The five-yearly wave is rolling in. A decade after Bill Gates wrote his “internet tidal wave” memo, outlining how the new medium would change computing, and five years after another on internet-focused software, Microsoft is bracing for a further sea change. This time it is software as an internet service.

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The trend is no sudden revelation. Google, for example, has for some time wowed consumers, investors and advertisers with its search service and rapid proliferation of new online services to go with it. Microsoft has started reacting, with its reorganisation into three divisions, the appointment of Ray Ozzie to lead the services strategy, and the recent launch of Windows Live.

But the memo does underline how urgent it has become. The software group has missed out on leading a range of new services. For example, its MSN internet search business has lagged behind Google on innovation and its ability to drive advertising revenues. Skype has stolen a march in the peer-to-peer internet telephony.

Reacting to the threat will require a big shift in how Microsoft operates. It has focused in the past on complex new versions of its software products. Next year it will launch Windows Vista, the new operating system, and Office “12” which both took many years to develop. Their success, coupled with the new Xbox 360 games console and new server software this year, remain the key to Microsoft's performance short-term. They will continue to churn out cash for many years.

But to generate growth further ahead Microsoft needs to become more nimble. That means stripping complexity out of the development process and matching smaller rivals for speed on new product launches and updates. Otherwise it risks another company such as Google becoming the software platform of the future. One challenge will be Microsoft's willingness to allow engineers to develop new products, without a slavish reference back to the powerful Windows cash cow. The new initiatives demonstrate a new determination to try.

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by marcelk 10 Nov 2005 02:51 AM

The company has three distinct businesses,therefore it ought to let them compete on their own as separate entities.Failing to recognize this simple notion hobbles the creative drive as well as the stock performance.

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