who has run online businesses for Microsoft before, is also a contender.

Ballmer has also put feelers out to Web leaders all over Silicon Valley of late, including former Facebook exec Owen Van Natta, to come and refurbish its Internet arm. Sources said Ballmer is also interested in execs like former CNET head Shelby Bonnie, as well as others.

One of the leading outside candidates was former AOL (TWX) head Jon Miller, who, sources said, told Ballmer yesterday that he does not want to be considered.

In fact, Miller is now likely to join the board of Yahoo as part of a deal the Internet company struck with activist investor Carl Icahn to cease his proxy fight.

Yahoo was, not surprisingly, top of mind in Ballmer’s speech before financial analysts yesterday at Microsoft’s Redmond, Wash., HQ.

Not surprisingly, Ballmer went out of his way to pooh-pooh Yahoo–a behavior that looks like it will become Microsoft’s latest weapon of choice for denigrating Yahoo and tanking its stock, in the wake of Yahoo’s rejection of Microsoft’s initial bid to buy the company outright and then, just its search business.

Pointedly calling the important search arena a “two-horse race” between Microsoft and Google–despite the fact that Yahoo is the No. 2 player, with a market share more than double Microsoft’s–Ballmer sounded more like a spurned swain for Yahoo’s affections.

Trotting out his somewhat inexplicable distinction of the Yahoo bid being “a tactic, not a strategy”–whatever!–Ballmer said: “We had a set of principles, we talked about them, it didn’t work out. … Fine, we’re done. We can move on.”

It seems Neil Sedaka was right: Breaking up is hard to do. As a parting shot, even though he was careful to leave the door open to future talks with Yahoo, Ballmer added: “People say ‘you have to buy Yahoo.’ … No, we don’t.”

Except Microsoft, um, does.

In any case, what the company will definitely do is spend more piles of money on its online business–an unspecified $500 million going forward, to be exact, which Ballmer said was critical to Microsoft’s future.

“There is this huge, huge, huge new opportunity around the Internet and online and we have to embrace that opportunity and invest in that opportunity,” Ballmer said.

That’s why some think Ozzie would be perfect for the job, now that the once fast-rising Johnson is gone.

He left, sources said, due to the collapse of the Yahoo deal, an effort for which Johnson served as point man.

Sources said that if the deal went through, Johnson would have run the Yahoo business, noting he has long indicated he wanted higher-level experience.

He will be getting that in his new job as CEO of Juniper Networks (JNPR), a quick move that many sources said surprised Ballmer and irked him (and things were already tense due to the failure of the Yahoo deal).

“Ballmer has to have a win here,” said one Microsoft source. “Even he can’t afford to miss again in this important space.”

That is the other certainty related to Microsoft’s rocky road on the Web: No, he cannot.

Please see this disclosure related to me and Google.

BoomTown was all busy trying to think of execs to replace Yahoo CEO Jerry Yang, as pressure mounts on him to right the troubled Internet company.

But now, Yang’s position feels safer than ever and it’s his nemesis–Microsoft– that needs a new leader for its long-stumbling online services business.

Microsoft (MSFT) was already cracking, according to sources, and had a wish list of internal and external candidates that CEO Steve Ballmer is now considering.

Ballmer noted in his memo to company employees yesterday the departure of Platforms and Services President Kevin Johnson and the reorganization of that massive division, that he would “create a new senior lead position and will conduct a search that will span internal and external candidates.”

Many think, given the turbulence, that Ballmer will pick a trusted internal Microsoft veteran, especially since he probably should move quickly.

Sources said Brian McAndrews (pictured here), who came to Microsoft via the $6 billion aQuantive acquisition last year, is the leading insider for the job.

SVP Satya Nadella, who will run search, MSN and ad platform engineering efforts in a new reorg, is less likely.

But Strategic Partnerships Senior Vice President Yusuf Mehdi, a longtime exec who has previously led online businesses at Microsoft, is also in the mix, the possible dark horse due to his past experience. As strategy “wingman” to Johnson, he might want a more operational job again now that Johnson is gone. Mehdi is also well liked in Silicon Valley and in media circles.

