We started the week with Microsoft calling off the Yahoo deal (or maybe not). Then Grand Theft Auto stole the spotlight with its record-breaking sales. Along the way, we have the Webby Awards, big settlements for movie piracy, and candidates seeking to save us from the evils of Second Life. We cover it all in this week's quiz. Give yourself 10 points for each correct answer. Ready to test your news know-how? Then begin.

1. Microsoft decided it would rather switch than fight Yahoo for control of, well, Yahoo. Which of the following is NOT one of the reasons it gave for dropping its bid?

a. Yahoo's decision to outsource search ads to Google
b. Yahoo's take-it-or-leave-it price of $37 a share
c. The engineering brain drain that would follow a hostile takeover
d. Absorbing Yahoo would cause bureaucratic and logistical nightmares

Take the InfoWorld news quiz

Security researchers have developed a new type of malicious rootkit software that hides itself in an obscure part of a computer's microprocessor, hidden from current antivirus products.

Called an SSM (System Management Mode) rootkit, the software runs in a protected part of a computer's memory that can be locked and rendered invisible to the operating system but which can give attackers a picture of what's happening in a computer's memory.

The SMM rootkit comes with keylogging and communications software and could be used to steal sensitive information from a victim's computer. It was built by Shawn Embleton and Sherri Sparks, who run an Oviedo, Florida, security company called Clear Hat Consulting.

The proof-of-concept software will be demonstrated publicly for the first time at the Black Hat security conference in Las Vegas this August.

The rootkits used by cyber crooks today are sneaky programs designed to cover up their tracks while they run in order to avoid detection. Rootkits hit the mainstream in late 2005 when Sony BMG Music used rootkit techniques to hide its copy protection software. The music company was ultimately forced to recall millions of CDs amid the ensuing scandal.

In recent years, however, researchers have been looking at ways to run rootkits outside of the operating system, where they are much harder to detect. For example, two years ago researcher Joanna Rutkowska introduced a rootkit called Blue Pill, which used AMD's chip-level virtualization technology to hide itself. She said the technology could eventually be used to create "100 percent undetectable malware."

"Rootkits are going more and more toward the hardware," said Sparks, who wrote another rootkit three years ago called Shadow Walker. "The deeper into the system you go, the more power you have and the harder it is to detect you."

Blue Pill took advantage of new virtualization technologies that are now being added to microprocessors, but the SMM rootkit uses a feature that has been around for much longer and can be found in many more machines. SMM dates back to Intel's 386 processors, where it was added as a way to help hardware vendors fix bugs in their products using software. The technology is also used to help manage the computer's power management, taking it into sleep mode, for example.

In many ways, an SMM rootkit, running in a locked part of memory, would be more difficult to detect than Blue Pill, said John Heasman, director of research with NGS Software, a security consulting firm. "An SMM rootkit has major ramifications for things like [antivirus software products]," he said. "They will be blind to it."

Researchers have suspected for several years that malicious software could be written to run in SMM. In 2006, researcher Loic Duflot demonstrated how SMM malware would work. "Duflot wrote a small SMM handler that compromised the security model of the OS," Embleton said. "We took the idea further by writing a more complex SMM handler that incorporated rootkit-like techniques."

In addition to a debugger, Sparks and Embleton had to write driver code in hard-to-use assembly language to make their rootkit work. "Debugging it was the hardest thing," Sparks said.

Being divorced from the operating system makes the SMM rootkit stealthy, but it also means that hackers have to write this driver code expressly for the system they are attacking.

"I don’t see it as a widespread threat, because it's very hardware-dependent," Sparks said. "You would see this in a targeted attack."

But will it be 100 percent undetectable? Sparks says no. "I'm not saying it's undetectable, but I do think it would be difficult to detect." She and Embleton will talk more about detection techniques during their Black Hat session, she said.

Brand new rootkits don't come along every day, Heasman said. "It will be one of the most interesting, if not the most interesting, at Black Hat this year," he said.

