Microsoft ogles Google’s goodies

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For long-time Microsoft watchers, there was a strong sense of déjà vu about Bill Gates’s description this week of a new vision for the future of software.

The future, he declared, lay in delivering services over the internet, not selling shrink-wrapped CDs containing code that customers could load on their own machines. Writing the software that powered those services – much like the Google search engine, or the eBay auction site – would be Microsoft’s next big mission.

However, while the Microsoft chairman and chief software architect announced the latest in a succession of once-every-five-years “big ideas” around which he tries to reshape the company, it carried echoes of similar statements in the past.

Matt Rosoff, an analyst at Directions on Microsoft, points out that ideas like Hailstorm (a plan to deliver a wide range of personal information services over the internet) and bCentral (a service for small businesses) were unveiled at the end of the 1990s with much fanfare. Neither lasted – although initiatives like MSN, the struggling online service, and Xbox Live, a pioneering online element to its games console, continue to play a part at the software group.

But the internet’s impact on the software business continues to spread, and the idea of software-as-a-service is back in fashion in Microsoft’s Redmond HQ – this time under the new rubric of “Live Software”.

This week’s description of Windows Live and Office Live – new services meant to help individuals communicate and organise their lives better, and small businesses to use the internet more effectively – bore striking resemblances to Hailstorm and bCentral. Elements of Windows Live, at www.live.com, are already available in test form, while Office Live will begin a trial early next year.

However, two things have changed that suggest Microsoft may be ready to throw more of its weight behind the effort.

One is the arrival of Google. The internet search company’s runaway success has sent tremors through Mr Gates’s seemingly impregnable domain. If Google can deliver search to a massive global audience over the internet – and is now moving into communications and e-commerce – where will its influence stop?

According to Ray Ozzie, a software industry veteran who recently joined Microsoft as chief technology officer and who now plays a central role in promoting the services idea, internet users have come to expect services that are fast, easy-to-use – and, in many cases, free. Access to personal information from any PC or mobile device is becoming expected, making more users willing to store their personal information on the servers of companies such as Google than their own PCs.

The other change is the arrival of a new way to make these internet services pay their way. “What’s different this time around is the advertising model,” says Mr Rosoff.

The idea of attaching relevant text ads to the results of internet searches, first developed by Overture (now a part of Yahoo) but perfected by Google, has become a money-spinner that could one day rival even Microsoft’s powerful cash machine.

Some estimates suggest that the $15bn online advertising market could grow to $150bn in 10 years’ time, as the technology that links advertising to relevant content spreads beyond search into all forms of media, including TV delivered over the internet. “It’s a big number, but it’s not unreasonable,” says Mr Ozzie.

This is already creating a new advertising-supported software business which, according to Microsoft, will pay for many of the internet services that will one day be used by consumers and small businesses.

Microsoft’s own efforts to create a third internet-based advertising network to rival Google and Yahoo is moving slowly, but trials have begun in France and Singapore, and the service is expected to come into operation some time next year.

To supplement advertising, Microsoft also has its sights set on charging subscriptions for higher-value services.

However, are even these new incentives strong enough to persuade Microsoft finally to throw its weight more fully behind online services? After all, Windows and Office, the main engines of Microsoft’s business, are potentially threatened by the shift of computing power to the internet and away from the “client” computer. Defending those products has long been at the heart of Microsoft’s strategy.

For now, Microsoft prefers to describe services as an extra source of revenue, not an alternative to selling software licences.

“In the broad scheme of things, Bill [Gates] and Steve [Ballmer, CEO] are cautious and only want services that complement” Microsoft’s core desktop products, says Rob Helm, an analyst at Directions on Microsoft. “But there’s a group inside Microsoft that wants to be less cautious.”

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