More interesting perhaps is one of the top outside candidates on the list, former AOL head Jon Miller (pictured here), who is poised to be added to the–wait for it–Yahoo (YHOO) board, as part of its recent proxy fight settlement activist investor Carl Icahn.

Miller, who was bounced out of AOL unfairly several years ago, is now running an investment firm with former Fox Interactive Media head Ross Levinsohn.

(And, adding to the hijinks, Levinsohn was on Microsoft’s alternate board in its own abandoned proxy fight against Yahoo.)

Other execs on the list are also more experienced in the Web space, such as former CNET head Shelby Bonnie, who is currently working on a start up called PolticialBase.

Microsoft sources said someone like former Yahoo COO Dan Rosensweig–now in private equity at the Quadrangle Group–is also the type of exec the company is looking for. Of course, he is deeply loyal to Yahoo (and his name has also been bandied about as a possible future Yahoo CEO too).

Of course, the company’s fondest desire is probably to get an even bigger Web or media exec like News Corp.’s (NWS) Peter Chernin or former eBay (EBAY) head Meg Whitman. (News Corp. is the owner of Dow Jones and of this Web site.)

Having been around when Microsoft first dipped its toe in Internet waters back in the mid-1990s, I’m sorry to say that whoever the software giant picks has small shoes to fill.

After years and years of losses, while Google (GOOG) and Yahoo made bank and grabbed share, Microsoft has not.

In its recent quarterly report, for example, while revenues for the online business rose 24 percent to $838 million, losses from Platforms and Services doubled to $488 million.

Ouch! That’s gotta hurt.

Because of the continued inertia, Johnson’s large unit–which includes the powerful Windows division, as well as the online services business–will be reorganized into two parts.

The Windows and Windows Live online service will be one part and other will be made up of online advertising, search and MSN.

That division needs to bulk up the software giant’s efforts in the Web space, especially in the online advertising arena where Google now rules.

In an attempt to make an end run around the search behemoth, Microsoft tried to buy Yahoo, the No. 2 player in the search and search-advertising space, and then tried to grab only its search business–efforts that have so far yielded nothing.

In any case, this reorg of a previous reorg (Ballmer united the Windows and online services business three years ago) is a clear signal of the unrest and even a bit of chaos at Microsoft resulting from the Yahoo battle.

There is definitely a lot of ire aimed directly at Johnson (pictured here) as the key executive in charge of the effort besides Ballmer, because of his failure to make a deal.

Worse, the bid forced Yahoo into the arms of Microsoft archrival Google, via a controversial search-ad outsourcing deal.

Microsoft must obviously do something.

Its market share in the search market, for example, has persistently stayed under 10 percent, despite a range of efforts to differentiate itself.

Re-energizing Microsoft’s Web efforts is most definitely a thankless job.

And whether replacing Johnson and bringing in a new leader who can push the reset button will work this time is unclear, as are many things having to do with Microsoft’s Internet strategy right now.

Please see this disclosure related to me and Google.

Kevin Johnson (pictured here), the point person for Microsoft’s failed bid to buy Yahoo, is leaving the company to run Juniper Networks.

As the president of its Platforms and Services Division, the smooth Johnson has been trying, without much success, to beef up the software giant’s efforts in the Web space, especially in the online advertising arena.

He and Microsoft have had a little problem with that, largely due to an immovable object called Google.

In an attempt to make an end run around the search behemoth, Johnson led Microsoft’s attempt to take over Yahoo, the #2 player in the search and search advertising space.

The six-month effort, according to many sources at Microsoft, has led to a great deal of unrest at the company, including ire aimed directly at Johnson because of his perceived influence on CEO Steve Ballmer.

That got worse as Microsoft’s various tactics to grab Yahoo and later just its search business have failed again and again.

In truth, Johnson’s strategy of using Yahoo as an “accelerant” has been a sound one, playing to Microsoft’s strengths.

