It did not start out too well for AOL CEO and Chairman Tim Armstrong, with a poll on the screen showing most of the attendees in the ballroom at Fortune Brainstorm Tech voting that the Time Warner (TWX) online unit was either out of juice or irrelevant.

The event, which is taking place over three days in Pasadena, Calif., is packed full of Web and media luminaries, so BoomTown will be sitting in the front row and liveblogging some of the sessions here, such as this one that I did for the session with Bob Iger, CEO of the Walt Disney Company (DIS).

Armstrong did not break any news in the interview with Fortune’s lively interviewer, David Kirkpatrick, relying more on projecting an I’m-in-charge-here attitude and saying confident things like “a challenge is also an opportunity.”

In general, Armstrong tried to be upbeat about the prospects for AOL, which has for too long been the Web’s sad sack of an Internet company.

“We are still in a very large trade wind,” he said, referring to advertisers spending money online. “If someone asked you if advertising [online] is going to go up, I think you would have to say yes.”

To take advantage of that, Armstrong said AOL would be focused on investing “in content systems that connect with advertising systems–that’s a white space we are going after.”

He noted that AOL needs to have the same “plumbing approach” to content that Google (GOOG)–where Armstrong had been a major advertising exec before taking his new job–has had to search advertising.

“You have to take the Silicon Valley approach to content,” Armstrong declared.

Armstrong also talked a little bit about his recent 100-day trip around the AOL empire worldwide and what he got out of it.

“I got a lot of advice from different people about what to do,” he said.

His takeaway, which he will discuss at an all-hands meeting scheduled for tomorrow with AOL staff: “It’s really about strategy. If we don’t have the right strategy, we’re not going to win.”

Which is kind of stating the obvious, but it sounded good.

Armstrong also touched lightly on the issue of getting rid of various assets AOL has compiled over the last several years, like it pricey purchase of the Bebo social networking site.

But some, as I recently reported–such as the Truveo video search service and the information search company Relegence–are staying.

Armstrong also talked of buying, but judiciously–noting to me later that AOL had 900 possible acquisition deals blocked in its pipeline.

Someone call a plumber stat!

Armstrong said he has put a stop to a lot of those deals, including putting the kibosh on a $400 million check he was supposed to sign right when he got there.

It was, as he told me after his interview, a windfall that supposed to go to a big computer maker for a distribution deal, which he chose to pass on.

“Everything has to make sense from a return-on-investment basis for me,” said Armstrong. “It’s that easy.”

And that hard, although he did move the crowd, which was polled with the same questions about AOL’s chances after Armstrong talked.

He got more people in the audience to vote that AOL would “return to health as a major Internet player,” which is–as legions of the company’s leaders have shown–no easy task.

[Photo credit: Brad Markel for Fortune]

In yet another appointment of an exec close to AOL Chairman and CEO Tim Armstrong, Patch Media CEO Jon Brod (pictured here) has taken over the new venture arm of the Time Warner (TWX) online unit.

AOL confirmed the appointment to BoomTown.

Patch is a hyperlocal community news site, in which Armstrong was the major investor. It was bought by AOL in June for just under $10 million.

Like recently installed AOL advertising head Jeff Levick, who worked with Armstrong at Google (GOOG), Brod has also known him for a long time.

He ran Patch for Armstrong and was president and COO of Polar Capital Group, Armstrong’s private investment company, which is focused on the media, technology and sports sectors.

Previous to that, Brod worked as an exec at InterActiveCorp (IACI) and even at the National Basketball Association.

Now Brod will helm AOL Ventures, a new unit of AOL that Armstrong created as part of a larger new strategy to invest in new things, and he will manage a portfolio of some of its more difficult recent acquisitions.

That means Brod will be figuring out what to do with AOL’s pricey purchase of its Bebo social networking site, as well as the Truveo video search unit, widgetmaker Userplane.

