Microsoft takes Windows online

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By TODD BISHOP
The Seattle Post Intelligencer

SAN FRANCISCO -- Microsoft Corp. is giving its two biggest programs an online refresh, and overhauling its fundamental business model in the process. In a new bid to catch its rivals and revive its own growth, the company will supplement its dominant Windows and Office franchises with related Internet services designed to generate revenue through advertising and subscription fees.

The new services, Windows Live and Office Live, are the latest in a long line of attempts by Microsoft to adapt its old-line software businesses for the Internet age. This time around, the online services come with a new twist -- adopting and building on the online advertising approach that has fueled Google's success.

"Google has done an amazing job at making that ad engine click ... and we've all learned quite a bit from them," said Ray Ozzie, Microsoft chief technical officer. At the same time, he said, existing services "have barely scratched the surface" of the ways that online advertising can be used.

The new Microsoft services were unveiled by Ozzie and Bill Gates at an event here Tuesday that also showed one of the challenges the initiative faces: Technical glitches repeatedly stalled demonstrations of preliminary versions of the services -- contrasting sharply with Microsoft's assurances of a "seamless" experience.

Windows Live is a customizable online home page that combines elements of an Internet portal, a search engine and a PC desktop, letting people access and share files between computers, among other things. Office Live is a set of Web-based programs for small businesses that can work in tandem with the regular Office software.

Gates, Microsoft's chairman and chief software architect, called the new services part of "a revolution in how we think about software."

However, he said the services will supplement -- not replace -- the traditional versions of the programs. As currently envisioned, for example, the company said it doesn't expect users to be able to create a Word or Excel document solely by using the Web browser in Office Live, without the traditional program, as well.

Some of the initiatives could create new competition for others in the industry. For example, the Windows Live service will include the ability for people to share contact information online in a way that's similar to existing services.

In other ways, the new services repackage efforts that Microsoft has tried before. Many similar services fizzled under Microsoft's .NET initiative, and Gates acknowledged that Microsoft has been down this road before. But he also pointed to successes in such areas as the Xbox Live, a subscription-based online gaming service.

Remote access

Tuesday's technical glitches, which Microsoft executives on stage attributed to network problems, showed that online services aren't infallible. But Gates said underlying improvements in processors, storage capacity and network access make it much easier nowadays to host programs and data online, and access them remotely.

Microsoft competitors such as Sun Microsystems offer that approach as an alternative to the Redmond company's traditional, PC-based programs. A Sun executive said Tuesday that Microsoft is late to the game and falling short.

"Microsoft is actually validating a strategy that we have been talking about for over five years, which is software as a service," said Ingrid Van Den Hoogen, a Sun vice president, referring to the concept of letting people access programs over the Internet. "From that perspective, they are finally catching up." At the same time, she said, by not offering full-featured capabilities of Office and other programs online, Microsoft isn't going far enough with its new services.

Goldman Sachs analyst Rick Sherlund said the new services appear to be Microsoft's response to the risk posed by competing software companies whose business models are based primarily on advertising and subscriptions.

New competition

As Microsoft's revenue growth has slowed, dropping below 10 percent last year, Google's advertising-based business has soared. And other competitors, such as Salesforce.com, have demonstrated the viability of offering programs online.

"I see Microsoft today saying, 'We understand that. Here's our first step in that direction, and how we address it.' That's all I think you can conclude today, is they're taking their first steps," Sherlund said. "They've gotta do it."

The free Windows Live service, available in test form at www.live.com, descends from a project called Start.com that originated in Microsoft's MSN group.

In addition to generating money through advertising, the company will use Windows Live to promote online subscription services. An example shown during the event was an on-screen pitch for people using the free Windows Live Safety Center security tool to pay to use the more advanced Windows OneCare Live service.

As part of the new service, the company said, it will morph its MSN Messenger instant-messaging and Hotmail e-mail services into Windows Live services, while maintaining the MSN.com portal for people who want preprogrammed content.

Microsoft said it will use its MSN adCenter service, currently in testing in the United States, to supply advertising for a variety of its new online services. In that way, the company is taking ads beyond the MSN Search engine, which itself will be introduced in a new form next year as Windows Live Search.

A preliminary Office Live version is slated for release early next year. Basic features, such as simple business Web hosting and e-mail services, are expected to be free, supported by advertising incorporated into the Office Live browser window. Microsoft says it has lined up Cingular Wireless, Toshiba and American Express small-business services as advertisers.

The company says additional features, such as advanced hosting and online collaboration tools, will be available on a subscription basis.

Microsoft said other software developers will also be able to build their own programs and features that work with the Windows Live and Office Live services.

The company didn't disclose the expected pricing for the subscription services. Executives also didn't say how much revenue they expect the advertising to generate. Ozzie said the company's financial gurus are watching closely to make sure that the new services don't hurt Microsoft's traditional software businesses.

Together, the traditional versions of Windows and Office contribute the vast majority of Microsoft's profits, despite efforts by the company to expand.

Online software programs, known in the industry as hosted services, offer Web-based access to many of the same features traditionally available in standard programs for desktop PCs. Rather than charging one-time license fees, software companies and service providers typically charge ongoing subscription fees for access.

Salesforce.com, which offers an online customer-relationship management program, is still a fraction of Microsoft's size, but its revenue rose more than 80 percent in its last fiscal year, to more than $176 million.

Earlier this year, Microsoft Chief Executive Steve Ballmer said the company would compete more directly with Salesforce, offering an online version of Microsoft's customer relationship management software.

"The basic model of selling software as a hosted service has finally started to get some traction," said analyst Dwight Davis, vice president at Summit Strategies Inc.