Unlike the gripping back and forth of the fight over Yahoogle last year, the approval process for the search and online advertising partnership of Microsoft and Yahoo is chugging along slowly but surely as the Justice Department has deepened its investigation by reaching out to a broad range of publishers, advertisers, public interest groups and rivals for comment recently.

A month ago, the government agency lobbed in a “second request” for information about the deal the pair struck earlier this summer.

This kind of regulatory review is typical in deals of this magnitude.

But so far, there is no significant external challenge to the MicroHoo deal, even–according to many sources BoomTown has interviewed over the last week–from Google, the likeliest company to try to scuttle or, at the very least, slow down the deal.

“Is it worth fighting a big fight over?” asked one person close to the thinking of Google (GOOG). “Not really.”

Said another source, surveying the state of play: “It’s eh, kind of inevitable and not that interesting on a lot of levels.”

While none of the key constituencies wanted to comment or make predictions about the outcome of the regulatory scrutiny, most seem to agree that MicroHoo is more likely to be approved than not.

At the time the partnership was announced in July, execs at both Microsoft (MSFT) and Yahoo (YHOO) said a lot of investigation was likely from Justice, although they said they were also confident that it would be allowed go through by year’s end.

So far, several sources said, the key issue raised by the Justice Department has been whether the argument Microsoft and Yahoo are making–that they need scale to compete with Google–is valid or not.

Currently, Google has just under 70 percent of the search market in the U.S., while Microsoft and Yahoo together have about 28 percent.

Google has been arguing that huge scale is not necessary to be successful in the search ad market, although its execs have often said bigger is better when it comes to natural search and in spurring more clicks on ads.

Meanwhile, Microsoft and Yahoo have said they need all the firepower they can muster together to battle Google’s hegemony.

In a related concern, some regulators are worried–as they were when Google and Yahoo were trying to get approval for a similar deal last year–that any hookup of big players in the market will effectively take Yahoo out of the search business.

“With only three big players, going to two is not desirable to the government,” said one source. “Yahoo has to reassure everyone that it is focused on a sustainable business model beyond search.”

In a blog post yesterday, in fact, Yahoo said it was committed to search innovation.

In any case, most expect another month of investigation at least, although the lack of any loud voice in opposition could shorten that time frame.

And, added some sources, unlike with Yahoogle, there is not likely to be any kind of Congressional hearing on the deal.

Nonetheless, Microsoft, Yahoo and Google remain concerned that deals like this will lead to more focus on privacy issues, specifically around behavioral targeting.

That would be more a matter for legislators or the Federal Trade Commission and would probably come well after the deal is cleared and as part of a bigger topic.

Rep. Rick Boucher (D., Va.), who chairs the Subcommittee on Communications, Technology and the Internet, said he will consider consumer privacy legislation this fall.

Boucher led hearings on the subject this summer, and there might be more, especially as Web companies garner a lot of personal information from consumers with little oversight of what they do with those data.

If Boucher does call for hearings, he might want to replay this particularly boneheaded (but funny!) video from Yahoo’s U.K. ad staff, which classifies various Yahoo customer types–such as “disco-dancing heart surgeons from Nantwich”–as farm animals:

Please see this disclosure related to me and Google.

Although it is not a particular surprise, because Microsoft and Yahoo execs had previously said they expected as much, the Justice Department lobbed in a “second request” for information about the search and online advertising partnership the pair struck earlier this summer.

A Microsoft spokesman confirmed the request to BoomTown.

“As expected Microsoft and Yahoo received an additional request about the agreement, as we said when this agreement was announced,” said Microsoft’s Jack Evans. “We anticipated this deal would be closely reviewed and we continue to be hopeful that it will be approved by early 2010.”

Simply put, the Justice Department wants more information about the 10-year deal and will do more investigation before approving it–or not.

This kind of review is typical in deals of this magnitude, although it is unlikely to be as fraught as Yahoo’s attempt last year to form a similar partnership with Google.

That deal collapsed after regulators indicated that they would oppose the arrangement, which caused Google to pull out.

