Quincy Smith, the high-profile CEO of CBS Interactive, is planning on leaving his job at the media giant in January to start an advisory firm in Silicon Valley, according to several sources.

But, in an interesting twist, Smith (pictured here) will remain an adviser to CBS (CBS) under a multiyear contract, sources added, making it his first client.

UPDATE: CBS confirmed the move BoomTown earlier reported, in a press release below.

Apparently, Smith will focus intently on video monetization, authentication and other digital issues for the company. CBS is calling it a “transition to a new role,” in its official statement.

CBS Interactive President Neil Ashe will take over Smith’s duties, but without the CEO title, which was a relatively new one for Smith.

CBS is television’s most popular network again this season and its interactive properties are among the top ten in aggregate in both traffic and video.

“I’m very pleased to extend our relationship with Quincy, who is one of the finest minds working in Interactive media today,” said Leslie Moonves, president and CEO of CBS Corporation, in a statement. “Quincy helped put CBS Interactive on the map and we are now a Top 10 presence in premium content.”

Said Smith: “It’s a huge honor to count CBS as my first client. In three years, this company has grown its Interactive profile immeasurably, and yet there is so much more to be done. I love CBS and its people and I look forward to working closely with them to help CBS become the premier video content company, regardless of platform or screen.”

MediaMemo’s Peter Kafka wrote in May about the possibility of Smith departing CBS, where he has worked since late 2006.

As Kafka wrote, Smith has long wanted to start a new media consultancy and has also wanted to return to Silicon Valley.

In fact, the man BoomTown has dubbed the “Energizer Bunny of the Web” was an early employee at Netscape Communications in the Web 1.0 heyday, tried his hand at venture capital and worked on tech deals for media banking firm Allen & Co.

At CBS during the Web 2.0 era, Smith has been aggressively guiding the company into a series of transactions, including the $280 million acquisition of Last.fm in 2007 and the $1.8 billion purchase of CNET last year.

Smith has also been involved with digital issues related to CBS’s strong television assets. He has championed–unlike other media giants–widely distributing CBS content online and keeping control of its advertising sales.

People close to Smith say he often talks of trying to emulate Dan Case, the late brother of AOL founder Steve Case and the former CEO of Hambrecht & Quist, one of the more influential among Silicon Valley investment banks during the first Web boom.

Sources said that the time has now come and that the move is expected to be announced very soon.

It is also likely that Smith’s top business development exec at CBS, Mike Marquez, will also leave to join him at the still unnamed firm.

BoomTown suggestion for a name: Q 3.0.

Here’s Smith in a cameo for a video spoof after he paid $5 million for Wallstrip, the funny business video site which has since been severely sidelined:

QUINCY SMITH SIGNS MULTI-YEAR ADVISORY AGREEMENT WITH CBS CORPORATION

CEO of CBS Interactive to Depart in January 2010 but Will Continue Working with Company on Video Content Monetization, Among Other Projects

CBS Corporation announced today that Quincy Smith, Chief Executive Officer of its CBS Interactive division, will transition to a new role with the company beginning January 2010 as he starts an independent advisory business. In this new role, Smith will advise CBS on strategies and opportunities for growth across the Company’s interactive businesses. Smith, who had led CBS Interactive since November 2006, will remain with CBS Corporation as the division’s CEO through the end of 2009. Neil Ashe will continue as President of the division.

Smith will continue to be closely involved in CBS’s initiatives related to next-generation monetization of video, including oversight of the Company’s effort to explore authentication as a new, additive method of distribution. He will also advise on partnering with technology companies to expand CBS’s interactive presence, as well as explore new growth opportunities related to content, services and applications.

“I’m very pleased to extend our relationship with Quincy, who is one of the finest minds working in Interactive media today,” said Leslie Moonves, President and CEO of CBS Corporation. “Quincy helped put CBS Interactive on the map and we are now a Top 10 presence in premium content. His entrepreneurial spirit and his passion for the business have helped this Company attract some of the most creative minds working in digital media. I know he will continue to be successful in all he’s yet to do, and we’re very happy to have Quincy working with us in this new role at CBS.”

“It’s a huge honor to count CBS as my first client,” said Smith. “In three years, this company has grown its Interactive profile immeasurably, and yet there is so much more to be done. I love CBS and its people and I look forward to working closely with them to help CBS become the premier video content company, regardless of platform or screen. I especially want to thank Leslie for his leadership and counsel, and for giving me this opportunity to continue working with CBS.”

Smith came to CBS Interactive in 2006, and in three years helped build a division that has become a top ten property in terms of worldwide visitors and video views. CBS’s acquisition of CNET in 2008 added industry-leading Web sites like CNET.com, GameSpot, TV.com, chow.com and BNET.com to a portfolio that had already included top ranking properties like cbs.com, cbssports.com and last.fm. Today, CBS Interactive sites span nearly every category of premium content on the Web, across news, sports and entertainment.