News from and about Microsoft dominated this week from start to finish. But the dire situation caused by Cyclone Nargis in Myanmar, where the ruling junta cares more about oppression and domination than early warning systems or getting aid to people, tended to put everything else into perspective.

[ Video: Catch up on the week in tech news with the World Tech Update ]

1. Microsoft abandons Yahoo acquisition and Microsoft and Yahoo: Now what?: We ended last week with speculation that Microsoft was about to launch a hostile takeover attempt on Yahoo, only to get word over the weekend that Microsoft was instead bailing out on the deal. Microsoft's first bid came Feb. 1 and was then valued at $44.6 billion, an offer that was sweetened over time to no avail. At least some Yahoo shareholders are said to be disgruntled by the turn of events, especially given that the company's share price was hammered, but directors and managers say they want to remain independent. Yahoo announced a variety of ambitious future plans and initiatives since February, with analysts noting in the aftermath of the bid that the company will now be expected to deliver on those plans.

[ For the complete saga of Microsoft's unsuccessful bid to take over Yahoo, check out InfoWorld's  special report ]

2. Microsoft to appeal $1.3 billion EU fine: Microsoft is appealing the European Union's $1.3 billion fine for the company's failure to live up to a 2004 antitrust agreement. Microsoft filed an application with the Court of First Instance in Luxembourg seeking to appeal the E.U.'s Feb. 27 decision that imposed the latest fine on the company, which has been socked by almost $2.6 billion in fines in the E.U.

3. IT didn't fail Myanmar during cyclone, people did: The incredible disaster in Myanmar could have been lessened if people who lived in the path of Cyclone Nargis had been warned that it was coming, according to the head of the Association of Southeast Asian Nations. An estimated 100,000 people are believed to have died so far and more than a million are homeless after the cyclone struck on May 2. However, despite warning technology, the Indian Ocean earthquake and tsunami in late 2004 killed thousands and wreaked enormous damage. So, "in spite of the technology that we have, in spite of the power that we have, in spite of the network that we have, we still lose lives needlessly," said Surin Pitsuwan, secretary general of ASEAN, in a speech this week.

4. Sun exec ponders OpenSolaris, Linux: Ian Murdock founded the Debian Linux distribution and was CTO at the Linux Foundation. Now he works for Sun as vice president of developer and community marketing. InfoWorld's Paul Krill caught up with him at the JavaOne conference, where Murdock discussed Sun's open-source efforts and the paradigm shift needed to monetize open-source software.

5. Sprint, Clearwire form $14.5B WiMax venture: Sprint and Clearwire are combining WiMax businesses to form a $14.5 billion mobile broadband company with the goal of deploying a U.S. WiMax network with 4G coverage. The new company, to be called Clearwire, also will offer wireless broadband to homes, businesses and government public safety services. The new company is expected to be up and running in the fourth quarter. Sprint will have a 51 percent stake, with Clearwire owning about 27 percent and give major investors -- Google, Intel, Comcast, Time-Warner Cable, and Bright House Networks -- the remaining 22 percent.

6. XP SP3 cripples some PCs with endless reboots: Windows XP Service Pack 3 causes some PCs to get stuck in endless reboots, according to messages posted at a Microsoft support forum, where users are expressing their endless frustration.

7. Google grilled on human rights: Google's human rights record dominated discussion at the annual shareholder's meeting, where two proposals that called for the company to change its policies were nevertheless voted down. Google has been criticized for the way it conducts business in China, where it complies with government censorship. The company insists that is what it must do to have a presence in China and contends that it's better to do that and be able provide at least some information to Internet users in China than to be forbidden to do business there at all.

8. Intel, OLPC affordable laptop bout only hurts users: A little food for thought in the week, on the heels of the May 2 news that Charles Kane was named president and chief operating officer of the One Laptop Per Child Project, which has been beset with some level or other of turmoil and change for sometime now, including the acrimonious split of the Intel-OLPC partnership a few months back. As the project seeks to right itself and stay on track, columnist Ken Banks reminds us of the bigger picture -- a child in a developing country "doesn't particularly care where their laptop comes from, what principles were applied in its design or development or who's right or wrong in the 'battle of the paradigms.' All they want is an education, ideally aided by the occasional brush with computer technology in some shape or form. Sometimes, we just need to remind ourselves of the bigger picture." Can we get an "Amen" on that?