Sources close to the situation said AOL is bullish on Truveo (even though the previous management at AOL was poised to sell it), thinks Userplane’s once-promising prospects have dwindled due to neglect and will likely seek to sell Bebo.

But Brod will also be charged with investing in start-ups and also incubating.

“The Ventures group is about fostering innovation around the globe,” said Brod, in an interview with me. “And we’re going to create the Internet’s most entrpreneurial-friendly environment in order to accomplish this.”

The New York-based Patch is a platform that does deeply localized coverage of communities on a range of topics, from announcements to news to events to obituaries. It is aimed at competing with local newspapers and other media.

Microsoft does not have a secret plot to buy Yahoo.

Maybe Microsoft CEO Steve Ballmer should be hovering in the wings, like a digital Simon Legree ready to pounce again on poor Yahoo CEO Jerry Yang.

But he’s not.

And still the hopeful, the suspicious and, most of all, the beaten-down Yahoo shareholders continue to jump on any utterance from the software giant, even woefully mistranslating interviews with its top execs, to make it so.

Yesterday, it was some apparently mistranslated words from a German story coming from Microsoft’s Kevin Johnson–the head of its Platforms & Services unit who has been one of the main execs driving the Yahoo bid–about the company ready to make a new one if management changes.

This kind of thing has happened a lot since Microsoft (MSFT) walked away from its takeover bid for Yahoo (YHOO) in May, put off by months of rejection from the Internet portal and smarting from Yahoo’s flirtation with archrival Google (GOOG)–worries that turned out to be totally worth the worry, in fact.

Thus, the feeling persists that Microsoft is still hovering in the wings with some fabulously clever ploy to grab Yahoo once the time is right, once Yahoo’s current bumbling management is swept aside, once Yahoo’s stock once again falls below the $20-per-share mark that prompted its last foray.

But, even though Yahoo’s stock price is nearing that scary mark, as near as BoomTown can tell and let me repeat again, Microsoft does not have a plan to buy Yahoo at the ready.

That is not to say that they should not, as I have written again and again, given Microsoft’s definitely stated goal to compete aggressively in the online ad business, both in the search and display arena.

To do that and fast–because there needs to be some urgency here as Google is now sprinting away in the search sector and has some traction in the display area–Microsoft needs to be considering buying up, if not Yahoo, then the third-ranked business in the space, which would be Time Warner’s (TWX) AOL.

As I wrote before, in a move that seems increasingly sensible and easy (plus Time Warner CEO Jeff Bewkes is someone clearly ready, willing and able to deal):

As for AOL–it’s a more likely scenario, given it would allow Microsoft to double down in the display space with the Time Warner division’s Platform A ad unit and also gain some other strong properties (such as in video search with Truveo, with widgetmaker Userplane, as well as in instant messaging).

It would also probably like to give the boot to Google, which now serves up AOL search ads (and which also holds a 5% stake in AOL).

Microsoft has been very close to buying AOL before, once even considering spinning its Internet properties and AOL into a newco, so it does know the lay of the land there.”

While I realize a purchase of AOL, which Microsoft has noodled on before and is clearly noodling on now, seems like a band-aid approach to the situation and does not up its search share, the company probably needs to make a very bold and definitive move to begin its long slog to becoming the No. 2 player in the online ad market.

Because as Yahoo dithers its way and tries to recover from the management crisis it is in, Microsoft does, in fact, have the clear opportunity to become the second most important player in online advertising.

And given the attractive and obvious growth rate in the market over the next decade, is it such a bad thing to come in second?

In fact, when asked in a recent interview in the Financial Times, Microsoft’s Ballmer said as much:

At the end of the day, this is about the ad platform. This is not about just any one of the applications. The most important application for the foreseeable future is search. It’s where you start things. It’s where you express intent. It is important.

I don’t think we can say, OK, well, we’re going to be in the ad platform business, and we’re going to do it just on the strength of non-search based assets. We have to be in the ad business, and we’ve got to have a good chunk. We don’t have to dominate, but we’d better have a darn good chunk of the search market over time, and we’re working away at it.”

But, Microsoft clearly needs to work harder and quicker.

Or as Ballmer also said in the FT interview:

We’re small; the other guys are big. There’s a market out there. We have only one way to go, and it’s up, baby, up, up, up, up, up!”

Sounds like a plan to me.

Everybody remain calm.

While it might have looked like it was the rapture for major Internet players yesterday–what with everyone and his mother getting sucked up into the Yahoo-Microsoft takeover tussle and disappearing into the ether of confusion that now reigns over the situation–it is best to keep moving toward the light of harsh reality for illumination.

And the reality in three parts, addressing the trifecta of big news yesterday, is:

I DO NOT LIKE MONOPOLIES, I DO NOT LIKE THEM, JERRY-I-AM

Google (GOOG) and Yahoo (YHOO) will not and, more importantly, cannot make any significant search-ad deal in any way longer than the two-week test they announced to terrific fanfare yesterday.

It is a regulatory no-no of such an obvious nature, that Microsoft (MSFT) has to prove almost nothing to win on the merits of the fact that Google dominates the arena with such power that it cannot be linked with anyone else.

But it is a nice image of one Silicon Valley company coming to the rescue of another, helping to show how Yahoo could be better monetized and, therefore, be worth more.

(Although irony-alert: Outside of Yahoo’s own self-inflicted wounds, it is Google that is most responsible for knocking Yahoo’s teeth out in the search and search ad game.)

So, any further hook-up between the two seems sure to become the Justice Department Lawyer Employment Act of 2008, the likes of which we have not seen since Microsoft got its turn at being deservedly whacked for being a monopolist back in the last century.

Let’s face it, outside of those who cannot seem to shake the annoying Kumbaya mentality over at Google, a Yahoo-Google partnership is simply fantastical, like some out-of-control Dr. Seuss ditty.

They could not, would not with a goat. They would not, could not on a boat. They will not share an algorithm, they will not, will not, Jerry-I-Am.

TROUBLE AHEAD, TROUBLE BEHIND

In a post I did just before the heating up of the AOL-Yahoo talks was reported yesterday, I had written:

“Yahoo is still ferreting away with execs from Time Warner and its AOL unit–you know, that rat’s-nest of a deal in which AOL, Time Warner investment dollars and, oh, some old fishing rod of former exec Don Logan’s is thrown into Yahoo for a 20% stake, along with perhaps a dollop of Google involvement for added complexity.”

And, maybe it is just me, or–except for the fine fishing rod–is anyone else a little worried about the potential disaster of an AOL-Yahoo mashup?

As someone who wrote two–count ‘em, two!–books on AOL, including a very detailed narrative of the horrific AOL merger with Time Warner (TWX) a few years back, a union from which both sides have never adequately recovered, I am plenty worried.

From a Time Warner perspective, I get it. It allows the company to unload the lodestone of AOL from around its neck and finally give it some value.

I might point out that Time Warner had ample opportunity to so do over the years (more on that, tomorrow!).

And its inability to make much of the online unit must be disappointing to its new CEO Jeff Bewkes, who hated the original AOL merger more than most.

While Time Warner and AOL like to point to the success of Advertising.com, and there are some various bright spots here and there (Truveo, TMZ, Userplane), its online ad business is still not dominant enough and other parts woefully behind the efforts of others.

And its recent $850 million cash purchase of the very nice, but distant-third Bebo social-networking site reeked of desperation rather than the aspiration it was meant to be. With MySpace and Facebook battling for the big numbers, only help from a large traffic site like Yahoo might work.

That’s not to say that some of its deeply underutilized assets, like AIM, would not be a good add to Yahoo. But the benefit to Yahoo–except as a way to try to escape from or shake down Microsoft for more money–seems negligible.

Lastly, given that it would be a stock transaction without the need for a shareholder vote, I cannot imagine that a large number of them would not freak out at the uncertainty of an AOL-Yahoo merger versus a solid number from Microsoft.

RUPE-A-DOPE

How jaw-dropping are the rascally wiles of Rupert Murdoch of News Corp. (owner of this site)?

First, he cozies up to Yahoo CEO Jerry Yang like a White Knight, but gets caught up in the fact that Yahoo does not want him to have too much power.

Then, Murdoch heads on up to Redmond to play footsie with Microsoft CEO Steve Ballmer, intrigued by the possibility of offloading MySpace and getting a better trade for it.

You just know he’s going to end up with the whole thing and Yang and Ballmer will be left scratching their heads over what just happened.

But, seriously, I am not entirely clear why Microsoft is also adding this level of complexity, even if it would give it a partner to add more money and assets to the deal.

I get the addition of MySpace might be nice. And so would some investment dollars from News Corp. (NWS).

And, most of all, I see how delicious it might be for Microsoft to be able to fire Google as News Corp.’s ad partner for MySpace (a firing, I suspect, Google might actually welcome, given its public complaints about the difficulty of monetizing social networking).

But I am not sure why Microsoft won’t just man-up and fork over a few more dollars to its original offer, which would end this circus pretty quickly.

My guess is that the deal-making fervor has gone to its head and it cannot just be seen as giving in to Yahoo’s exertions to show it really, truly could be worth more.

Ballmer should just deliver that need from Yahoo and do the deal.

And, for good measure, he might just consult Proverbs 16:18: “Pride goes before destruction, a haughty spirit before a fall.”

GETTING READY FOR THE RAPTURE

Finally, for those who want to rock out on the rapture, here is singer-songwriter Jill Sobule, singing about it onstage at D5 last May:

Please see this disclosure related to me and Google.

Gone, Tim Tuttle of Truveo. Gone, the Birches of Bebo. Gone, Dave Morgan of Tacoda. Gone, many Quigos.

One of the more interesting little problems that AOL has had over the last few years, in regards to its acquisition of hot Internet companies, has been that it is situated deep in the bowels of the Time Warner (TWX) behemoth.

So, one wonders, will a possible hook-up with Yahoo (YHOO) change that, giving the also-ran Internet outfit potentially valuable stock in Yahoo to better entice valued employees to stay?

AOL has to hope so, especially since it has had an especially hard time loading up new employees it absorbs from acquisitions. This talent pool typically comes from a start-up culture, and they are used to big slugs of stock, with an attractive package of options in order to entice them to stay.

While all Web companies struggle with the hippity-hopping nature of employees, AOL has suffered more than most, sometimes due to its circumstances, sometimes due to its own efforts.

For example, with Time Warner stock staying in a permanent state of stasis over the years and a reluctance to reload too many new employees without generating the ire of old ones, except for the most desired talent, it is harder to keep anyone at AOL for long.

And that’s without the fact that AOL is not exactly the dream job for ambitious entrepreneurs.

For example, one of the stars AOL has lavishly pointed to as an example of how innovative it can be, Tim Tuttle, the CEO of its deservedly lauded video search engine Truveo, recently left to pursue other projects.

According to an AOL spokesperson, Tuttle will remain a consultant, passing day-to-day management to Pete Kocks. That also happened with Dave Morgan of Tacoda.

And AOL’s generous acceleration of vesting when it acquires other companies also often results in brain drain.

Case in point, two of its biggest accquisitions, Bebo and Quigo, in which the options ALL employees had in the companies were fully accelerated upon completion of the deals.

“I was amazed that they insisted on it,” said one person familiar with the Quigo deal, in which AOL paid $300 million for the online advertising company (news of which we broke here last fall). “It seemed designed to give everyone an escape hatch.”

And, indeed, many key Quigo employees have left since the deal was struck, which might have been the point.

It will be interesting to see what happens at Bebo too, where some have been given generous retention packages, but all have gotten their stock options accelerated.