It includes a focus on servers (muscle), software (technology) and scale (bigger is better) that is tailor-made for giant like Microsoft, which must both jumpstart is long-suffering online services business and also keep its powerful Windows brand from weakening.

Microsoft’s recent Vista version of Windows has not been well-received, despite Microsoft’s claims that it is a success.

The company is now currently working on its roll-out of the next operating system, Windows 7. It will include touch technology and also be more integrated to its Live offerings.

In a memo to Microsoft troops today, Ballmer wrote: “The success of Windows is our number one job.”

At the same time, Microsoft has been trying to improve its online business, especially in search and display advertising. But its market share in the search market, for example, has persistently stayed under 10 percent.

Over the last year, Microsoft has tried to move forward via acquisition, such as its $6 billion purchase of online ad marketing firm aQuantive last August. It has also introduced new search innovations like a cash-back program.

But, most of all, it has zeroed in on Yahoo, which has a share in the mid-20s, in order to give it a better chance to compete with Google, the dominant market leader.

After first trying to buy Yahoo in a bit of a ham-handed manner, it turned to a plan to buy its search business.

That proposal has been rejected by Yahoo twice as not good enough for a variety of reasons, some better than others.

The hubbub sent Yahoo into the arms of Google, with which it struck an outsourcing ad search deal, which has attracted a lot of controversy, but will likely go forward.

Welcome to Microsoft’s nightmare!

With archrival Google allied with Yahoo, Microsoft has succeeded in burnishing its image as a Web also-ran and still has an uncertain path to change that.

What Microsoft will do next is unclear, as it now probably has to focus on getting its own house in order, before facing outward again.

To begin, the company said, Johnson’s large unit–which includes the powerful Windows division, as well as the online services business–will be reorganized into two parts.

The Windows and Windows Live online service will be one part and other will be made up of online advertising, search and MSN.

Perhaps in a sign to its troops and Wall Street–Microsoft’s stock has been swooning of late, due to its recent disappointing results–CEO Steve Baller will take over the Windows unit.

Reporting to him will be SVPs Steve Sinofsky (engineering), Jon DeVaan (development) and Bill Veghte (business).

Microsoft will search for a new head of its online business, who will also report directly to Ballmer. Until then, SVP Satya Nadella will run search, MSN and ad platform engineering efforts and SVP Brian McAndrews will continue to lead the Advertiser and Publisher Solutions Group.

Hey, Jerry Yang is looking pretty stable in comparison right now, doesn’t he?

Please see this disclosure related to me and Google.

Just prior to Microsoft’s annual advertising conference advance08, Kevin Johnson, president of the company’s Platforms & Services division, sent the following strategy update to PSD employees:

From: Kevin Johnson
Sent: Sunday, May 18, 2008 1:30 PM
To: Platforms & Services Division
Subject: Online Services Strategy Update

We have been executing against the core strategy I first presented at our Financial Analyst Meeting in July 2007 to go after the growing opportunity in online services and advertising. Four pillars have formed the basis of our strategy:

1. Consolidate ad platform and win in display
2. Innovate and disrupt in search
3. Deliver end-to-end user experiences across PC, phone, and Web
4. Reinvent portal and social media experiences

We have many options that support acceleration of our strategy. As announced earlier today, we are also considering new alternatives for a transaction with Yahoo! which do not involve a full acquisition. At this time, we have not made a new bid to acquire all of Yahoo!, but we reserve the right to reconsider that alternative depending on future developments and discussions that may take place with Yahoo!, shareholders of Yahoo! or Microsoft, or with other third parties.

Regardless of the outcome of any new discussions, it is important that we continue to move forward to strengthen our online services business. The fact is that we are not where we want to be in this business yet and we’ve been in this position longer than we’d all like. To that end, we will be accelerating elements of our core strategy, and breaking ground in new areas.

On Tuesday, Brian McAndrews is hosting advance08, our annual advertising conference here in Redmond. Over 400 leaders from across the media, technology and advertising landscape will be here for two days to engage in dialogue on industry trends and opportunities. These leaders are some of our closest partners in the digital transformation of the advertising industry, and they recognize the increasingly important role Microsoft plays in this transformation. We are very excited to have these customers and partners on campus.