9. Sun provides JavaFX road map: At this week's JavaOne conference, Sun put a bright spotlight on JavaFX, even providing some firm product delivery dates. JavaFX, which allows application development across multiple types of interface (including devices), is Sun's entry into the burgeoning RIA space and will be a competitor to Microsoft Silverlight and Adobe Flash. Sun promises that the JavaFX Desktop SDK Early Access Program will launch in July with JavaFX Desktop 1.0 shipping in the fall.

10. Vista as insecure as Windows 2000: Windows Vista is supposed to be the most secure Microsoft operating system with the least potential for vulnerabilities, but, alas, it still racked up 639 unique vulnerabilities over about the last half year. Windows 2000, on the other hand, had 586 vulnerabilities in the same stretch. That means Vista didn't have a whole lot more vulneratibilities than Windows 2000, but users may wish to cast this as either good news or bad news. As this week's news bears out -- it really is all about perspective.

Ian Murdock is vice president of developer and community marketing at Sun Microsystems. Prior to that, he was the founder of the Debian Linux distribution and CTO at the Linux Foundation. InfoWorld Editor at Large Paul Krill met with Murdock at the JavaOne conference in San Francisco this week to talk about open source and how Sun, with its OpenSolaris version of the Solaris Unix platform, will fare in the open-source arena versus Linux.

InfoWorld: What exactly is Debian?

Murdock: Debian is a Linux distribution. It's the basis of Ubuntu Linux. I suppose the basic innovation of Debian was that it was developed by a distributed community, so we intentionally set out to build it in a distributed fashion, and it's one of the first open-source projects to operate that way.

InfoWorld: Are you still involved with the Debian project?

Murdock: Not so much, but that's more of a function of lack of time.

InfoWorld: Why did you join Sun?

Murdock: When I was in school as a computer science student in the early 1990s, I was a huge Sun fan. There were Sun workstations all over the place, and I wanted one of these more than anything in the world, and Sun was the company I wanted to work for. And when I had the opportunity to come to Sun and in particular bring some of my Linux experience to sort of a new set of challenges, I jumped at the opportunity.

InfoWorld: What do you do at Sun? I see the OpenSolaris project seems to fall onto your plate.

Murdock: Initially I was working on OpenSolaris and started Project Indiana, which culminated this week [with] the first version of the OpenSolaris binary distribution.? These days I am running the developer and community marketing organization, so I am responsible for marketing Sun's developer tools, the developer programs like Sun Developer Network and Tech Days Events, our open-source projects and communities. [Also, I do marketing for] StarOffice, OpenOffice, Network.com. So basically anything that relates to the developer community in some way, I run the marketing piece of that.

InfoWorld: Is Sun completely open source with its software right now?

Murdock: Well, not entirely, but that's again mostly a function of how complex it is to take a piece of intellectual property that has not been open source and then moving it into open source. We are in the process of open sourcing all of our software, as [Sun President/CEO Jonathan Schwartz] has said many times.? But, for example, with Solaris there, are still a few bits and pieces that have been licensed from other companies. We are working out the arrangements with those companies to be able to open source them.

InfoWorld: What pieces are those?

Murdock: Well, for example, some device drivers [and] certain bits of functionality that were licensed.

InfoWorld: I heard a former Sun official last year who basically said that he thought Sun was kind of moving too fast with open source, maybe over-emphasizing it a bit. You're probably going to disagree with that, but how would you respond to that?

