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Wednesday, 11/09/2005 10:12:17 PM

Wednesday, November 09, 2005 10:12:17 PM

Is Ozzie MSFT's Savior?

Out: .Net, In: Web Services
Victoria Murphy Barret, Forbes.com, 11.09.05, 7:35 PM ET

Microsoft (nasdaq: MSFT - news - people ) is great at embracing causes. Ten years ago Bill Gates wrote an employee memo titled "The Internet Tidal Wave". Over night, it seemed, Microsoft was all-Internet, all the time. Five years ago the awkward moniker .Net (dot-net) stood for all things forward-thinking in Redmond.

Now the tide has turned. Revealed in two internal memos crafted by Gates and recently arrived chief technology office, Ray Ozzie, Microsoft is ready to take on the "services wave" of software available to millions over the Web.

Hints of the wave were unveiled on November 1 to a small crowd of journalists and analysts in San Francisco. Though that event underplayed what the two memos describe as a dramatically different future Microsoft.

Both execs argue for a revamped Microsoft that taps advertising to fund software development, delivers software online, and lets customers trail run software before buying. All of this should "just work", writes Ozzie.

Gates' letter emphasizes Microsoft's opportunity to grow, and its past success at taking advantage of technological shifts. He is typically upbeat. Ozzie's account is a much more sobering one. While Gates lauds the company he founded for seeing software services as far back as 1998, Ozzie blasts Microsoft for missing out on key trends.

Ozzie writes: "While we've led with great capabilities in Messenger & Communicator, it was Skype, not us, who made VoIP broadly popular and created a new category. We have long understood the importance of mobile messaging scenarios and have made significant investment in device software, yet only now are we surpassing the Blackberry."

Ozzie's battle cry is as instructive as it is decisive. He is assigning what he dubs "scenario owners" to monitor services-driven software development. It is unclear how many of these jobs there will be across Microsoft. The role entails prioritizing features and making sure teams are meeting goals. "They'll listen," Ozzie writes. Listening is not known to be a great strength of Microsoft's upper ranks.

Microsoft is a latecomer to its latest cause. The pioneer of advertising-based software delivery, Google (nasdaq: GOOG - news - people ), has sales of $4.5 billion. Marc Benioff founded business software-as-service firm Salesforce.com (nyse: CRM - news - people ), in 1999. Salesforce is up to $237 million in sales. Both have richer values on Wall Street. Google trades at 44 times next year's earnings, Salesforce at 85 (Microsoft trades at 17).

Microsoft has had glimmers of success in the newest areas of tech. But without boosting its sales dramatically and at a huge cost. The Xbox videogame machine, MSN, wireless and the small business software group have racked up $7 billion in losses in four years.

The transition to more dynamic, customer-drive software risks being an uncomfortable one for Microsoft and its shareholders. Windows and Office, product lines released over a decade ago in Microsoft's last fiscal year accounted for 70% of sales and 140% of profits (makes up for the other lines that lose money). Both products have historically been rolled out in big-bang semi-annual releases. One of Microsoft's greatest strengths has been its entrenchment in the industry. From chips to store shelves, Microsoft dominates. That distribution channel seems less relevant if Microsoft selling its wares over the Web.

Microsoft's tremendous profits will likely be tough to match if more and more software is sold online, paid for by ads. Microsoft isn't yet suggesting Windows and Office should be untethered from a PC. Instead, an ad-funded layer of services will be built on top of Windows and Office. Silicon Valley upstarts like Writely.com, Thinkfree and Numsum.com are already offering Word functionality online.

A hundred days into arriving at Microsoft, Ozzie said he needed a dictionary to understand the goings on in Redmond. He loathed the marathon-length meetings. Three months later, he is offering a refreshingly concise view of where Microsoft needs to go. His name has been dropped by outsiders as a possible successor to Gates. Unlike other executives there, Ozzie mentions competitors by name and points out where Microsoft is failing. Five years from now, his candor might be the unspoken wave that propelled Microsoft into the future.

http://www.forbes.com/enterprisetech/2005/11/09/microsoft-gates-ozzie-cz_vb_1109microsoft.html?partn...

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