Previously, Smith was an executive with Allen & Company, where he was involved with multiple transactions and advised companies such as Comcast, Google and CBS. Prior to Allen & Company, Smith was a Founding Partner of The Barksdale Group, a venture capital firm. Previously, Smith spent five years at Netscape where he ran Investor Relations and Corporate Development and played a role in over 20 joint ventures, investments and acquisitions including Netscape’s ultimate sale to AOL. Prior to that, Smith was an investment banker for Morgan Stanley.

Perhaps the sides in the ever-escalating war over the Skype deal will work out their differences and settle–which is what should and probably will eventually happen after everyone realizes how stupid all this noisy legal wrangling over the Internet telephony giant is.

But that day is decidedly not today, given a pair of recent PR hires by parties involved.

The founders of Skype, via the two tech companies they control, Joost and Joltid, have hired Sitrick & Company, headquartered in Los Angeles, while Index Ventures has tapped Joele Frank, Wilkinson Brimmer Katcher, based in New York.

Both strategic communications and public relations firms are well known for employing some very sharp elbows and extremely tough talk when it is time for some creative corporate crisis management.

And both are familiar with tech issues, having worked on contentious issues related to companies such as Microsoft (MSFT), Yahoo (YHOO), CBS (CBS) online unit CNET, and others.

And there is plenty of bad blood to work with here.

Yesterday, in yet another legal volley, Joost and Joltid filed a motion for preliminary injunction against former Joost CEO Michelangelo Volpi and Index Ventures, where Volpi now works as a partner.

They are asking that he not use knowledge or confidential information he got at the video start-up in current dealings with Skype.

Legal attacks have become the negotiating tool of choice from the founders of Skype, Niklas Zennström and Janus Friis, who were on the losing side of the $2 billion deal to buy the Internet telephony giant from eBay (EBAY).

Volpi is now a partner at London-based Index, which was one of the smaller players on the winning side of the bid, putting up $75 million.

To complicate things further, the innovative and entrepreneurial pair also own a company called Joltid, which has licensed key technology for Skype to eBay.

Joltid and eBay have already been fighting in court over that agreement, bickering back and forth about whether eBay violated the terms of that deal or not.

Via Joltid, Zennström and Friis also filed suit again against Skype and its owner, eBay, for copyright violations in the U.S.

For good measure, they added the winning buyout group, including Index, Silver Lake Partners, Andreessen Horowitz and the Canada Pension Plan Investment Board.

And both Joltid and Joost have also sued Volpi personally, as well as Index, making serious allegations about his behavior as Joost CEO.

This kind of mud-slinging could get even worse with the hiring of big PR firms.

Along with Frank and Sitrick, by the way, Silver Lake–which is the big player on the winning side–has hired Edelman’s crisis and issues management team.

Interestingly, several sources said, the various players have also been engaged in settlement talks, even as the lawsuits have piled up.

Coming to some agreement is clearly the best outcome, although it does not appear that the spate of lawsuits has yet derailed the eBay deal with the Silver Lake-led group, which could even close in the next several weeks.

“Everyone should be thinking ahead of the headlights,” said one source. “But right now, it seems to be all about emotions.”

Oh, I’m sorry, is this the part where BoomTown is supposed to make a list of some sort of what I like and don’t like, what’s hot and what’s not, what’s going to happen and such to all the various players in the digital space?

I don’t think so.

Why? Well, when I have in the past or have read them from others, it’s a lot like Nostradamus. You can read into it anything you want.

For instance: Apple (AAPL) CEO Steve Jobs wrote a public letter today that essentially says he is not dying, as many speculated he was last week–without a trace of proof.

And, presto-chango, the thickest in the blogosphere then does another twisteroo and uses it as confirmation that he is in indeed sick and it was the true reason for his Macworld keynote pullout, even though Jobs says no such thing in the letter.

Or, more mundanely, I write: “Mobile will be bigger than ever.”

Well, to start, it is a kind of duh-prognostication. Plus it is essentially meaningless, since obviously more folks on the planet means more cellphones.

Or, what about: “Twitter/Facebook/Digg/Fill-In-The-Overhyped-Start-Up will sell to a major media giant.”

Okay, maybe, if any of those major media stocks were not in the toilet and their execs decided to do another Bebo/CNET/Fill-In-The-Overhyped-Start-Up cash belly flop like last year.

You get the idea.

But the real reason I am not inclined to go all Miss Cleo is simple: I have no idea what is going to happen and neither does anyone, even in their heedless guessing.

Did we imagine Microsoft (MSFT) would launch a hostile attack on Yahoo (YHOO)? No, we did not.

Did we guess that Google (GOOG) stock would tank to half its value in a massive U.S. economic collapse? Nope, sister.

Did we know that Apple apps would take off like gangbusters, even as rumors of Jobs’s imminent demise would too? Sorry, but we didn’t, including you in the back there insisting you did.