Murdock: I think the big question around open source is how do you make money from it? And it's because the software industry has traditionally been built on an intellectual property licensing model. But the reality of the situation is with the rise of open-source software, developers don't buy things anymore. [It is] a world where you can go to the Web and download just about anything you could possibly need to put an application into production. So you don't monetize at the point of acquisition of software any longer, you have to monetize at a different place. So it's not to say that there is not money to be made in software, it's just made at a different place, and the different place is with all of the developers adopting technology, putting it into production, some of those applications that are deployed are going to be successful. They're going to run into the traditional challenges of having to grow and scale that application. They're going to need to have a relationship with the vendor behind the technology. So there are ample opportunities to make money because even though open source is free in the monetary sense, it still requires a lot of expertise and knowhow to make it operate efficiently. So there's plenty of opportunity there to add value.

InfoWorld: I heard two different computer industry executives make the following comments. One is, how do you have a software industry if there's open source? And the other is, open source lowers revenues for everybody. How would you respond to those?

Murdock: Well again, open source is only free or free software is only free if your time is free. And I don't know about you, but my time is definitely not free. And in terms of lowering revenues, I don't think that's necessarily true. I think the money changes to a different place. The revenue opportunity changes to a different place. So it's a disruptive event in the software industry. But disruptive events create opportunities for those who are agile enough or have the foresight to see the changes that are coming and can adapt. And so Sun's embrace of open source is just a part of adapting and changing with the changing of landscape. There's still plenty of money to be made, it's just shifting to a different place. Again, pay at the point of deriving some value from having a relationship with your vendor versus pay to get access to the technology.

InfoWorld: With OpenSolaris, Sun changed the packaging to make it more like Linux. Is it too late for OpenSolaris to compete against Linux?

Murdock: No, I don't think it's too late at all. In fact, I think there's a huge amount of interest in the Linux community for the technologies that we have in Solaris. So whether it's ZFS (Zettabyte File System) or DTrace [providing a dynamic tracing framework] or containers or any of those things. And the problem has always been barriers to adoption, right? The changes that we have put into OpenSolaris are primarily designed to lower barriers to adoption to that technology that the market has been wanting, but it has been too difficult to this point for to get at it. It'll be interesting to see how OpenSolaris is received in the Linux community. I would look at it as it's not so much an OpenSolaris versus Linux thing. We're putting another alternative out into the marketplace just like Ubuntu is an alternative and Red Hat is an alternative and SuSE is an alternative.

InfoWorld: As somebody who has developed Debian and now is an advocate for OpenSolaris, which do you see as superior?

Murdock: I think they're both good for different reasons. One of the advantages of Debian is it has a huge ecosystem of packages around it, so just about anything you could possibly want is just an app to get installed away. OpenSolaris has some of this functionality, like ZFS and D-Trace, that Debian -- or no Linux distribution for that matter -- has. So it all depends on the application environment.

InfoWorld: Won't those capabilities you mentioned be added to Debian in other Linux distributions?

Murdock: Well no, because those are part of the Solaris platform, and Debian is based on Linux. Now certainly we're going to see a lot of the reverse happening, so now that we have the package system in place around OpenSolaris, we have the same kind of infrastructure around it to enable bringing in this open-source software that is available for Debian.

InfoWorld: No one is permitted to take ZFS and port it to Linux?

Murdock: Well, today the licenses are not compatible with each other, so that can't be done.

InfoWorld: What are the differences in the licensing?

Murdock: Linux is governed by the GNU Public License, or GPL, and open source is governed by the CDDL, the Common Development and Distribution License.

InfoWorld: Why CDDL and not GPL like you did for Java?

Murdock: Well, OpenSolaris was open sourced, what, a year and a half before Java? There's a desire in some of our customer base to have a license that allows you to build value-added products on top of OpenSolaris. And so the ability to easily drive commercial versions based on Solaris technology was one of the drivers behind the CDDL. And basically, the CDDL is just a slightly modified version of the Mozilla Public License, so it is an OSI-approved open-source license. It's no more or less open source than a GPL is. But it turns out that the GPL is very restrictive, and so you can't combine some of the things that the CDDL says with some of the things that the GPL says.

InfoWorld: What are you expecting developers to do with Open Solaris?