AOL paid $850 million in cash for the third-place social-networking site recently. The two founders of Bebo–Michael and Xochi Birch–grabbed their large payday and were gone, baby, gone.

A Yahoo deal could certainly help the situation, by making AOL–whose assets would presumably be shoved into Yahoo–into a real live Internet company again and give its employees a true ownership stake.

Yesterday, newly minted Time Warner CEO Jeff Bewkes (pictured here) finally acknowledged the Web equivalent of the grass is green and the sky is blue related to its AOL unit.

His move–separating the dying Internet-access business from its much more robust online ad business–was long in coming, and it has been perplexing as to why it took so long for the media giant to declare this publicly.

The bold tone is certainly nice to hear at Time Warner, which has been cautious in the Web game over the past few years, ever since it got snookered in the mega-deal merger to AOL at the peak of the last Internet bubble.

Once burned, twice shy, one might say. But, in the case of the AOL-Time Warner merger, it was scorched earth for the company and the recovery has been long and painful.

Since then, the AOL unit has chugged along slowly, with its parts glommed together in an increasingly uncomfortable way, a vestige of an era when AOL ruled the soup-to-nuts online services business. It was once a very lucrative arrangement, with fat monthly fees rolling in, along with an ad business based on 1999 bubble economics.

No longer, as the way people access the Web was separated from a now largely disintermediated Internet.

Thus, the logical move has been to split the parts apart, giving Time Warner and Bewkes more options, including selling off either or both.

That issue is sure to come into sharp relief with Microsoft’s recent $44.6 billion bid to buy Yahoo, which most are saying is a dire problem for Time Warner, given they both were the prime candidates to buy AOL’s assets.

Well, maybe, but maybe not.

AOL still has one of the stronger ad networks out there, because of its prescient purchase of Advertising.com in mid-2004 for about $435 million. While there are way too many ad networks out there now, it is still an under-leveraged asset within the company, which could be sold, but does not need to be. After all, Time Warner is in the ad business overall and owning an online network is not such a stretch for it.

Plus, it will now be freed from the yoke of the access business, which will eventually decline to almost nothing. But that does not mean zero and its millions of customers might be worth something to someone. In any case, Time Warner can milk that part of the business–as it has been doing–until it eventually falls over dead.

The most interesting part of Bewkes’s figuring will have to center around its content and portal property, as well several interesting Web efforts.

While it is not known for original content, for example, AOL’s recently redone finance page is really quite excellent and useful, giving a dominant site like Yahoo Finance a credible competitor.

In addition, AOL owns pieces of the also terrific TMZ.com celebrity news site, and cool services like its very-early-to-widgets Userplane and the well-done Truveo online video service.

How Time Warner handles these kind of assets, to my mind, will be the most interesting indication of what it intends its digital future to be.

(By the way, Bewkes will be interviewed on stage at our sixth D: All Things Digital conference in late May, so it will be interesting to hear what he has to say then about AOL and Time Warner’s digital strategy.)

Of course, the inane answers of Miss Teen South Carolina made the top of the list.

And, however did we miss this gem at No. 4?–the “Paris in Jail” music video parody, sung to Hilton’s non-hit “Stars Are Blind” (which BoomTown actually paid for and downloaded):

Under the top television moments was, no surprise, the last scene of HBO’s “Sopranos,” with its “Don’t Stop…” stop.

And here’s BoomTown’s interview with Truveo’s Tim Tuttle in August:

As expected, from a story we broke in BoomTown more than a week ago, AOL confirmed it has bought the Israeli content-targeting ad network Quigo.

The sale price, said sources, was a lofty $300 million, around what Yahoo paid for data analytics ad network BlueLithium in September.

Well, it’s probably a good thing for AOL as it tries to turn itself from the onetime online digital home for consumers to what amounts to a glorified ad network.

