Opening New Windows On The Web

Microsoft couldn't be accused of overhyping its announcement of a major new
Internet initiative in San Francisco on November 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 a decade earlier.

At the event, Gates proclaimed the era of 'Live software' and insisted
Microsoft 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, Web portal Yahoo!, business services provider
Salesforce.com, 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 radically, because that's the way
the business is going," says analyst Rick Sherlund of Goldman, Sachs &
Co.

CHOOSE US Gates may have a hard time coaxing consumers

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 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 December 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. "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 bn 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