Brian’s keynote will highlight our unique position in the advertising industry. It’s amazing to see how far we’ve come with the aQuantive acquisition in differentiating our advertising platform. This foundation is paying off, with Q3 advertising revenue growth of nearly 40 percent, a rate that has accelerated over the past two quarters while growth rates at Google, Yahoo and AOL have slowed.

On Wednesday, we will be announcing a major new initiative that our search teams have been driving. We are getting better and better with our core algorithmic search, and at the same time, we are investing to differentiate in vertical experiences and to disrupt the current model. You’ll hear more about our plans Wednesday.

advance08 will underscore our commitment to search and online advertising, and you’ll continue to see announcements demonstrating our progress in this space. Earlier this week, I spoke to leaders across our online services business about our core strategy, the importance of acceleration and a set of actions we are taking, including:

1. Innovate and disrupt in search–We will disclose some elements of our plans with this week’s release of search and sharpen our focus on user experience and business model innovation. The work we have done over the last four years on search has established a solid foundation to build upon.
2. Win targeted distribution–With this release of search, we are now ready to throttle up broader distribution initiatives.
3. Reinvent portal and deliver new experiences across PC, phone and Web–We are building our new releases of Windows 7, Windows Live wave 3, Windows Mobile 7, Internet Explorer 8, Search and MSN with an eye towards optimizing and unifying experiences and scenarios.
4. Fix our online branding–Our brands are fragmented and confusing today, and we recognize a need to clarify and align our online branding . We are now driving forward to address this opportunity.
5. Win in display advertising–We have an advantage in tools, agency assets/relationships and a team laser-focused on capturing the display ad platform opportunity. As we build from a position of strength, we will increase engineering resources to drive even more innovation.
6. Build on our strengths in Europe–As measured by comScore in March, our online business in Europe is doing well. We have over three times the page view volume and nearly seven times the minutes of usage compared to Yahoo!, and 68% reach to internet users throughout Europe. We will double down on our investments in Europe and expand on this strong position.
7. Expand strategic partnerships–In addition to our organic innovation agenda, we will expand strategic partnerships that increase inventory on our display ad platform, enable new paradigms in search and accelerate growth in key geographies.
8. Pursue small, targeted acquisitions–Looking forward, we will focus on small, targeted acquisitions that support our work in search, complement our value in the ad platform and help us grow scale in key geographies. Recent acquisitions including Rapt and YaData are examples of these types of acquisitions.

   The PSD leadership team is actively working on the FY09 budget, including resources and investments to support the actions above. Additional elements of our work will be revealed in the coming weeks, leading to our Financial Analyst Meeting in July where I will share more details on our strategy and business/financial outlook.

As we move forward, I want to remind everyone that we are well positioned to compete. We have some of the industry’s best assets on our side: technical and business talent, global scale, a culture of self-criticism and tenaciousness, a healthy balance sheet and an unparalleled product portfolio. It’s time for us to seize the opportunity.

Thanks again for your continued leadership and focus on our business.

Regards,

Kevin Johnson l President Microsoft Platforms & Services Division

According to numerous sources familiar with Microsoft’s thinking whom I have been talking to this past week, quite a lot–from creating a single search index to forming one common ad platform to running the place with longtime Microsoft execs at the helm.

So let’s just ignore for now the latest wrinkle in this obviously dysfunctional relationship between Yahoo and Microsoft–which is beginning to remind me of that bizarre Charlie Brown, Lucy Van Pelt and football situation.

That’s because once again (and, as it has apparently done over the last year secretly, until Microsoft finally went hostile 10 days ago), Yahoo’s board is expected to deliver another no-thank-you-very-much-for-now in answer to Microsoft’s latest bid–this time a $31-per-share offer.

Fine, fine. We all know this is going to grind forward agonizingly, as investment bankers parry and various scenarios are bandied about (including here in excess, we can assure you!).

