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Opening New Windows On The Web

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DQI Bureau
New Update

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.

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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
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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."

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LEADING

THE CHARGE: Ozzie, Microsoft's new CTO
Microsoft

Goes
"LIVE"

On November 1,

Microsoft unveiled two sweeping new Web service initiatives:

Office Live

Targeted

at small businesses, it enables them to set up Web sites and e-mail

systems, provides online collaboration tools for teams, and has

software for handling customer relations. It, too, will be supported

by advertising and subscriptions for more advanced services.

Windows Live A

Web site, Live.com, where consumers can personalize their digital

activities and keep them all in one place-including e-mail,

blogging, photo sharing, collecting podcasts, and instant messaging.

Microsoft will make money from advertising and subscription fees.

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.

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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

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