Did we foresee that the insane valuations for Web 2.0 companies like Facebook and others would drop like the ball in Times Square on New Year’s?

Wait, we got that one right.

Here are the only predictions I can make, which is that these will be the topics that everyone will be chattering about in tech in 2009:

AppleAppleAppleAppleAppleAppleAppleAppleAppleAppleAppleApple
AppleAppleAppleAppleAppleAppleAppleAppleAppleAppleAppleApple
AppleAppleAppleAppleAppleAppleAppleAppleAppleAppleAppleApple
AppleSteveIsSickAppleAppleAppleAppleAppleAppleAppleAppleApple
AppleAppleAppleAppleAppleAppleAppleAppleAppleAppleAppleApple

Also:

TwitterTwitterTwitterTwitterTwitterTwitterTwitterTwitterTwitterTwitter
TwitterTwitterTwitterTwitterTwitterTwitterTwitterTwitterTwitterTwitter
TwitterTwitterTwitterTwitterTwitterTwitterTwitterTwitterTwitterTwitter
TwitterTwitterTwitterDidYouKnowSteveIsSick?TwitterTwitterTwitter
TwitterTwitterTwitterTwitterTwitterTwitterTwitterTwitterTwitterTwitter

And:

Yahoo!

Wait, that’s just me.

[UPDATED: H-P exec Todd Bradley has been a public company CEO, which I reflected below correctly.]

With Yahoo board Chairman Roy Bostock reportedly assuring investors and others that the company will have a CEO in place by the end of the year, it seems prudent for BoomTown to initiate an official Yahoo CEO Countdown.

After all, this column had a 100-Day No-Sacred-Cows Vision Quest to mark the time that Jerry Yang said he needed to give Yahoo a top-to-bottom look-see when he took over last summer as CEO.

Yang announced he was stepping down on Nov. 17, prompting the search for someone to lead Yahoo (YHOO) to the promised land where BoomTown countdowns are illegal.

But that’s not today, so here’s the 26-days-to-go update:

It looks like Yahoo has almost no chance to nab a top candidate, News Corp. (NWS) COO Peter Chernin. While Yang made nice and Bostock quickly lobbed in a call to get the well-known exec to come in and talk, several sources said Chernin declined even that.

Of course, moguls like Chernin are pros at not interviewing–one media player schooled me that you apparently never show interest in a job and only take it if a full offer is made, because if you don’t get it after chit-chatting, you look like a loser.

But I don’t think it is a slick feint on his part, even though Chernin is now engaged in contract renewal negotiations at News Corp. (which owns this Web site).

Consider: If you were Chernin, would you want to trade your powerful, well-paid, glamorous job in Hollywood and New York for what will surely be a slog of a job in Sunnyvale, and in a cubicle?

And Chernin has told many he is not interested in doing the job, although News Corp. would still love to do some sort of deal to combine its online assets, like MySpace, with Yahoo’s, as it almost did many times.

While Chernin did just take delivery on a Tesla, showing some clear geekiness, and he would be an exciting get for Yahoo, it’s the longest of shots.

The same is true for some other names that have been floated (by me!).

But several of the people are on the Yahoo board’s list too. And while things can change, it is more unlikely any of them will be the pick.

That includes former Yahoo COO Dan Rosensweig, who has a good life now as a media investor; former eBay exec and OpenTable CEO Jeff Jordan, who told his investors he does not want to be in the running and was sticking with the start-up’s IPO plans–if and when the economy recovers (although Yahoo could buy OpenTable and, thus, Jordan); former eBay (EBAY) CEO Meg Whitman, who could be running for governor of California; and former AOL CEO Jon Miller, who is not secretly buying Yahoo, but who could not be its leader anyway, since he is bound by a Time Warner (TWX) noncompete agreement until the end of March.

Another sticking point: The Yahoo board has limited the pool by a list of six criteria that it has drawn up, with the No. 1 being a CEO candidate has to have public company CEO experience.

If enforced, that nixes some folks, like Google (GOOG) exec Tim Armstrong. In addition, Yahoo President Sue Decker getting the nod is even more unlikely, for that and other reasons, according to many.

From my lists, that leaves DoubleClick head David Rosenblatt (his company is now owned by Google); Demand Media’s Richard Rosenblatt; former Viacom (VIA) head Tom Freston; former CNET CEO Shelby Bonnie; Hewlett-Packard (HPQ) exec Todd Bradley; and Juniper Networks (JNPR) CEO Kevin Johnson, who was the Microsoft exec who was key in the Yahoo takeover attempt there.

All have reasons not to either want or be able to take the Yahoo CEO job, so that means there could be a dark horse candidate. (I am now drawing up yet another list of qualified public CEO tech and media execs).

Here’s one: Yesterday, after it was announced he was stepping down from Microsoft (MSFT) in the wake of its hire of former Yahoo tech star Qi Lu as its online leader, I noted that I liked Brian McAndrews for the job.