And, of course, there will be possible other merger partners leaked. On today’s menu: AOL! Having written two books about the even-more-troubled-than-Yahoo Internet outfit, here is my official response: Yuck.

Thus, to be more helpful, it might be better to focus on some things that might happen if the software giant ever got the keys to Yahoo.

Let’s be clear–nothing has been formally decided by Microsoft brass as yet, but there are some interesting ideas to be found in the planning they did before they prepared the offer, which can give one an outline of their plan if they won.

It’s important to think about, because exactly what Microsoft would do to Yahoo is probably something that Yahoo’s board, executives, employees and others would probably like to get a sense of as it considers what it should do.

First, we already know Microsoft will keep the Yahoo brand name, per public declarations by Microsoft CEO Steve Ballmer. This is kind of a no-brainer, especially when it is compared to the lackluster MSN. (Historical footnote: The code name for MSN was Marvel, which was a much better moniker still!)

Most sources familiar with Microsoft’s thinking could not agree more. One noted that Yahoo was clearly the best brand, but said Microsoft would likely remain “open-minded about what happens to the rest of the MSN-branded names.” Expect Window Live products to have the best chance of survival.

Also on the PowerPoint slides, which Microsoft execs have only vaguely referred to as cost savings, is the consolidation of the search indexes and technology of Yahoo and Microsoft into one product. Signs lean toward Microsoft here, as some of its execs have even publicly insulted Yahoo’s efforts in this arena.

Frankly, neither should be bragging much, given how badly they both lag behind Google, but Microsoft is better equipped from an engineering and power programming point of view to dominate here.

That also goes for the consolidating of the ad platforms, both for search and display. Even though Yahoo dominates the display market, Microsoft considers its recent acquisition of aQuantive to be the driver of this arena, rather than Yahoo’s technology and new purchases like BlueLithium and Right Media.

In both the ad and search efforts, sources said that Microsoft would split engineers between those who work on improving and running the core existing products and another group who will be focused on pushing to incorporate new innovation.

That would include trying to figure out a recent project Yahoo is currently undergoing, which inside sources call a “lugubrious” overhaul of the technology related to its display business. It’s comparable to its ill-fated Panama search-ad fix, a multiyear project Microsoft would probably be inclined to want to make sure is staffed by its own execs.

In that regard, if Microsoft ever prevails, Yahoo better be prepared to meet the parents.

They will be running the Yahoo show and would include Microsoft execs, pictured here, such as:

Brian McAndrews, former aQuantive CEO and now Microsoft’s SVP of its Advertiser Publisher Solutions Group, who is a rising star and would surely play a key role in all ad efforts and coordination.

Satya Nadella, corporate vice president of its Search and Advertising Platform Group, the engineering head whom BoomTown will now dub, “Mr. Search and Destroy,” because he would likely lead all efforts to use Yahoo’s assets to catch Google. (Good luck with that one, Satya!)

Yusuf Mehdi, SVP of Strategic Partnerships, who has been in and out of the MSN businesses many times and is one of Microsoft’s better-known Internet execs outside the company, and who has played an important role in this bid.

And, of course, Kevin Johnson, president of Platforms and Services Division, who runs quite a swath of the company. Besides Ballmer, he is probably the most important player in this effort to turbocharge Microsoft with Yahoo power.

That is, except for Hank Vigil, SVP of Strategy and Partnership, who has worked closely with Ballmer on this deal and also big moves like the recent $240 million Facebook investment. Vigil is not high-profile in any way, but he feels a lot like Zelig in his clearly important presence in a lot of Microsoft’s more bold initiatives.

One major Web exec who will not be part of the hunting party is Steve Berkowitz, SVP of the Online Services Group, who is finally on the way out, as has been long rumored. Sources said his change of status as a major Web player at Microsoft has been communicated to many top execs at the company last week. But it is not clear whether the former Ask.com CEO will leave Microsoft or get another job at the company.

In fact, many a Microsoft Web exec has mysteriously disappeared into the bowels of the company, never to be seen again, so Yahoo execs: Beware!