Murdock: I think first of all, there's going to be a lot of experimentation now that the barriers are gone for a Linux developer, a Linux user to take a look at what OpenSolaris has to offer. We are spending a lot of time understanding what those developers are doing; namely, how they are moving up the stack and working in environments like PHP and Ruby on Rails. So how do we describe the capabilities of Solaris, such as DTrace, in a way that's relevant to them? For example, OpenSolaris is going to be an ideal environment for Web-facing applications because we've moved the DTrace functionality up into somebody's Web application frameworks. And if you think about it, the basic problem behind a Web application is, particularly if you are successful, how do you scale? If you build an application, you put it out there, you gain a large user base, people start hitting your servers, you have to figure out where in your code you need to optimize so that you can scale along with it. DTrace offers those kinds of developer's capabilities that are not available on any other operating system.

InfoWorld: What do you see happening with the Amazon-based hosted version of OpenSolaris?

Murdock: That represents yet another barrier to entry being removed. Now you can take advantage of these same capabilities without necessarily having to provision your own infrastructure. And it's all a part of the same trends that you've seen coming out of Sun over the last several years. The embrace of AMD and Intel, Linux, Windows. I mean, it's all about how do we get Sun technology as broadly adopted as possible, no matter what the vehicle?

InfoWorld: Do you see a role for OpenSolaris in the Web 2.0 world?

Murdock: Absolutely. If you are building a Web application and you become popular, your servers are getting hammered by all of these users who are coming, how do you scale with the increasing demand? And we've actually done this in several Web 2.0 shops where they've run into scaling problems, we've been able to come in, point DTrace at it, and extract some very amazing performance improvements in a very short amount of time. So we feel that now that the barriers to adoption have been removed, we're going to be able to play a much bigger role in this space than we have with Solaris 10 and previous.

InfoWorld: Is there anything else you wanted to bring up?

Murdock: One of the things to watch here in the coming months is what we are doing around Network.com [which is Sun's grid-based cloud computing platform]. At Sun we are fully committed to open source. To your earlier question about open source and business, we have a very clearly defined business model where the core offerings that are for developers are free and open source, no barriers to adoption. The one interesting question is what role does open source play in a world where software is no longer delivered as a product but rather delivered as a service? Web 2.0, for example, wouldn't be possible without open source. But why are people going to open source? They're going to open source for the same reason that they went to open standards and open systems. [There is] the desire to not be locked into a single vendor. Are we going back to the 30-year-old model in the pursuit of simplicity and moving everything into the cloud? I think you're going to see, coming out of Sun and around Network.com in particular, some pretty interesting answers to these questions.

Microsoft is appealing the $1.3 billion (€899 million) fine imposed on it by the European Union for failing to honor a 2004 antitrust agreement, the company said Friday.

Microsoft spokesman Jack Evans said via e-mail Friday that the company has filed an application with the Court of First Instance in Luxembourg to annul the European Commission decision of Feb. 27, which imposed the fine against Microsoft.

"We are filing this appeal in a constructive effort to seek clarity from the Court," the company said in an e-mailed statement.

Microsoft is not commenting further.

(More to follow.)

When the University of Illinois' National Center for Supercomputing Applications set out to build a machine with more than 200,000 server cores, the key wasn't simply shelling out cash for newer, faster silicon chips. The trick was harnessing the power of a substance that comes right out of your kitchen sink: water.

Using water to cool servers isn't a new idea, but it is gaining new converts at a time when fears of global warming and rising energy costs are making datacenter operators and server vendors search for ways to increase efficiency.

To Rob Pennington, deputy director of the NCSA, water cooling offers one huge advantage: power density. The NCSA's planned Blue Waters petascale computing machine will fit more than 200,000 cores in a space that's about twice the size of a current NCSA machine that has 9,600 cores, according to Pennington.

"Water cooling makes it possible," Pennington says. "If we had to do air cooling, we'd be limited by how much air can be blown up through the floor."

Blue Waters will be operational in 2011 and will likely use servers based on IBM's future Power7 chips. (Compare server products.) 

Water cooling is inherently more efficient than air conditioning, Pennington says. That efficiency is being exploited to greater effect with today's multicore processors and multisocket motherboards. When a motherboard had one socket a decade or so ago, the advantage of water cooling didn't mean as much as it does today, when you're typically trying to cool four sockets on the motherboard, he says.

NEC, using Intel Pentium processors, began selling a  water-cooled server at the end of 2005. IBM is just returning to water cooling servers after not using the technique since 1995. Big Blue abandoned water cooling after shipping its last bipolar mainframe with CMOS (complementary metal--oxide--semiconductor) technology, according to Ed Seminaro, chief system architect for IBM's Power Systems.

"We actually went from a product that used almost 200 kilowatts of power down to a product that could basically satisfy the same function with about 5,000 watts," Seminaro says. "That's why we didn't need water cooling anymore. There was far less power required and far less heat density."

Times have changed. Last month, IBM added what it calls a hydro-cluster water cooling system to its System p5 575 supercomputer. As the number of transistors on a chip increased over the past decade, IBM wasn't always able to keep power usage steady. So it turned to water cooling with an innovative design that brings water almost right up to the chip.

Why is water so efficient? Because heat from servers eventually gets transferred to water anyway, even in datacenters cooled by big chiller air conditioning systems, says Jud Cooley, senior director of engineering for a Sun Microsystems water-cooled product known as the Modular Datacenter. With computer room air conditioning systems, chillers are placed by the racks, and from the resulting hot air, heat is moved into liquid and pumped outside the building, Cooley says.

"Every datacenter does move water. We get that water closer to the point where you're actually generating heat," Cooley says.

Sun isn't bringing water into the servers just yet.

"What comes along with it is the need to bring water into every server, and all the plumbing issues," Cooley says. "Sun does not have a product in this space right now. But every vendor is looking into this."

Rather than put water inside the servers, Sun placed the water cooling technology in the Modular Datacenter, which is essentially a computer room in a large box that's been generally available since the end of January. Standard servers are placed inside the box, bringing them closer to water and reducing the amount of hot air that needs to be moved around a datacenter.

IBM did Sun one better with the  System p5 575, which uses the Power6 chip. A cabinet that holds 14 servers pumps cold water through pipes onto a little copper plate that sits right on top of the chip, Seminaro explains. The cabinet contains 7.2 gallons of purified water, which is endlessly recirculated, remaining in the cabinet for the life of the product. A connection to a building's plumbing system is necessary for the heat to be transferred from the product to the customer's water pipes.

Naturally, customers may worry about a leak inside the system ruining their expensive processors. IBM uses a corrosion-resistant water distribution system to minimize that risk, and water is kept at a temperature that causes no condensation, Seminaro says. Leaks are possible, he acknowledges. But IBM is confident enough that it plans to expand water cooling to more servers.

"We're evaluating it now," Seminaro says. "We will definitely put it into more of our platforms. We started here because in the world of technical computing there is a real desire for a tremendous amount of compute capacity in a given location."

The System p5 575 with water cooling has 448 processors and is capable of performing trillions of operations per second. Water is about 4,000 times more efficient than traditional air cooling, IBM notes in a video on its Web site. Actual energy savings aren't quite that impressive. The number of air conditioning units can be reduced by 80 percent, and energy consumption for datacenter cooling is reduced by 40 percent, IBM says. Big Blue says its scientists are working toward "direct on chip" water-cooled systems that will be even more efficient by bringing water all the way to the hottest parts of a computer.

While IBM recently rediscovered water cooling, HP has been researching water cooling since 1999 and began offering an HP-branded system about four years ago, says Wade Vinson, HP's power and cooling architect. Like Sun, HP is not bringing water directly into the servers. HP's Modular Cooling System is a water-cooled rack that gets water from one of three sources: a direct connection to the building's chilled water system, a dedicated chilled water system, or a water-to-water heat exchanger unit connected to a water system.

Vinson says the "jury's still out" on whether the complexity of having water inside the server is worth it. Air cooling inside servers is easy and less risky, he says, and customers can still gain 30 percent energy reductions by using the HP water-cooled rack.

At the National Center for Supercomputing Applications in Illinois, Pennington is eagerly anticipating the arrival of Blue Waters, the 95,000-square-foot petascale computing facility on the University of Illinois campus. The NCSA, which provides computing resources to scientific engineers and industrial users, uses a 9,600-core machine that's known as "Abe" and is based on Dell blade servers. It requires three floors: The bottom floor for air handling units, the second floor for servers, and the third to handle return air flow, Pennington says.

With the 200,000-core water-cooled system, there will be a mechanical room under the server floor, with the third floor left over for office space. The datacenter will connect to the building's plumbing infrastructure, and from there to a large chilled water plant maintained by the university.

"We spent a significant amount of time working with people on campus and with companies, understanding how to make a water cooling room efficient," Pennington says. "I wouldn't say it's simpler [than air cooling]. It's just a different set of engineering challenges."

Pennington expects to use servers based on IBM's in-development Power7 chip, successor to the current Power6 microprocessor for high-end Unix servers, which IBM unveiled one year ago. Water cooling will be used inside the servers, Pennington notes, but the NCSA project involves considerably more work to optimize the efficiency of water cooling. Including staff, the machine room and computers, Blue Waters will cost $208 million.

"We're providing water to the racks. IBM is doing all the other plumbing within the racks," he says.

The NCSA isn't committed to using only IBM servers. If other suitable water-cooled machines come along, the organization will buy them, Pennington says. What has been clear to Pennington for several years is that water cooling is the only viable technology that can provide the kind of power density the NCSA seeks in the foreseeable future.

After expanding the current machine room eight years ago with dense air-cooled systems, "we looked at what was coming in the next decade," Pennington says. "It was clear to us that water cooling was going to have to be a significant technology for us to think about."

Poor Steve Ballmer. Having yanked his offer to buy Yahoo, Microsoft Corp.'s CEO is left to run a $57 billion company that is on track for its annual orgy of profits and continues to dominate several software spheres. And he still gets to decide how -- or even if -- the company should spend its $26 billion cash hoard.

But these aren't breezy times for Microsoft or its top executive. There's a growing sense outside of the company that it needs to make major changes if it wants to continue thriving. For example, Gartner analysts claimed last month that Windows is "collapsing" under its own weight. And George Colony, CEO at Forrester Research, said in his blog this week that a wholesale reformation is required at Microsoft.

[ For the complete saga of Microsoft's unsuccessful bid to take over Yahoo, check out InfoWorld's  special report ]

In particular, Ballmer needs to move quickly to shape Microsoft's strategy for the Web, where, with a few exceptions, it remains a laggard behind Google and other online rivals.

That can hurt Microsoft's chances with some users even when its online offerings are equal to Google's technically. For example, the University of the Pacific in Stockton, Calif., recently joined other schools in deciding to roll out the Google Apps suite instead of Microsoft's similarly free Live@edu package.

"On paper, Microsoft's and Google's products looked exactly the same," said Rob Henderson, director of cyber infrastructure at the school. But a poll of the university's 6,000 students showed that a majority preferred Google's technology, Henderson said.

Dana Gardner, an analyst at Interarbor Solutions LLC in Gilford, N.H., said that Microsoft "needs to become No. 1 or No. 2 in online consumer and business 'something' before its Office and desktop Windows franchises go into slow-growth and/or maintenance mode."

So how can Microsoft try to catch up on the Web, now that its bid to buy Yahoo is off the table? There are three main options:

1) Forget about Yahoo and look elsewhere. Abandoning what had become a $47.5 billion cash-and-stock offer for Yahoo showed that Microsoft is belatedly coming to its senses, said Enderle Group analyst Rob Enderle.

One upside of the failed merger attempt, he added, is that it opened up possible opportunities for Microsoft with News Corp. and Time Warner that may "turn out to be both less risky and more lucrative than [buying] Yahoo would have been."

Under that scenario, News Corp.'s MySpace social networking unit or Time Warner's AOL subsidiary could become new candidates for acquisition or partnership deals.

Each has some potential appeal for Microsoft: MySpace is essentially the Windows of the casual social networking market, while the "A" in AOL could well stand for advertising at this point. AOL's online ad network delivers 3 billion banner ads daily, tops in the U.S., and reached the most Internet users of any network in March, according to market research firm comScore Inc. And AOL's Web properties collectively rank as the fourth most popular in the U.S., behind those of Yahoo, Google, and Microsoft.

But there are downsides. Time Warner said as part of its first-quarter earnings report that advertising was down year over year on its own Web sites, leading to management changes and an internal reorganization. And a Microsoft acquisition of MySpace -- or of Facebook, in which it has a 1.6 percent stake that cost $240 million last fall -- could alienate the predominantly young social-networking user base.

If Microsoft is fixated on the Web advertising business, other options might include Specific Media or ValueClick. Those two companies operate the largest independent online ad networks in the U.S.

Or if it really wants to get into social networking in a bad way, it could consider trying to entice LinkedIn to agree to a buyout. The professional networking site has 20 million members, and a deal with Microsoft likely would trigger less user backlash than one between the software vendor and MySpace would. On the other hand, LinkedIn CEO Dan Nye has said the company is aiming for an IPO next year and isn't interested in a buyout.

2) Focus internally. Microsoft's biggest online weakness is in the core Web search market. Its Live Search engine is used for just 9 percent of searches by Internet users in the U.S., leaving it far behind Google's 60 percent share, according to comScore.

Since no acquisition apart from buying Yahoo would quickly boost Microsoft's search position, "their best priority for now would be to work on innovating around their own search business," said Forrester analyst Shar VanBoskirk. "I'd stay out of the acquisition game for awhile and spend my money on my own R&D."

Although that approach has left Microsoft floundering in search, it has worked in other areas. A case in point: Microsoft was rebuffed by federal regulators when it tried to buy Intuit for its Quicken family of personal finance software in the mid-1990s. But afterwards, Microsoft "steadily improved" its own Money application, said Burton Group analyst Guy Creese.

Microsoft may need to look inward and rethink a lot more than just its search strategy -- much like IBM remade itself in the mid-1990s.

Colony wrote in his blog post that Ballmer "unintentionally dodged a bullet" when he withdrew the offer for Yahoo. What's really needed at Microsoft, Colony added, isn't a quick-fix acquisition; instead, the company has to change its culture, software development processes, and financial models in order to become a true online software vendor. If it doesn't, Colony warned, "Google is going to use its citadel of advertising to attack Microsoft's heart -- software."

3) Swoop back in and grab Yahoo after all. Microsoft is distancing itself from the proposed acquisition of Yahoo, which is no big surprise. But there's a possibility that the software vendor's public walkaway from its offer may ultimately end up being a high-risk but successful negotiating tactic.

The fact that as of this afternoon, Yahoo's stock price was off by only 11 percent from where it was prior to Microsoft's pullout -- and that it remains well above the price levels from before Microsoft launched its buyout bid on Feb. 1 -- is being attributed partly to investors remaining hopeful about a deal between the two companies.

Perhaps backtracking a bit under pressure from unhappy shareholders, Yahoo CEO Jerry Yang told multiple media outlets this week that a sale of the online services company remained a possibility if the purchase price was right.

But Creese noted that Yahoo needs to meet its financial targets over the next few months. "If it doesn't," he said, "Microsoft may be back with a lower offer price."

Microsoft has invested several million more dollars into an incentive program it recently unveiled for small businesses, hoping to make it easier for customers in that market to run their businesses using Microsoft products.

Microsoft has increased its already $10 million investment in a program it calls the Big Easy by about $3 million, the company said Thursday. Through the program, unveiled in February, small businesses purchasing certain products through authorized specialist partners get a certain percenta