Not to mention thousands more in relocation assistance such as covering the closing costs and paying mortgage interest on a new home near the company's Sunnyvale headquarters. No longer having to report to Microsoft CEO Steve Ballmer? Priceless. (Photo by AP/Elaine Thompson)

Allison's sort-of ex, Digg cofounder Kevin Rose, said he was buying Google. Surely not for Knol, Google's weak attempt at taking on Wikipedia — at launch, its search engine didn't even work. Jackson, come back and help us make sense of this crazy business! (Photo by Jason Calacanis)

It all comes down to Windows — and Windows Live, Microsoft's attempt to extend its monopoly operating system online. The basic strategy of combining the Windows operating system with Microsoft's online-media division, which created Johnson's job, was flawed. The skills involved in coding an operating system and creating websites and selling ads are fundamentally different; mastering them all would be beyond any executive's reach. Johnson was a talented executive, most agree, and his departure is a loss to Microsoft. But succeeding at his job would require focus, and a smaller ambit to his assignments. He needed to have a bigger job; and Microsoft needed someone with a smaller job.

The reorganization following his departure leaves things in a muddle. Windows will still be tied with some online services, under the "Windows Live" rubric; other online operations will be in a separate division. But what goes where? Hotmail, for example, was recently rebranded as a Windows Live product; but it's hard to see Microsoft's online operation giving up such a reliable traffic generator to the Windows group.

In Johnson's wake, expect more infighting, more reorganizations, more mass rebranding campaigns — everything, that is, except the kind of purposeful progress Microsoft desperately needs to compete with Google.

That Facebook would throw this all in Schrage's lap is telling — about both Facebook and Schrage. Schrage, having shrunk his role considerably by following Sandberg from Google to Facebook, is likely desperate for some scrap of increased authority. And Facebook's geeks, getting assailed in the press for their decisions, are eager for someone slicker than they are to take the abuse.

Still, it needs to be said: Facebook's platform is technically immature, and needs a technical manager. Chamath Palihapitiya, whom Schrage is replacing as its head, may be inept at public relations — look at last year's debacle with Facebook's privacy-invading Beacon feature. But that doesn't mean he's bad at running a computing platform.

Schrage may not be a geek, but he'll now need to play the part. This should be fun to watch. And he can take comfort in one precedent: This isn't the first time the owner of an important computing platform has, in desperation, put a gladhanding slickster in charge. Microsoft's Kevin Johnson, who now oversees Windows, previously ran its sales operations. He also negotiated Microsoft's Facebook investment. He would surely approve.

• Former Fox Interactive boss Ross Levinsohn and AOL CEO Jon Miller, now partners at Velocity Interactive, seem to come as a pair. Levinsohn is best known for acquiring MySpace for Fox Interactive and quitting the company after it wouldn't buy Digg. But Levinsohn is also known for bullying entrepreneurs — once, so badly that renowned angel investor Ron Conway reportedly "flew off the handle" at him. In some quarters and in Jason Calacanis's heart, Miller gets credit turning around AOL. But like any exec, Miller has his detractors at AOL and they came out of the woodwork when he was fired last year. One described him as
  

  An executive over 4 years that put more incompetent people in high-places (e.g., McKinley) while firing (Govern) and letting reams of talented folks (e.g., Kotay, list-o-long) leave that were passionate and—at least—somewhat competent, and were actually trying to foster some core innovation and synergy.

• OpenTable’s CEO Jeff Jordan is on Yahoo shareholders and board members' wishlist, just like he was on Facebook founder Mark Zuckerberg's list to become COO of that company before it settled on Sheryl Sandberg. An eBay veteran, Jordan was thought to be in line for Meg Whitman's job until he took over as OpenTable's CEO in 2007. His reputation as a "product Nazi" led Valleywag to endorse him for Yahoo's top job way back in November 2006.
• Tim Armstrong heads up Google's ad sales force and the unit is perhaps respectably profitable enough for Yahoo shareholders and board members to include him on their list. We wonder, however, if the board knows about Armstrong's involvement with sketchy search engine spam company Associated Content.
• Why wouldn't Yahoo's board and shareholders want Microsoft’s Kevin Johnson for the company's top job? Ever since Microsoft CEO Steve Ballmer announced a bid to acquire the company on February 1, no one's given more thought to running Yahoo. Johnson's even written several memos on the topic — showing great ability to include exclamation marks after the company's name while still respecting the need for capital letters.

Because we could not come to an agreement on price by the end of April and given our concerns about Yahoo's business performance, we elected to withdraw our bid and pursue better options for Microsoft.

Johnson's whole note, courtesy of Beyond Binary, below.

From: Kevin Johnson



Sent: Friday, June 13, 2008 2:20 PM



Subject: Update on our Yahoo discussions



I wanted to take an opportunity to provide my thoughts and perspective on the conclusion of our discussions with Yahoo, and its announcement of a commercial agreement with Google.



As I shared in my mail on May 18 (see attached), we have better options than a full combination with Yahoo at the price it suggested, and we have moved forward on our strategy to grow our online business.



Let me share a little background with you. When we made our original proposal on February 1st to combine with Yahoo, we offered a 62 percent premium that was based on a desire to reach an agreement in short order. The faster we could reach an agreement, the sooner we could begin the regulatory process and create value through this combination.



In a March 10th meeting in Palo Alto, we explained to Yahoo management the importance of reaching an agreement by the end of April in order to have an opportunity to complete the regulatory process by the end of this calendar year. Because we could not come to an agreement on price by the end of April and given our concerns about Yahoo's business performance, we elected to withdraw our bid and pursue better options for Microsoft.



During the last few weeks, we spent a considerable amount of time with Yahoo discussing an alternative proposal around search. Specifically, this search proposal had three components:

• Microsoft would have invested $8 billion in Yahoo at $35/share;
  
  
  
• Microsoft would have purchased Yahoo's search assets for $1 billion, and assumed the operations and R&D expense while returning data back to Yahoo for use in their advertising business; and
  
  
  
• Microsoft and Yahoo would have entered into a long-term search partnership, where Microsoft would have provided favorable economics to Yahoo search, including a three-year guarantee of higher monetization than Yahoo's Panama paid search system currently provides.
  
  
  
  This partnership would have created a stronger competitor to Google, providing greater choice and innovation for advertisers, publishers and consumers. This approach could have been implemented quickly and would have simplified the integration process for both parties. It would have also established the basis for a long-term Internet partnership between Yahoo and Microsoft.
  
  
  
  We believe this proposal would have created compelling value for Yahoo and its shareholders in at least three ways:
  
  
  
• New Transfer of Cash to Yahoo Shareholders. This proposal would have transferred $9 billion from Microsoft to Yahoo, which could have been used by Yahoo to reward their shareholders.
  
  
  
• A More Profitable Ongoing Business. This proposal would have resulted in higher operating income on an annual basis for Yahoo, with our projections more than doubling Yahoo's operating income in the first year of operation, and increasing it by more than $1 billion above its current operating income level.
  
  
  
• A More Compelling Search Offering. The combination of the search platforms would have unlocked new R&D innovation, eliminated redundant engineering efforts and allowed for greater scale in serving our customers.
  
  
  
  Taken together, we believe that our proposal would have created total value for Yahoo's shareholders in excess of $33 per share.
  
  
  
  Unfortunately Yahoo has chosen a different course, and yesterday announced an agreement that would start to consolidate over 90 percent of the paid search advertising market in Google's hands. This will make the market far less competitive. There are many experts who suggest that a host of legal and regulatory problems lie ahead for Google and Yahoo.
  
  
  
  Regardless of Yahoo's decision, we will continue to move forward on our strategy in online services and advertising.
  
  
  
  Since my mail on May 18, we have been making great progress. At our Advance '08 conference, we announced Live Search Cashback and Live Search Farecast, and the initial response to these user experience and business model innovations in search has been very positive. On June 2nd, we also announced a distribution deal with HP, the world's largest PC manufacturer, to install a Live Search-enabled toolbar on all HP consumer PCs planned to ship in the United States and Canada, beginning in January 2009.
  
  
  
  We look forward to sharing more milestones and details on our plans as we head to MGX (the company's annual sales conference) and our Financial Analyst Meeting in July.
  
  
  
  I remain confident in our assets, plans and people to succeed in building our online business. Thanks again for your commitment and focus.
  
  
  
  Regards, Kevin

The idea is that engagement mapping will convince advertisers that the ads consumers saw before they searched actually led to the purchase of their products, not the search ad that took the consumer to the vendor's online store. "We think paid search is getting more credit than it deserves," Johnson told Fortune. He hopes engagement mapping will convince advertisers to spend less on search and more on types of advertising Google doesn't have completely locked up.

This is a misconception of what search advertising is. It's not "brand advertising" meant to convince consumers to purchase a product. It's a way to make sure a product is highly visible when consumers are looking for it, no matter how they decided to look for it. If a series of ads on content sites convinced a consumer to purchase a product, that product's vendor better be the top search ad when that convinced consumer goes searching for it.

The good news? Engagement mapping — an effective way to tell how well a brand advertising campaign is working — won't erode the power of search, but it will take money from less measurable TV, radio and print advertising. The bad news? From the top, Microsoft may be too obsessed with Google to notice.