At the time the partnership was announced in July, execs at both Microsoft (MSFT) and Yahoo (YHOO) said a lot of scrutiny was likely from Justice, although they were also confident that it would go through.

And, indeed, there seem to be no major objections from publishers and advertisers, as was the case with Yahoogle, even though a privacy group has raised some concerns.

Even Google (GOOG) has been unusually quiet about the deal, perhaps because its nearly 70 percent of the search market makes it the behemoth. Together, Yahoo and Microsoft have close to a 30 percent market share.

The deal must also be approved by European regulators, according to the terms negotiated by Yahoo and Microsoft. But since Google’s share there is even higher, roadblocks seem unlikely.

Meanwhile, according to numerous sources, Microsoft and Yahoo are separately working on transition plans in order to move quickly once it gains regulatory approval.

While they cannot work together as yet at a detailed level, Microsoft will eventually be absorbing hundreds of Yahoo search engineers as part of the deal.

So as we all wait in breathless anticipation, enjoy this hysterical video version of the famous gruel scene in the movie, “Oliver,” with the lines speeded up and then slowed down:

BoomTown just got an interesting memo that Yahoo CMO Elisa Steele sent out to her staff immediately in the wake of the deal for Microsoft to take over Yahoo’s search technology business two weeks ago.

I render it unto you, dear readers, since it shows just how intent the top managers of Yahoo (YHOO) are, especially internally, in reassuring those concerned that Yahoo had not just gutted itself and how it can remain as innovative as ever.

Also amusing–for reasons I cannot understand, since it is an internal memo–is the use of the code name for Yahoo, which is called Yale, after the famous university in New Haven, Conn.

(By the way, “Boola, Boola” is one of Yale’s old football fight songs, which you can hear here.)

By the way, Microsoft (MSFT) was known as Cambridge, Mass.-based MIT, as you can see below.

Also some fun facts, showing the give-it-the-old-college-try mentality of Yahoo dealmakers:

In past merger talks, Time Warner (TWX) online unit AOL’s moniker has been Amherst College in Amherst, Mass.

And, when Yahoo was considering the Yahoogle deal, the code name for Google (GOOG) was Georgetown, after the Washington, D.C.-based university. That must really rankle at the MIT-stuffed search giant, since–as a graduate of Georgetown–I can tell you, tech is not exactly its forte.

Here’s the Steele memo:

From: Elisa Steele
To: Marketing-all@yahoo-inc.com
Sent: Wed Jul 29 05:11:52 2009
Subject: Announcement today.

Marketing Yahoos,

Yale is already the place where millions go to see what is happening with the people and things that matter to them most, but our aspirations have always been bigger than that. Our vision is to be at the center of people’s online lives, and the deal we announced with MIT earlier today will enable us to focus even more of our efforts on realizing it.

At the same time, our role as marketers has never been more critical. We must focus our energies on engaging our users and our partners, and on making sure that our brand initiatives continue unabated.

Our consumer marketing teams will keep driving more users to our leading audience properties, mobile experiences and applications. Our b2b team will continue communicating to marketers that as the world’s largest media company, Yale offers the most compelling and unique advertising proposition in the industry. The Insights team will continue delivering industry-leading research that helps speed the flow of dollars online. The Global Communications team will be answering lots of important questions from the media and influencer community about this deal (in addition to building buzz around the other amazing stuff we’re doing). The brand team will not stray at all from its mission, as it’s as relevant as ever. And, our regional marketing teams remain in place, partnering with our business leaders to execute our global marketing strategy.

In a nutshell, this is our opportunity to further establish Yale mindshare and preference with all of our audiences through world-class marketing. Our work is more important today than ever before as we communicate our brand position globally.

We are making decisions that we believe set the company up for continued success—and enable us to take back our rightful place in the market.

It’s an exciting new day at Yale, and I couldn’t be more optimistic about our future.

Elisa Steele
Executive Vice President &
Chief Marketing Officer
Yahoo!

And below, I have posted a video of the Yale Glee Club performing all the university’s fight songs in a delightful medley, so Yahoos can start practicing now:

With upward of two-thirds of the search market, depending on what survey you use, one would not imagine that Google would worry too much about any kind of hookup of Microsoft and Yahoo.

Think again.

While several sources at Google (GOOG), even off the record, have professed to me that they are not that worried about any search and online advertising deal the pair have finally struck, others admit that a more robust rival will force the company to compete and innovate more aggressively.

“We take nothing for granted, because anyone can make a comeback,” said one person at Google, who points to Microsoft’s laudable efforts with its Bing search service. “Especially with Microsoft’s deep pockets and Yahoo’s talent in the advertising market.”

Sources close to the situation said Google will likely try to keep a low profile at first in opposing the deal announced today, positing that regulators have the same opinion about fewer competitors in the market as they did when opposing a similar Google-Yahoo search deal last year.

“Is Google siccing the dogs on this deal?” asked one person familiar with Google’s thinking. “Or will it wait for regulators to cast scrutiny on a deal that drops the number of competitors from three to two?”

Still, having three in the market has not been enough to lift the share of Yahoo or Microsoft very much in comparison to Google over the last several years.

According to a comScore (SCOR) report for June, for example, even combined, Microsoft (MSFT) and Yahoo (YHOO) have a share that is less than half that enjoyed by Google.

Microsoft accounted for 8.4 percent of the search market in the month, with Yahoo clocking in at 20 percent. Google grabbed the lion’s share at 65 percent.

And that dominance means a financial windfall–as volume means more queries means better search ads means better relevance in an ever-virtuous and very lucrative cycle.

It is a cycle Google would like to keep intact, so much so that it made what turned out to be a very risky move to block Microsoft when it was trying to take over Yahoo last year.

Regulators ended up raising federal eyebrows about the proposed Yahoo-Google search deal, which was less sweeping than the Micosoft-Yahoo one announced today.

Google dumped Yahoo in the end–although not before the company found itself front and center on antitrust radar screens.

And there it has remained, with Christine Varney, assistant attorney general for the Antitrust Division of the United States Department of Justice, having become Google’s most pointed critic.

She should be, given the Silicon Valley-born Yahoogle idea was an appalling reach by Google, as I wrote last April:

And while it might be a long-cherished dream of Google’s to take over Yahoo search–and also get the chance to return to the scene of the crime, since Google got its first big push from doing Yahoo search, before Yahoo wised up too late–there is simply no way this will be allowed by regulators nor should it.

Still, you have to almost admire the chutzpah of the search giant in making this move, if the sheer and unadulterated arrogance of it wasn’t so distracting.

Because, while Google has almost none of the obvious menacing aggression that characterized Microsoft when it thoroughly dominated tech (although all those beach bikes on its campus inexplicably creep me out a little bit), the company still cannot be allowed to have a monopolistic share of the market.

It is bad for advertisers, it is bad for consumers, it is bad for innovation, no matter how well-intentioned Google is.

And no matter how many flashy moves Google and Yahoo make, it is flat-out wrong for one player to so dominate such an important sector.

Anti-competitiveness would likely be Google’s first arrow in what will surely be an attempt to slow down, if not block, the deal.

And while advertisers are more disposed to have a stronger No. 2 player to counter Google’s growing power, the company might use the opportunity to shave the sharp edges of its ever-scarier reputation.

In a conference call early this morning about their deal, Yahoo CEO Carol Bartz and Microsoft CEO Steve Ballmer tried to paint a picture of Google as a scary and dominating search giant.

But, as Google will surely offer up, if Microsoft and Yahoo combined is the underdog, it might not look like so much of a bully after all.

Please see this disclosure related to me and Google.

Former Facebook exec Owen Van Natta will take the CEO job at a music discovery site called Playlist, a move that had been speculated last week, after he did not end up taking another position as head of MySpace Music.

Van Natta’s arrival at Playlist was not the only news for the Palo Alto, Calif.-based start-up–former AOL exec Bob Pittman’s Pilot Investment Group is also investing an undisclosed amount of money in Playlist. Pittman will also join its board.

Playlist has previously raised several million dollars, said sources, but the new funding is many times that, to total about $18 to $20 million.

The move to Playlist is an interesting one for Van Natta, who has looked at a number of jobs since leaving the high-profile social-networking site earlier this year.

He has talked to a wide range of companies, sources said, including Microsoft (MSFT) and a range of start-ups, as well as with MySpace, which is owned by News Corp. (NWS). (News Corp. also owns this site).

Those talks between Van Natta and MySpace to run its new music initiative did not pan out for a variety of reasons.

But he has long expressed a desire to become a CEO of a company, rather than just head to another executive job within a larger company, so the move to run a start-up is not a surprise.

In an interview this afternoon, Van Natta told me he got very intrigued by the possibilities at Project Playlist, which was the first iteration of the start-up and in which he is an investor, due to its viral growth.

And, indeed, Playlist has grown quickly to become one of the larger music communities on the Web, claiming that more than 38 million music fans monthly, sharing playlists via its Web site and also widely distributed embeddable widgets. The site has tens of millions of daily page views, according to surveys.

To get to those big-scale numbers, Playlist essentially has offered users a giant linking service for music, not unlike Google (GOOG) with all information, pointing users to promotional, free and sometimes illegal music and music video tracks all over the Web.

Those links to illegal music have resulted in a lawsuit aimed at Playlist from the music industry, sources said, a sadly typical experience of many online music services.

The usual tactic for the music giants: Sue first and shake down later.

Under Van Natta, I would guess, Playlist is likely to reach out to music companies and strike deals.

The company also needs to settle on its main business plan, which appears to me to have been less important than its explosive growth.

Playlist currently does have some small amount of advertising on the site, and seems to be making most of its scratch from sending leads to ringtone sellers.

Van Natta did not want to reveal specific strategies for Playlist going forward, only noting the opportunity is large.

“Discovery around music is exploding on the Internet,” said Van Natta. “And the company that does the best job of taking advantage of that is really going to be huge.”

That said, there have been a lot of music-aimed efforts like Playlist in the music space, with a lot of different business plans and varying degrees of success, ranging from the Apple (AAPL) behemoth iTunes site, which sells single songs, to the CBS (CBS) music service, Last.fm, which relies more on advertising revenues.

Other contenders in the space include the Rhapsody subscription service from RealNetworks (RNWK), music discovery service iLike and many others. MySpace has also waded deeply into the music space, and Facebook is also reportedly weighing its own service.

Van Natta was one of Facebook’s earliest and most prominent execs, serving in jobs like COO and also Chief Revenue Officer while there.

He came to Facebook in the fall of 2005, after a stint as VP of Worldwide Business and Corporate Development at Amazon, and was part of the founding team of A9, the Amazon search company.

“I am excited to be building a company again,” said Van Natta, who has taken many months off since he left Facebook in February.

Okay, here is what is true at this moment about Yahoo, which is sure to get even more caught up in the maelstrom of rumor and innuendo about its fate after the collapse of its controversial search advertising deal with Google today.

While Yahoo’s corporate gyrations are beginning to feel like there are more twists and turns than a Spanish telenovela, the actual situation is a lot less sexy and definitely more grim.

Simply put: Yahoo (YHOO) is in the midst of a very serious resetting of its business that might or might not go well, after years of mismanagement and damaging external forces over which it sometimes had control and sometimes not.

And there are valid questions about whether its current leadership is up to the task of reviving Yahoo, after one painful stumble after the next.

Nonetheless, Yahoo remains one of the Internet’s most trafficked and profitable sites and its products are uniformly excellent.

And, while it has lost share in search, it is still No. 2. In addition, even though its graphical ad business is suffering badly in the weak economy, it is still the best on the Internet.

But, let’s face it: What a mess.

Thus, in the interests of clarity, here is a rundown of the situation.

1. Yahoo CEO Jerry Yang is not stepping down. In fact, I will soon be headed out the door to see him onstage at the Web 2.0 Summit in San Francisco later this afternoon.

In fact, he seems determined to stay, until someone throws him out. And who would that be?

Investors had their chance at the annual meeting and failed; so did activist shareholder Carl Icahn, who is now on the Yahoo board and unable to agitate publicly.

Maybe employees will revolt on the Sunnyvale campus in a purple rage? Doubtful.

In a two-part interview with BoomTown after its sad-sack third-quarter earnings were released, Yang was telling the truth 100 percent:

BT: You have been attacked a lot recently for not selling Yahoo to Microsoft, Yahoo’s low stock price and your management of the company–why do you think you are the best leader for Yahoo going forward?:

Yang: I think if you look at what the company is doing and what we have been going through and the story we have been telling, we have done most, if not all, of what we set out to do, starting last year.

My dream is to transform Yahoo as a platform and product company and I think we are on the way to really doing that. And a lot of what we have been doing is starting to translate into value–whether it is our front page, our profiles, our email or our APT ad platform.

And, in this uncertain environment, I think I am absolutely the right person. Times like this require a leader who really understands this company and its customers, and I think I do. The world is a different place today than even a month ago and I think I am the best person to guide Yahoo through this volatile time.”

2. The collapse of Yahoogle does not mean that Yahoo will now be automatically forced to turn to Microsoft (MSFT) to strike a similar deal, and on terms with no leverage.

After all, Yahoo is still the No. 2 player in search by far after Google (GOOG), with Microsoft trailing badly.

Of course, it must now contemplate spending a lot on keeping that spot, and it is not good to be caught between two warring moneybags.

3. Microsoft does not want to buy Yahoo and will not show up with another bid, unless the stock truly tanks and it becomes such an amazing bargain that CEO Steve Ballmer has to get over himself.

Microsoft is now only interested in Yahoo’s search business and there might be more talks to revive that offer in the future.

But, no matter what analysts pontificate about, neither is under any “pressure” to act fast. It is a crappy economy and everyone has cover to do badly for a while and scuttle along.

4. Yes, a merger deal with AOL looks more likely than not now, especially with the Yahoogle uncertainty out of the way.

Why? Well, Yahoo execs like it and Time Warner (TWX), which owns the AOL online unit, needs it. AOL’s poor results today should underscore that fact.

While integration issues are complex, it also brings together some of the biggest communications, advertising and content properties on the Web.

Done right–and that is a big if with both these crews in charge–it might work and give the pair the much needed boost they desperately need.

Done wrong, well, the soap opera just continues on endlessly.

Yahoo and Google have agreed to delay their online search advertising partnership to give the Justice Department more time to evaluate the deal.

A Yahoo spokesman confirmed the move in a statement: “The companies have agreed to a brief delay in implementing this agreement to continue our ongoing discussions with the Department of Justice. We have had discussions with regulators and look forward to responding to their questions about this agreement.”

A Google spokesman also added: “When we announced our advertising agreement with Yahoo! in June we agreed to delay its implementation until October to give regulators time to look at the details. As we are still in conversation with the Department of Justice we have agreed to a brief delay in implementing the agreement while those discussions continue.”

The delay could impact Yahoo’s share price on Monday, given the deal for Google to serve some of its search ads promised to give Yahoo (YHOO) hundreds of millions of dollars in additional revenue.

Still, the pair had few options of late but to cooperate fully with regulators.

Although Google (GOOG) execs have been especially adamant that the arrangement was going forward no matter what, the delay is now not as surprising, given the increasing opposition to the deal involving the No. 1 and No. 2 online search leaders in recent weeks.

So much so, that, according to several sources with knowledge of the situation, staffers at the Justice Department had recommended to their superiors that the deal be investigated further and even blocked in court.

Top Google execs have been in Washington, D.C. over the last week, seeking to change regulators’ minds, sources said, including offering up more proof that the deal would not result in a Google search ad monopoly and necessarily raise online ad prices.

But the problem has been that more critics have been joining the just-say-no-to-Yahoogle bandwagon–questioning the controversial ad deal for Yahoo to outsource some of its search ads to Google and its aggressive, damn-the-torpedoes approach to pushing the deal forward.

Just a few weeks ago, Google CEO Eric Schmidt told reporters the deal would not be delayed by Justice Department mulling. “Time is money in our business,” he said.

That might be, but time now apparently waits for regulators.

The partnership was set to start up around mid-October and promised to give the much-suffering Yahoo a huge boost in revenues.

Of course, the deal has been much lobbied against aggressively by Microsoft (MSFT), especially since Yahoo used it as a way to escape the software giant’s takeover clutches.

Nonetheless, critics like Microsoft have a lot of ammo, especially because Yahoo and Google together will claim over 80 percent of the search market.

That has caused a big outcry among advertisers and publishers to prevent the top two players from partnering at all.

BoomTown has been one of those objecting to the deal too.

In a post recently, I wrote: “Because while Google displays none of the bullying tactics of Microsoft in its glory days–think of it more like a giant that could accidentally squash all us little people with its big dumb feet–the worries about it amassing too much power are well-founded.”

What’s next is anyone’s guess. Google and Yahoo could agree to certain parameters in the deal, in order to assuage critics, or they could fight any regulatory action.

And, of course, they could abandon the deal, a move that most agree would hurt Yahoo more than Google–whose search market share has been ever-growing, even as Yahoo’s and Microsoft’s has declined.

Please see this disclosure related to me and Google.

Even as the Justice Department drills down on the deal (along with Canada now), a very helpful Google PR guy wrote to BoomTown in an email:

“The site attempts to answer questions that people have raised about the deal, address the agreement’s impact on advertisers and on competition, and serve as an information clearinghouse for journalists as well. … We’ll be updating the site regularly too, so you can use it as a one-stop shop for information about the agreement.”

Phew!

I, for one, am glad to learn that the outsourcing deal is NOT a merger (page 10) and that Toyota provides hybrid engine technology for Ford (Page 11).

But, curiously, the site touts the deal by using a woefully-out-of-context quote from a piece I did last week.

While I have been very much against the deal since it was announced, I did a post last week–in the interests of fairness–in which I featured the best arguments (not mine!) as to why the deal would probably not get blocked by the Justice Department.

Google used a quote from the piece on its site, but it is misleading (see the quote on the page below; click on the image to make it larger). [UPDATE: Google has thankfully removed my fake blurb, as seen below.]

I did write in a post on Sept. 18:

Thus, there’s not a whole lot for the Justice Department to hang a case on, in contrast to its case against Microsoft, which landed in court because of bullying behavior that actually took place before the case was waged.”

But, in the piece, I was clearly paraphrasing the reasoning of Google (GOOG) and Yahoo (YHOO) and in no way was it my opinion of the deal.

Saying there’s a chance Yahoogle will not get stopped by regulators is a bit different from saying I think this is a good thing.

I do NOT think it is a good thing.

In fact, here’s what I said in a piece the day before:

Thus, BoomTown is both gobsmacked and a bit in awe that [Google CEO Eric] Schmidt–now sitting atop the high-tech pig pile as CEO of the powerful search giant, Google–can, with a straight face, make the argument that everyone is wrong to be nervous about its deal with Yahoo to serve some of its search and text advertising, even though the pair control more than 80 percent of the search market.

Because while Google displays none of the bullying tactics of Microsoft (MSFT) in its glory days–think of it more like a giant that could accidentally squash all us little people with its big dumb feet–the worries about it amassing too much power are well-founded.”

And here’s what I wrote back in April:

Still, you have to almost admire the chutzpah of the search giant in making this move, if the sheer and unadulterated arrogance of it wasn’t so distracting.

Because, while Google has almost none of the obvious menacing aggression that characterized Microsoft when it thoroughly dominated tech (although all those beach bikes on its campus inexplicably creep me out a little bit), the company still cannot be allowed to have a monopolistic share of the market.

It is bad for advertisers, it is bad for consumers, it is bad for innovation, no matter how well-intentioned Google is.”

Somehow, neither of these two-thumbs-down quotes made it onto the Yahoogle-rocks site.

I feel like one of those misquoted movie critics in newspaper ads! (“Go…see…it…quick!!!,” when the entire quote was “Go home before you see even a second of it or you will be sick quick!!!”)

In any case, here are the 17 pages of slides from the Yahoogle site, embedded below:

Please see this disclosure related to me and Google.