Plus, the former CEO of aQuantive, which Microsoft bought for $6 billion last year, would be a delicious irony. But those who have talked to him told me McAndrews–who did want the digital head job at Microsoft and was left hanging by the software giant’s CEO Steve Ballmer–seems intent on taking time off now.

Alternatively, one of the two Yahoo board members, Maggie Wilderotter or John Chapple, both have the public company CEO checked off.

Personally, I am betting on one of them as CEO, although I believe it would be better if Yahoo picked a fresh outside choice.

So do a lot of execs remaining at Yahoo, most of whom visibly roll their eyes at the idea of a board member taking over, considering the record of the directors so far in guiding Yahoo’s fortunes.

That’s why the board–which definitely has not distinguished itself by any criteria so far in Yahoo’s long fall from grace–should try to get it right this time, as Yahoo can’t take any more of the way it has been running the show so far.

Last night, Walt Mossberg and I hosted yet another annual “What’s Hot and What’s Not in Personal Technology” event for the Churchill Club.

A brief rundown of the Palo Alto gadgetfest show-and-tell: An animatronic singing Elvis freaked out my No. 1 son, Louie, who played an excellent Luke Skywalker/gadget boy for my presentation; our guest gadget geek was Twitter Co-Founder and CEO Evan Williams, who was a delight with a mini-helicopter, a flat-screen reader and a wry wit; Walt showed off the new Blackberry Storm from RIM (RIMM), the alleged Apple (AAPL) iPhone killer (maybe not so much), as well as a fuel cell and more; and our crazy gadget maven, Greg Harper, co-founder of Gadgetoff, went perfectly insane with everything from tiny projectors to a creepy probe to minicellphone towers to USB ties and eyepads.

It was a lot of fun with a packed crowd, even in this econalypse-impacting Silicon Valley.

Here is a rather longish video, which is well worth watching. Yes, BoomTown is–along with Louie and Elvis–wearing a Yahoo (YHOO) hat.

Here’s the video:

[Photo courtesy of Dan Farber of CNET.]

BoomTown might have been remiss in my post yesterday on top candidates for the Yahoo CEO job, after the news Monday that Jerry Yang is stepping down, by leaving out several key possibilities.

Yesterday’s roster included News Corp.’s Peter Chernin, Google’s Tim Armstrong, Kevin Johnson of Juniper Networks (JNPR) and also two Yahoo board members, among others. (The main internal candidate, Yahoo President Sue Decker, seems unlikely to get the nod.)

So here is an addendum to my initial list–all of whom are Yahoo (YHOO) outsiders.

Tom Freston:

Chernin is not the only media mogul whose name is being bandied about–the other prominent one is former Viacom head Tom Freston.

Freston apparently got shafted by the–let’s be polite here–disturbingly volatile founder of Viacom (VIA), Sumner Redstone, for not buying MySpace. In fact, News Corp. (NWS), which also owns this Web site, did. But Freston remains a well-respected and creative exec and has been dabbling in the Internet space since leaving Viacom.

Also, Oprah and Arianna love Freston–which is all I need to know.

Jeff Jordan:

Jeff Jordan, the former top eBay (EBAY) exec who is now the CEO of OpenTable, was also on the short list for COO at Facebook, a job that went to former Google exec Sheryl Sandberg.

While the restaurant reservations Web start-up has been headed for a public offering, that event has obviously been pushed out indefinitely by the econalypse, which might be just the impetus to convince Jordan that bussing tables all day is too dull.

Some speculate that Yahoo could buy OpenTable and get Jordan in the process.

Richard Rosenblatt:

Another interesting idea is Richard Rosenblatt of Demand Media, a company that Yahoo was sniffing around not too long ago.

The network of social-networking sites and apps maker is an innovative play in the space and might give Yahoo some much needed Web 2.0 DNA. Demand could still be bought by Yahoo, in order to put Rosenblatt into place.

(Rosenblatt, for those who do not remember, ran the company that owned MySpace, and he was key to selling it to News Corp.)

Also, Lance Armstrong likes Rosenblatt.

Shelby Bonnie:

A reader actually made the excellent suggestion of former CNET head Shelby Bonnie, who is now investing in start-ups. Bonnie is another steady exec–despite leaving CNET, now owned by CBS (CBS), under an options backdating controversy–and is well-liked in the Internet industry.

Yahoo would be a much bigger job than he has ever held, although he certainly has both tech and advertising experience online.

David Rosenblatt:

Lastly, especially if Yahoo is interested in an exec who has turnaround talent, there is probably no better a choice than DoubleClick CEO David Rosenblatt. An experienced online advertising exec, he is also sharply outspoken and knows how to get companies in line and fast.

He is also impossibly rich after Google (GOOG) bought DoubleClick out from under–wait for it–Yahoo recently. While he is still running the show for Google, after having decided to stay, Yahoo might present an interesting challenge for the very savvy Rosenblatt.

Please see this disclosure related to me and Google.

