All Things Digital

My special BoomTown Yahoo (YHOO) tip inbox is filling up fast this week from Yahoo employees–who, by the way, seem to like to use Gmail as their secret one–all buzzing about the next shoe to drop.

That clodhopper would be, of course, which major exec will leave the troubled Internet company, all due to a major reorg that is about the hit the company within the next weeks.

After the recent departure of Network division EVP Jeff Weiner and Chief Data Officer Usama Fayyad–along with the flashier exit of Flickr’s Co-Founders Stewart Butterfield and Caterina Fake (who, it should be said, have been easing quietly out the door for a while now)–several sources tell BoomTown that Search and Advertising Technology group EVP Qi Lu is the next on his way out.

Dr. Lu (pictured here), holder of 20 patents, leads development efforts around Yahoo’s Web search and monetization platforms.

But Yahoo CEO Jerry Yang and President Sue Decker should be worried about just about everyone at this point, from Connected Life EVP Marco Boerries to Platforms and Infrastructure division EVP Ash Patel to the quartet of execs under Weiner.

Any insecurity in that group—Front Door and Network Services’ Tapan Bhat, Brad Garlinghouse, who heads Yahoo’s communications and communities arenas, Media Group head Scott Moore and Yahoo Search’s Vish Makhijani–and other SVPs on that level really, are especially worrisome, as the voids above and below them become larger and offers from the outside more enticing.

So, combined with the levels of tension rising at the company dramatically with the continued external turmoil, the looming reorg has got to have them plenty worried.

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Let’s move this back-and-forth- wrangling aspect of the story forward and get to the real issues in the Yahoo-Microsoft takeover battle, shall we?

So why is Yahoo’s board holding out for a higher price than Microsoft wants to offer to raise it?

From numerous reports, Microsoft (MSFT) seems willing to go to $33 a share, up from its original $31, while Yahoo (YHOO) and its shareholders are looking for from $35 to $37.

Are they simply looking for a bigger payday? Do they believe it is worth more, in spite of recent mismanagement? Do they want to save face, given the Internet company once had a $41 offer from the software giant? Is this just a big game of digital chicken?

Yes. Yes. Yes. And definitely.

But, according to sources close to Yahoo, one of the more important reasons Yahoo wants a higher price has a lot to do with worries about the domination of the email and communications market if a merger with Microsoft took place and the threat of regulatory action that would force the companies to divest those assets.

Sources said that Yahoo wants a large cushion in case the government finds the combination of Yahoo Mail and Hotmail too much.

It is.

That’s because Microsoft and Yahoo completely dominate all mail on the Internet. According to the most recent comScore (SCOR) figures, for example, Yahoo has 256 million users, while Microsoft has 255 million.

Google’s (GOOG) Gmail is a distant third with about 92 million users and AOL (TWX)–which kind of started off the whole email craze among consumers–has about half that at 49 million.

The same is true in the instant messaging market, with Microsoft and Yahoo holding an 80% to 90% market share together.

Calling David Boies! It all smells like antitrust investigation to me!

A high-ranking Yahoo source agrees. “We need a lot of reason to do the deal, because it could be very bumpy once we agree,” said the source. “How damaged would Yahoo be if it did not go through, or if important pieces of Yahoo had to be separated from the company?”

Some close to the company, though, would prefer a spinoff of its powerful communications products and services, in the case of a Yahoo-Microsoft union. “We could be the Google of communications,” said one source.

Of course, Google does not want this to happen. In a recent CNBC interview, Google CEO Eric Schmidt signaled the search giant’s intentions related to this thorny communications domination with a loaded quote:

“If they go ahead and the merger’s ultimately successful, it would be possible for Microsoft to integrate some of the properties and essentially eliminate consumer choice, particularly in electronic mail, instant messaging, the things where they have 80% or 90% market share, and that’s a sweet spot for Microsoft in its ability to eliminate choice.”

And, in fact, Yahoo CEO Jerry Yang and Chairman Roy Bostock raised the issue in a letter on April 7 to Microsoft, rejecting Microsoft CEO Steve Ballmer’s letter threatening to go hostile if talks did not proceed.

The Yahoo leaders wrote:

“As to antitrust, we have discussed with you our concerns. Any transaction between us would result in a thorough regulatory review in multiple jurisdictions. As a follow-up to a recent meeting among our respective legal advisers we had on this topic, and at your request, we provided to you on March 28 a list of additional information we would need to further our understanding of the regulatory issues associated with any transaction. To date, you have still not provided any of the requested information.”

According to one source, the antitrust concern that was not named was related entirely to email and instant messaging.

“Bring together our content and search is not an issue,” said the source. “But mail is a real problem.”

Please see this disclosure related to me and Google.

When BoomTown broke the news that Yahoo was paying $350 million for open-source email and calendaring company Zimbra back in September, it was clear it was not a middling move on the part of the Internet giant, which too often can act like a mouse when it comes to acquisitions.

In fact, the innovative Zimbra and employees, like its lively CEO and founder Satish Dharmaraj, are just the kind of new blood Yahoo needs as it tries to reinvigorate itself.

With the purchase, which was a bit pricey (but well worth it), Yahoo finally got the weapons it needed to go head-to-head with Google in the battle to offer fast-forward kinds of Web-based mail services to a wider range of customers from big ISPs to small businesses to universities.

Let’s be clear, Yahoo Mail has remained the bigger provider of Web email to general consumers. But most agree that it allowed Google’s Gmail to suck up all the oxygen in the room with more flashy features like threading of conversations, while not serving up a strong response in an arena Yahoo has pioneered quickly enough.

While its latest version of Yahoo Mail got strong reviews, such as this one from Walt Mossberg, Zimbra vaunts its effort at differentiation from the hyped Google offering forward more quickly.

More importantly, it has really strengthened Yahoo’s ability to make online email act more like a computer program than a Web page, which has been the main focus of late of Yahoo, Google and Microsoft’s Windows Live Hotmail.

The Zimbra acquisition takes it up a notch with a plethora of potential new features, such as easier-to-use calendaring and all sorts of nifty features via a widgety “Zimlet” system.

In addition, since Zimbra is designed with flexible and open Ajax programming tools, it makes it easy for third-party developers to make many other applications that jack innovation from the outside, making the communications platform the center of the Web experience with video, search and other tools.

Making online email sexy was not the greatest thing to have to sell to investors, but Zimbra did get backing from high-profile VCs like Benchmark Partners, Redpoint Ventures and Accel Partners. The start-up’s clients include Comcast, many ISPs and a number of colleges. The Wall Street Journal’s Robert A. Guth wrote about the company last year.

Now that the acquisition by Yahoo has taken place, Zimbra will continue to operate somewhat independently, although moving operations to Yahoo this month under the communications unit headed by Yahoo Senior Vice President Brad “Peanut Butter Manifesto” Garlinghouse.

Here’s my video interview with Zimbra’s Dharmaraj, which took place yesterday at its soon to be abandoned HQ in San Mateo:

And here is my video interview with Garlinghouse back when news of the acquisition broke: