In a memo to staff, Microsoft's internet business head, Kevin Johnson, admits that not only are they struggling, but they have been doing it hard for some time. "Regardless of the outcome of any new discussions [with Yahoo], it is important…to move forward to strengthen our online services business," the memo states. "The fact is that we are not where we want to be in this business yet and we've been in this position longer than we'd all like."

The discovery of the memo could not have come at a worse time, as it surfaced the day before advance08, a Microsoft conference set to highlight how they can help advertisers make the most of the online environment.

Johnstone's frank confession also comes at a time when Microsoft is still trying to broker a deal with Yahoo, so it can take on Google on its own terms. Any deal is being stifled by dissident Yahoo shareholders led by US billionaire financier cum equity raider Carl Icahn.