Silicon Alley Insider’s Henry Blodget sounds an important horn again, namely, outlining in graphically ugly detail why graphical advertising-based online businesses are in big trouble.

In his post, Blodget shows some convincing graphs about past performance trends, including the years after the first bubble burst, from 2000 to 2002, which could augur what is to come for the display business.

That means uh-oh for companies like Yahoo (YHOO), CNET (CNET) and all the many start-ups like Facebook that are focused on display ads as their main revenue source.

Search advertising, he notes, seems to be in better shape to face off the stiff winds to come, although most of that money goes to the dominant Google (GOOG) in this arena.

Money quote:

How do we know online display ad spending will fall? Because by Q2 of this year it had already slowed sharply–to mid-single-digit growth–and that was before things even began to get bad.

According to IAB, the growth of non-search online ad spending (display, classifieds, lead-gen) was 14% in Q1 and 5% in Q2. 5%! That’s before the horrific fall-off in consumer spending in September. We’ll be lucky if non-search spending is up year-over-year in Q3. By Q4, it will almost certainly be negative.

Blodget is predicting a 10 percent decline next year and more in 2010, which is–considering that the entire economy is in trouble this time–probably conservative to me.

As to all those start-ups who have been telling me Advertising, of course as their business plan, it might be time to get another plan for what is to come.

Last week, one of the things that struck me about the coverage of the two main tech conferences devoted to start-ups, DEMOfall and TechCrunch50, was the almost complete lack of discussion–or, more appropriately, worry–about the troubled economy.

This, even though the subprime mortgage crisis remains in full swing, along with the continuing turmoil around the stability of Wall Street financial firms, as well as Fannie Mae and Freddie Mac. Also, let’s not forget those sky-high gas prices.

Still, one entrepreneur after another got up and spun stories of companies built on fancy new ad models to come or the more hidden premise that they would get bought by a bigger fish up the food chain like Google (GOOG) or Microsoft (MSFT).

But as I wrote last week, all those stocks are suffering, and those companies are likely to be retrenching rather than expanding.

In fact, at an interview with Internet entrepreneur and investor Peter Thiel at TC50, he called Web companies undervalued. (See my video interview with Thiel here last November, in which he says a lot of the same stuff.)

As he told me almost a year ago, Thiel repeated his contention that the technology sector was still not in a bubble.

Well, perhaps not, but that’s actually because most companies in Web 2.0–despite their massive valuations over the last few years–aren’t going to have the chance get frothy and light enough to become so poppable.

Instead, most will likely fizzle away quietly, with no exits in sight as the economy weakens and puts a vise grip on companies that cannot survive the very tough financial road ahead.

That means the popular Web 2.0 maxim of “growth before profits” is in for a very bumpy ride.

It’s going to be especially true after this weekend’s latest round of bad news–the bankruptcy of Lehman Brothers, the sale of Merrill Lynch, the impending crisis at banks like Washington Mutual.

And with more to come, I could not help but remember the well-known political phrase used in the 1992 presidential race by the Clinton team: It’s the economy, stupid.

And that’s true even here in Silicon Valley, where the sun always seems to shine, even as the clouds gather.

(Also, here is a very good piece on the topic by CNET’s Larry Dignan on some more details of the impact on tech firms, specifically on selling products to financial firms.)

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.

So when will Microsoft (MSFT) and Yahoo (YHOO) really start talking again?

Much sooner than later, if investors have their way.

While the pair have not had any substantive new talks as yet, despite reports they had, BoomTown would expect pressure from those shareholders (if not a dose of sanity in the face of the Google juggernaut) will bring them to the table within the next week.

While the software giant has no interest in buying all of the Internet portal, under a scenario that was first suggested to Microsoft by major Yahoo shareholders–including activist investor Carl Icahn, who is waging a proxy war against the company–a more substantial search deal could effectively give Microsoft control over Yahoo.

How?

By beefing up all the terms of the partial search-ad deal Microsoft proposed recently, a deal it lost to Google (GOOG), especially the possibility of buying one-third or more of the company from investors at a price of $30 to $32 a share.

If Microsoft upped that stake, combined with the shares of other major investors, that would essentially give it and them a lot of control over the destiny of Yahoo.

That would mean, of course, the dumping of the much-touted Google deal Yahoo agreed to only two weeks ago.

Microsoft is contemplating the idea seriously, sources said, and its execs are busy preparing a new search-ad offer, although the company has not held any formal renewed talks with Yahoo thus far.

But, if this idea gains traction, Yahoo sources said there is little the company’s board could do to resist it and, in fact, key board members are also now interested in it.

Buying such a large stake in Yahoo is a bold move, of course.

Previously, as I posted two weeks ago and as was outlined again in a letter about a Microsoft search-ad offer released today by Yahoo, Microsoft had offered to buy 16% of Yahoo for $8 billion at $35 a share.

Microsoft was mighty irked by getting kicked to the curb by Yahoo, which has since insisted the Google deal was superior.

Not to Wall Street. Since then, Yahoo shares have dipped even lower, to about $22 a share today.

So if something does not happen, Yahoo’s annual meeting on Aug. 1 should be a doozy.

CNET’s excellent Charles Cooper ran a story outlining the possibility of a big-bowl-of-sugar-sweeter deal between Microsoft and Yahoo today, but it did not outline specifics, such as a larger stake or investors being key to its momentum.

But it is indeed pressure from disgruntled investors that has fueled action of late.

Because of that, sources said, some Yahoo board members–including board chairman Roy Bostock–have concluded the company must do some sort of deal with Microsoft, especially if it keeps Yahoo independent.

But independent does not mean that Yahoo CEO and Co-Founder Jerry Yang or President Sue Decker would necessarily be at the helm.

That might be why the pending announcement of a reorganization, which BoomTown outlined last week in detail, might have been delayed.

Not so! In fact, sources said, the reorg will be announced tomorrow morning.

Investors liken the reorg, being planned by Decker, to shifting around deck chairs on the Titanic.

“It’s over for Jerry–he is out of it,” said one major investor, who–like many–has lost patience with the pair. “And Sue is just too tied to him to remain.”

That might be wishful thinking, but sources close to the Yahoo board said the idea of doing a better Microsoft search-ad deal and also bringing in new leaders is gaining traction as options dwindle.

At least two board members, sources said, who feel they have not been heard, are contemplating leaving the board, and disappointment with Yang’s management appears to be the major reason for it.

And Bostock and others who have been key to the Microsoft talks and have been closely aligned with Yang now realize they must change course and perhaps leadership, sources said, especially as a significant number of top executives have left recently.

Despite all this hubbub underneath the surface, Yahoo has been publicly and loudly backing the search-ad outsourcing deal with Google that it struck.

In a letter to shareholders released today from Yang and Bostock, they noted about the Google deal: “This carefully structured agreement strikes the right strategic balance..”

And, of course, they also whacked the proposed Microsoft deal Yahoo rejected, adding:

“While Microsoft’s search-only hybrid proposal may have been helpful to Microsoft, our board and management concluded it would have had a significant adverse impact on Yahoo strategically, leaving the Company without the operational control of search assets and technology we view as critical to our objective of becoming a leader in the converging search and display advertising business.”

But the Google deal would be undone in the new scenario.

That might not be such a bad thing, though. The Yahoo-Google partnership is already raising troublesome questions from politicians and regulators, which is worrisome.

If Yahoo dumped the deal, the company would have to pay Google $250 million.

In addition to that cost, under the beefed-up search deal, Microsoft probably would also improve on all aspects of its offer, with more revenue guarantees on search ads and a higher price for search assets it would buy outright.

If Microsoft bought that large a stake, though, Yahoo’s worries about an exclusivity agreement Microsoft has wanted would be less problematic.

And, to add further complexity, I would also not be surprised to see an old Microsoft ally, like News Corp. (NWS), also brought into the picture, if talks proceeded.

Could it lead to more than just a search-ad deal to buy the company whole? I doubt it, as one Microsoft exec after another has insisted to me that the real prize for the company is Yahoo’s search share and search-ad business.

“A larger deal is unlikely in the extreme,” said one exec about a whole takeover. “That chapter is done.”

(Unfortunately, we’re not quite done with block-that-metaphors on the issue, like this moooooving one one from TechCrunch: “But for now, a clear message is being sent to Microsoft: If they want Yahoo’s search milk, they’re going to have to buy the cow.”)

In any case, there have been no formal negotiations yet, but as I also noted in many posts this week, there should be.

I wrote:

“It’s perplexing to me, for example, why Yahoo’s highly ineffectual board is not breaking land and speed records to try to revive a buyout from Microsoft or why Microsoft isn’t itching to do a deal now that the price is so low that Yahoo is practically giving itself away. At the very least, Microsoft should have and should still try to win the partial search deal, as it needs that market share badly to compete with Google.”

In other words, Microsoft and Yahoo: Get thee to a nunnery, oops, real negotiating table. And fast.

As readers of AllThingsD.com might have noticed, we added MarketWatch columnist Therese Poletti (pictured here) to the main rail of the site today.

Her twice-weekly column, Tech Tales, which appears on MarketWatch on Tuesdays and Thursdays, will also be published here too.

Poletti joins Eric Savitz (pictured here) of Barron’s, whose posts on his Tech Trader Daily blog about tech stocks have been appearing on the front of ATD several times a day for the past month.

We added these two very talented voices from other publications within Dow Jones (owner of this site), because we want to bring more cogent and useful news and analysis about tech and media to our readers. Also, they rock.

In all seriousness, the tech blogging arena is one with a lot of players–some great and some not so much–so we are especially proud of the high standards, accuracy and quality that each of these writers represents.

We will be adding more writers soon, so watch this space.