We are considering a transaction with Yahoo!, not a full acquisition, but we reserve the right to reconsider that alternative. We are not where we want to be. We are better with algorithmic search and we are investing to differentiate in vertical experiences. Hear more Wednesday. Actions we are taking: With search, we are ready to throttle up distribution initiatives. We are building new releases of Windows, Windows Live, Windows Mobile, Internet Explorer, Search and MSN with an eye towards optimizing and unifying. Fix our online branding-Our brands are fragmented and confusing. we need to clarify. In display advertising, we will increase engineering resources. Build on our strengths in Europe. Expand strategic partnerships. Pursue small, targeted acquisitions.

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

Kevin Johnson, president of Microsoft's Platform and Services Division, which includes Windows and MSN, is the most likely candidate. But like Ballmer, he has a sales background, and he, too, was involved in the failed Yahoo bid. Chief operating officer Kevin Turner is despised within the company, and despite previously being Wal-Mart's CIO, he's not seen as having the right kind of technology background. Ray Ozzie, a respected innovator, has yet to introduce any game-changing new products. Robbie Bach heads up the division that houses the Xbox, one of Microsoft's few hits outside Windows and Office — but he seems too disconnected from Microsoft's core businesses. The rest? A muddle of undistinguished Microsoft lifers and recently imported suits.

Was parked on University Ave right east of University Cafe near Waverly, on a conference call dealing with business for my own startup company. And lo and behold, Steve Ballmer, Kevin Johnson and some other woman walked out of the building on the corner (right @ 3pm). They walked along University Ave toward El Camino Real. I worked at MSFT for 3 years before leaving to do my start up so I know it was certainly then. Lots of silence on the Yahoo deal, and perhaps they were on Facebook business unrelated... but who knows.

Online advertising is an $80B industry by 2010. Yahoo! and Microsoft creates an alternative to [Google]. Yahoo! has issued a press release rejecting our proposal. We have a full and fair proposal on the table. We expect this transaction will close in the 2nd half of 2008.

Q: Benefits?
A: Media companies desire competition. Expanded R&D would drive innovation. Scale economics deliver value.

Q: Impact on staffing? Any reductions?
A: Some overlap. We have no shortage of opportunities. We need people.

Q: The cultures!?
A: Great engineering can change the world.

Q: Live, MSN, and Yahoo!?
A: The Yahoo! brand is the value. It is premature to make decisions about brands and technologies.

Q: Yahoo!'s technology infrastructure is non-Windows based?
A: In other cases we have prioritized continuity.

Q: Silicon Valley and Redmond?
A: Absolutely.

Q: Interact with Yahoo! employees?
A: No.

Q: Customers and partners?
A: Microsoft and Yahoo! continue to compete.

5:41 a.m.: Johnson is discussing operational "redundancies." Translation: When it comes to layoffs, Yahoo ain't seen nothing yet.
5:42 a.m.: Ray Ozzie, Microsoft's CTO, is giving a high-minded speech about how the Web has "transformed society." Derides search as "10 blue links," says the Web has evolved to "social media." Which would sound less like sour grapes if Microsoft were successful in either field. He ends with reference to "magic of software."
5:45 a.m. Microsoft CFO Chris Liddell says the company hopes to close the deal in the second half of the year. For Yahoos, that means at least 5, up to 11 months of uncertainty. Should be a field day for Valley recruiters.
5:47 a.m. Questions are starting. Why buy Yahoo, since you already bought aQuantive? Answer: Scale.
5:49 a.m. Question: Revenue synergies have been elusive in software deals. Kevin Johnson fields this one. Answer: Revenues are from advertising, not traditional software. "Scale economics" drive yield in both search and display advertising.
5:51 a.m. Ballmer: "We've been losing money. Our plan is not to lose money in the future."
5:53 a.m. Johnson: Advertisers have been giving Microsoft "unsolicited" praise for the offer. They want a No. 2 in the market, he says.
5:55 a.m. Microsoft-Yahoo can be "more efficient" with engineers working on search. Translation: More layoffs!
5:57 a.m. Question: Why not just spend more on R&D? Answer: Time to market.
5:58 a.m. Question: Why not wait until it could be a friendly offer? Answer: "We look forward to the dialogue."
5:59 a.m. Question: What happens to the MSN and Live brands? Johnson: "We love the Yahoo brand." Microsoft will "go through a process" to determine what to keep. Ballmer: "There will be a Windows Live. There will be an Office Live.... Yahoo those are all powerful brands." Sounds like MSN might be dropped.