That’s probably a good idea, given that the service has lost about one-third of its paying subscribers this year, which is no surprise after it went free. AOL now has just over 10 million, but is banking less on them than on selling ads all over the Web for its future.

Still, as sites like Facebook and others add users to their services, it is also more than a little depressing to me, given AOL’s history of pioneering the idea of a robust Internet community, where users created what former AOL top exec Ted Leonsis used to call a “permanent online presence.”

At the time of the merger between AOL and Time Warner at the turn of the century, AOL had more than 30 million such users, an audience that was bound to decline, given the lack of ability to take advantage of many opportunities for the company over the years.

I have always likened Time Warner’s handling of its AOL subsidiary–which I think comes a bit from its lingering corporate rage over the disastrous merger–to watching someone fall down stairs very slowly and deliberately.

At first you feel bad, and then you’re simply annoyed at the sheer waste of a once-great brand.

For example, it never built an ad network of its own (although former CEO Jon Miller’s purchase of Advertising.com was a lifesaver); it never spun the service off when it could have benefited from being on its own in terms of innovation; and it never made the kind of key acquisitions that would have kept its features fresh for users and prevented an exodus.

In my second of two books about AOL, called “There Must Be a Pony in Here Somewhere,” I jokingly referred to Dick Parsons, who recently stepped down as CEO, as a “noncarbonated beverage,” whose greatest legacy at Time Warner will doubtlessly be steadying the situation at the company after the merger mess.

Well, that’s been a good thing, of course, but it has also meant a stultifying recent record for AOL in years that have seen a really substantive boom in the Internet space.

In fact, the only real corporate focus thus far seems to be on jobs cuts, which is fine, but not exactly what I would call a vision for the future.

Nonetheless, in his new job as Time Warner CEO, Jeff Bewkes (pictured here) still has a lot of opportunity going forward. The ad network is a good idea, as I said, but AOL faces a lot of competition in the arena from companies like Google, Yahoo and now Facebook and MySpace. And no slackers here.

And it is encouraging when AOL invests in interesting subsidiaries like Truveo and UserPlane, as well as holding a piece of content sites like TMZ.com.

Why not more focus on drastically improving its email and communications tools? Why doesn’t AOL double down in the fast-growing mobile market? And it still has great assets in pieces it owns like ICQ.

Even more interesting would be a spinoff of AOL or even a sale to a Yahoo or Microsoft, creating a more powerful entity in which Time Warner could own a big stake.

Incredibly, after horses that have left the barn at AOL, there is a lot AOL can be going forward.

The question is: Does Bewkes have some fizz in him to do it?

It is a new consumer destination site, which is aiming to go head-to-head with other video-search sites, like Google’s, Yahoo’s and Blinkx’s. Until now, Truveo has been providing white-label video search to big sites like those of AOL and also Microsoft’s MSN, CNET and other Web destinations. AOL acquired the company in 2006.

I had an interesting talk with Truveo CEO and Co-Founder Tim Tuttle about the debut of the new version of the service and the state of video on the Web, including the need for content owners to be more flexible and advertising to improve.

In other words: Death to the preroll!

It’s not often that AOL can actually be called innovative these days, but perusing its Truveo video-search site, which will roll out a new consumer destination site today, I might have to reconsider.

I will post a video later today on my visit to the San Francisco-based company, where I talked to its CEO and Co-Founder Tim Tuttle about the debut of the new version of the service and the state of video on the Web.

Truveo has been providing white-label video search to big sites like those of AOL and also Microsoft’s MSN, CNET and other Web destinations. AOL acquired Truveo in 2006.

I will leave the reviewing to Walt Mossberg, but from what I have seen using it so far, it is a really strong entrant into the market, with a well-organized site that feels more useful and better designed than any other player, including powerhouses Google and Yahoo.

Given that most feel that video is going to be the gold mine of the Web going forward, if someone can find a great way to monetize it all, the company that allows people to search well is likely to be in a catbird seat.