Of course, we also don’t believe in only cross-promoting Dow Jones brands, and publish a half-dozen major links to other sites daily in Voices, along with our tabbed front page feeds that link directly to CNET, paidContent, GigaOm and Techmeme.

We admire the work those sites are doing and, most of all, want to give our readers as many ways as possible to access the best posts being done across the digital landscape.

Of course, BoomTown and John Paczkowski’s Digital Daily remain the anchor of the main rail, while the work of Walt Mossberg and Katherine Boehret gets its own place at the top of the main home page of ATD.

In all, we hope readers find our commitment to giving you high-quality and incisive work–from scoops to analysis to reviews–helpful and we welcome any feedback.

In yet another letter to Yahoo Chairman Roy Bostock, the ever-grumpier billionaire investor, who is waging a proxy fight against Yahoo (YHOO) and seeking to oust Yang and crew, stepped up the volume to Crazy Eddie levels today.

It’s almost too juicy to require translation, as the veins practically pop out in Icahn’s letter from all the agita he seems to be experiencing over this botched takeover.

Icahn writes: Dear Mr. Bostock:

I have constantly complained about how far CEOs and boards will go in order to retain their jobs, yet even I am amazed at the length Jerry Yang and the Yahoo board have gone to in order to entrench their positions and keep shareholders from deciding if they wished to sell to Microsoft.

Translation: And I thought Dick Parsons of Time Warner (TWX) was a potted plant! But you guys make him look like the Road Runner, which is a very nice Warner Bros. brand, I might add.

Icahn wrote: According to details in a complaint that I became aware of yesterday (details Yahoo fought to keep under seal), Jerry Yang and a majority of the board went to inordinate lengths to sabotage a Microsoft bid.

The damage to Microsoft “is compounded by the fact that Yahoo’s thousands of engineers, known as ‘Technical Yahoos!,’ have detailed job responsibilities and qualifications.”

Translation: I am playing brain dead here, even though everyone and their grandmother knew exactly what Yang was doing at the time with that massive and costly severance plan.

But, with a little verbal foot-stamping and some grumbly sounds, I think it approximates an appropriately hysterical level of outrage and surprise.

Icahn wrote: Most importantly, Microsoft might never be able to trust a CEO and board who, while claiming to be negotiating in good faith, went behind their back and adopted a “plan,” which not only sabotages any Microsoft acquisition but went so far as to completely disable its own ability to rescind the “plan” as long as Microsoft’s offer remains pending.

In my opinion, it will be extremely difficult for Microsoft or other companies to trust, work with and negotiate with a company that would go to these lengths.

Translation: Outrage! Foot-stamping! Grumbling! Acting like the once-thuggish Microsoft (MSFT) doesn’t actually admire this tactic by Yahoo in its secret heart of hearts.

And now, the piece de resistance, I compare Yang to Ernst Stavro Blofeld, as translated by Mike Myers’ Dr. Evil (One millllllliiiiioooooon dollars!).

What next from you evil-doers? A shark with a nuclear bomb attached in my lap pool? Painting me all gold and purple? Perhaps suspending me and a lovely disposable Bond girl high above a tank of piranhas?

But I am 0000000007, a billionaire’s secret agent number, so bring it on!

Icahn wrote: It is insulting to shareholders that Yahoo for the last month has told us that they are quite willing to negotiate a sale of the company to Microsoft and cannot understand why Microsoft has walked away.

Could this have been the problem?

Translation: I like the silly focus on “the plan,” don’t you? It sounds so sneaky and naughty.

Even though, truth be told, Microsoft’s Steve Ballmer has publicly pointed to the ad outsourcing deal with its archrival Google (GOOG) that Yahoo is considering, as well as the price it is willing to pay, as the software giant’s main deal blockers.

Icahn writes: Even more deceitful are Yahoo’s actions toward its own employees, for whom you claimed to have set up the “plan.”

Management neglected to mention to these same employees that Microsoft in its proposals had earmarked $1.5 billion of retention incentives (representing over $100,000 per employee) meant to allay any employee concerns.

Translation: Again, “The Plan” sounds spooky, doesn’t it? M. Night Shyamalan is set to make a movie of it, just like “The Sixth Sense.” The tag line: “I see overcompensated geeks!”

Icahn wrote: Ironically, according to the complaint, this is not the first time that Yahoo has denied shareholders the opportunity of selling to Microsoft at a large premium.

An article in CNET News cited in the complaint sums it up by stating, “Yahoo may indeed agree to Microsoft’s [offer], but it will be over Jerry Yang’s dead body.”

Translation: Dead bodies! I smell a hit movie! Hello, Oscar!

I wonder if Michael Douglas should play me again?

Greed, by the way: Still good!

Wait, I am being distracted from the issue at hand, which is: Was the board and former CEO Terry Semel high not to accept that $40 a share last year?

Smoking, I might add, is very bad for your health.

