By Eric Auchard
Microsoft Corp., the world's largest software maker, on Tuesday said it is embarking on a major new way of doing business in which it offers its software as free online services, funded by advertising, while seeking to fend off rivals like Google Inc.
Outlining what it said was its biggest strategy shift in five years, the Redmond, Washington company told a meeting of analysts and reporters that it would deliver many of its key products and services as online services as well as selling subscriptions or licenses for software installed on computers.
Windows Live and Office Live will give users some of the basic features of the software giant's two most-profitable products, but without the complexity of installing and maintaining the software in computer hard drives.
"We are trying to put a 'services plus software' mentality into many of the product groups inside Microsoft," said Bill Gates, Microsoft's chairman and chief software architect.
Microsoft also said it planned to fold many well-known products in its MSN division into a new brand called Windows Live. The move will combine its instant-messaging service, a new online e-mail service replacing Hotmail, Web security, data storage and other features, all available via the Internet.
The software giant is looking to defend its mainstay Windows and Office software franchises by borrowing from ideas used by challengers such as Google, Salesforce.com, WebEx, Yahoo Inc. and scores of start-ups.
While most of these rival programs have tiny audiences relative to Microsoft's hundreds of millions of Office users, the simplicity and power of Web-based software has captured the imagination of many software developers across the industry.
"(Microsoft) clearly gets where the focus of the competition needs to be," said Tim O'Reilly, publisher and software design guru, on the sidelines of the event.
"There are going to be some fabulous new services. But whether they are built by Microsoft or by Yahoo or Google or Salesforce remains to be seen," O'Reilly said.
Three tiers of service will be offered, starting with a free, ad-supported one, a second tier with more features paid for by a low-cost subscription fee and a premium price, full-featured tier for services that users regularly rely on.
Windows Live is a free Web-based service in which individual users can sign up for a "live" home page that pulls in constantly updating content from a range of information sources including Web searches, e-mail, syndicated headlines from other sites and photos and audio from across the Web.
Office Live will give smaller companies access to many of the features in Microsoft's collection of programs for business tasks, as well as the ability to maintain corporate e-mail accounts and data.
The pay-per-click advertising system pioneered in the dot-com era by Overture and fine-tuned by Google has created a new way of supporting innovative services and software on the Web, Microsoft executives said.
"Google has done an amazing job of making that ad engine click on eight cylinders. We have all learned quite a bit from them," Ray Ozzie, Microsoft's recently named chief technical officer said. "They and we have barely scratched the surface."
Microsoft is testing its own adCenter software in France and Singapore and will begin offering it for use by advertisers and partner Web sites worldwide over the next year, he said.
"We currently have about a 10 percent share of the online market. We fully intend to grow this share," Ozzie said.
"This advertising model has emerged as a very important thing," Gates said. "We want all software developers to tap into these models," he said of how many start-ups now depend on advertising from rival Google to fund their new Web projects.
Analysts attending the meeting said Microsoft demonstrated it clearly grasps how the industry is shifting to deliver software as Web-based services rather than isolated programs. But these moves are preliminary and fragmentary, they said.
The new initiative also reflects a recent company-wide reorganization at Microsoft that put MSN under the Windows division and put Ozzie in charge of Microsoft's efforts to deliver software services over the Web.
"It shows that they get it," said Goldman Sachs analyst Rick Sherlund, but added that he had many questions how Web services would meld with its existing businesses.
(Additional reporting by Reed Stevenson in Seattle)
Copyright 2005 Reuters Limited.
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