Opening New Windows On The Web

Microsoft unveils Net services to push back against Google, Yahoo, and other rivals

Microsoft couldn't be accused of overhyping its announcement of a major new Internet initiative in San Francisco on Nov. 1. In fact, the company even tried to play it down. Yet when Chairman William H. Gates III took the podium in a hotel ballroom, it soon became clear this could be Microsoft's most important Net strategy announcement since it launched the famous browser war against Internet pioneer Netscape Communications Corp. (TWX ) a decade earlier.

At the event, Gates proclaimed the era of "Live software" and insisted Microsoft Corp. (MSFT ) would play a major role in a new generation of computing. He laid out plans to create a series of so-called Web services. Unlike traditional software such as Microsoft Word, which resides on a PC, Web services run on Web sites and can be reached through any browser. The company is developing two families of these services -- one called Windows Live for consumers, another called Office Live for small businesses. They're online counterparts to its Windows and Office franchises, and will largely be paid for by advertising. Microsoft plans to make it easy for customers or independent software developers to build their own Web services to interact with its technology. "The Live era is just starting," Gates says. "It's a new way to look at software and a better way to create opportunities."

PLAYING CATCH-UP

While Gates sounded like a pioneer, Microsoft is playing catch-up in the new-generation Internet technologies, commonly called Web 2.0. The trailblazers are Internet search giant Google (GOOG ), Web portal Yahoo! (YHOO ), business services provider Salesforce.com Inc. (CRM ), and a host of tiny startups. Web surfers can write documents at Writely.com and create spreadsheets at Numsum.com -- things they used to have to buy traditional software to do. These outfits offer easy-to-use services that are inexpensive or free, often supported by advertising. "I would hope this changes the business model [at Microsoft] radically, because that's the way the business is going," says analyst Rick Sherlund of Goldman, Sachs & Co. (GS ).

While it's now clear that Microsoft gets it, it's not at all clear if the company can actually do it. The software giant's MSN unit has been an also-ran to Google and Yahoo in online ad sales, the exact type of revenue the company needs to generate in order to make this business a success. JPMorgan Equity Securities Inc. says MSN posted advertising revenue growth of 20% last quarter, compared with the 40% and 108% at Yahoo and Google, respectively. "Just getting it ain't going to be enough," says Credit Suisse First Boston analyst Jason Maynard. "They are significant share losers to Google."

The software giant's competitors made light of its pronouncements. "They are under substantial attack by companies like Google, Yahoo, and Salesforce.com, and they have to recreate themselves: They have no choice," says Marc Benioff, chief executive of Salesforce.com. Benioff maintains that even with its new Web strategy, Microsoft is not yet capable of creating and introducing new services as rapidly as its nimbler adversaries.

Still, Microsoft's San Francisco event was eerily similar to its famous Internet strategy day of Dec. 7, 1995. Back then, Netscape and its popular Internet browser made Microsoft's Windows seem less relevant. Starting that day, Microsoft used its Windows monopoly, an army of developers, and its influence with PC makers to bury Netscape. That strategy, in part, also resulted in a federal antitrust case that Microsoft settled in 2000. Gates made a passing reference to the 1995 occasion, calling it "a big event, equivalent to this one."

This time, Microsoft will have a harder time using the Windows franchise to gain advantage. "I don't see them leveraging their monopolies," says analyst Charlene Li of tech market researcher Forrester Research (FORR ) Inc. "This is about them having to convince users that their services are something they want. It's an acknowledgment that the users get to choose."

Will consumers choose Microsoft? With Windows Live, Microsoft has created a Web site, Live.com, where people can create personalized Web pages. In addition to headlines from their favorite sports teams and local weather, they can check out feeds from blogs and audio podcasts. And it will let users post content from their PCs, like documents they've recently read, to their personal Web pages, giving Live.com features that popular services such as My Yahoo lack.

WORKING ONLINE AND OFF

Office live offers a similarly wide array of services, aimed at small businesses. Microsoft will provide the software for designing Web sites and the computing capacity to run them for free. It will also give away Web-based applications to manage businesses, such as collaboration programs. The company hopes to pay for that basic level of service with ad sales. Users can subscribe to additional applications, such as project management, for a fee. And the services link to Office software programs such as Outlook so that users can work both online and off.

Microsoft's revenues from the new businesses will be largely advertising-driven -- mimicking Google. "Google has done an amazing job of getting that ad engine to click on all eight cylinders," says Microsoft Chief Technology Officer Ray Ozzie, the Lotus Notes creator who joined Microsoft in April and is leading the company's software-as-a-service charge. For Microsoft to succeed, it will have to prove to advertisers that it can provide laser-targeted advertising. Only then, "they'll be able to get advertising to subsidize services and software," says Tim Hanlon, director of emerging contacts at Starcom MediaVest Group, a media buying agency.

The strategy is as risky as it is bold. Microsoft's new online offerings will inevitably pull Web surfers -- and ad dollars -- away from its long-established MSN Internet portal. While the company isn't yet offering an online word-processing application, Ozzie says it is looking at the possibility. That could ultimately draw business away from its traditional Office software products. And most worrisome: The creation of a new Web-based ecosystem for software developers threatens to undermine the one built around its Windows operating system. "We're going to have to take some risks," acknowledges Ozzie.

That may be some of the most important news of all to come from the announcement. As the company has grown into a $39.8 billion behemoth, it has focused much of its efforts on defending its old empires, rather than building new ones. The announcement of the Live family of products may signal the dawn of a new -- and livelier -- era at Microsoft.

By Jay Greene, with Steve Hamm in New York

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