Icahn wrote: I and many of your shareholders believe that the only way to salvage Yahoo in the long, if not short run, is to merge with Microsoft. However, because of HSR considerations, to complete a merger of this magnitude will take a period of time.

Therefore, the best chance to bring Microsoft and Yahoo together is to replace Yang and the current Yahoo board with a board that will negotiate in good faith with Microsoft and in whom Microsoft will have trust to operate the company during the long period between signing and closing.

Translation: Please step down now! No? Pretty please? (It was worth the try.)

Of course, Microsoft trusts me less than you to run the place, but let’s leave that pertinent point aside here, shall we?

Icahn wrote: You stated in a press release yesterday that, “Yahoo’s board of directors, including Jerry Yang, has been crystal clear that it would consider any proposal by Microsoft that was in the best interests of its shareholders.”

I understand how these actions are in the best interests of management and a board whose members each receive $40,000 per month for several days work, but it is hard for me to understand how these actions are in the “best interests of the shareholders.”

Translation: To make my point, let me channel Jack Nicholson in “A Few Good Men” here, with me playing Jack and Yang Tom Cruise:

Icahn: Ever served in a forward area?

Yang: No sir.

Icahn: Ever put your life in another man’s hands, ask him to put his life in yours?

Yang: No sir.

Icahn: We follow orders, son. We follow orders or people die. It’s that simple. Are we clear?

Yang: Yes sir.

Icahn: Are we clear?

Yang: Crystal.

Icahn wrote: However, despite your actions to date, there is still some possibility that you can resuscitate a Microsoft offer for the company.

I can only hope that you will finally do what is in the “best interests of the shareholders.”

Translation: My “plan” is to say “the plan” as much as possible, until I drive everyone nuts and take their eye off the ball, which is getting more money for me in this digital briar patch, as the only “shareholder” that I actually care about.

I threw in the “one doesn’t have to be a rocket scientist” dig, because I am not one in any way whatsoever and still have my secretary print out my emails.

By the way, what is this Facebook thingamajig people keep talking about as another Microsoft target? Do you have to be a rocket scientist to join it?

Icahn wrote: Sincerely yours,

CARL C. ICAHN

Translation: Still as insincere as ever!

So what other Web media company facing a hostile investor does CNET remind you of?

Disgruntled investors, a troubled Web 1.0 company whose management is recalcitrant to give in, an obviously powerful, but underutilized, set of assets.

The acquisition of CNET (CNET) by CBS (CBS) for $1.8 billion in cash is the happy ending of this scenario and, on first blush, I like it.

It is a fair price, but not excessive for CBS, which gets one of the highly trafficked sites in the tech news sector.

And it gives CNET–which was too big and yet not big enough to really move its own needle–cover from its shareholder attacks to make the kinds of changes to its business and products that it should have been making for a long time now.

Yahoo (YHOO), a much bigger deal, needs exactly this kind of resolution and soon, as its continued turmoil is hurting its prospects of returning to power.

Why? Most of all, key employees continue to eye the door or cannot help but be distracted from the business at hand with all the uncertainty swirling.

The problem for Yahoo, though, is that it is simply too large and too pricey to really have any real options other than a big purchase by, well, Microsoft (MSFT).

Unfortunately, after playing a lugubrious game of chicken for far too long in its acquisition battle with the software giant, Yahoo has truly lost any leverage it might have had in making decisions about what it wants to do next.

Instead, it is now caught up in the maelstrom of Carl Icahn and all he represents, which is to say a story less about what is right for Yahoo and its products, employees and prospects and much more about its stock and how the vultures of Wall Street can make hay off Yahoo’s shares.

These investors have no tolerance for the who’s-zooming-who games Yahoo was playing with Google (GOOG), AOL (TWX) and others, in a vain search for alternatives to a Microsoft takeover.

So if I were Yahoo’s Jerry Yang, I might be making my way to Redmond right now with hat in hand, in an attempt to control these talks instead of Icahn, because at least Microsoft is a company that is in and understands Yahoo’s business and would have the most respect for its business.

It’s also the one and only move Yang can make to ensure the future of the amazing company that he has built lives on in the way it deserves.

The sky is indeed falling, Jerry, so get to the king of Microsoft before the Icahn fox–as it did the guileless Chicken Little–eats you up.

Walt Mossberg interviewed CBS CEO Les Moonves at the fifth edition of our D: All Things Digital conference last May, where he talked about the media giant’s Internet aims.

The 53-minute video is highly pertinent to today’s acquisition of CNET by CBS for $1.8 billion in cash.

As I previously wrote, Les Moonves is getting into the Internet in a big way, it seems, if you watch this onstage interview with the CBS CEO.

While it used to be that big old-media companies, including the powerful television networks, always seemed to display disdain for the online space, these days they are talking it up like they invented it.

At the conference, in fact, Moonves unveiled CBS’s acquisition of Last.fm, the Internet social music platform, and spoke a lot about getting the company’s content everywhere.

Here is Moonves: