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New outlook needed as Microsoft heads online
Dec 13 2005 | Steve Lohr | The New York Times
Think back to round 1 of the internet, when things really got rolling in 1995. The computing landscape was shifting and a cool, fast-growing young company symbolised the new order: Netscape. At the time, Microsoft looked like a lumbering old war horse, trapped in the yesteryear of desktop personal computer software, word processors, spreadsheets and operating systems.
But, of course, Microsoft emerged a winner. It embraced the internet and vanquished the Netscape threat with hard work, ingenuity and strong-arm tactics that a federal court ruled violated the US anti-trust laws. Microsoft's shares soared to a record high at the end of 1999.
We're now witnessing round 2 of the battle for the internet. The computing terrain is again changing remarkably, helped along by free software like Linux and the spread of high-speed internet access. Today, all kinds of computing experiences can be delivered as services over the internet, often free and supported by advertising.
New companies offer web-based word processors and spreadsheet-based products long regarded as mature and long dominated by Microsoft's desktop programs.
Champions of the internet services model range from IBM to start-ups. But the totemic company in this next big evolutionary step in computing is Google, the internet search power whose ambitions appear to be growing as fast as its profits.
And Microsoft? It once more finds itself surrounded by doubt and dismissed as a laggard.
The man Bill Gates is counting on to make a difference is Ray Ozzie, a soft-spoken 50-year-old who joined the company just eight months ago. He has the daunting task of galvanising the troops to address the internet services challenge, shaking things up and quickening the corporate pulse.
The forces arrayed against Microsoft, analysts say, may well prove more formidable than ever.
"The problem Microsoft faces today is that there is a totally different model emerging for how software is created, distributed, used and paid for," says George Colony, the chairman of Forrester Research, a technology consultant.
"That's why it's going to be so difficult for Microsoft this time."
Yet there are optimists. Big industry shifts, they say, create opportunity. Inevitably, they note, internet computing erodes Microsoft's power to set technology standards, but the company can still benefit as the overall market expands. That's what happened in the 1990s. They say that if Microsoft shrewdly devises, for example, online versions of its Office products, supported by advertising or subscription fees, it may be a big winner in internet round 2.
At first blush, Ozzie, whose title is chief technical officer, seems an unlikely person to meet the threat of Google and its brethren. He has only a small staff and no direct control over Microsoft's vast product groups. "It's soft power," Ozzie says, referring to the foreign-policy concept that influence need not be measured in bombs and battleships.
Ozzie recognised in the 1980s that personal computers could also be powerful tools for communications and collaboration. He led the team that created Lotus Notes, an early program for corporate email and sharing information in digital workspaces, anticipating the kind of computing that would become commonplace only later with the rise of the internet and the web.
In 1995, IBM paid $US3.5 billion for Lotus Development Corporation and the prize was Lotus Notes.
In 1997, Ozzie founded Groove Networks to make advanced collaboration software using internet peer-to-peer technology, well before the arrival of Napster and peer-to-peer networks for sharing music. Groove was a technological triumph but not a big commercial success. Microsoft bought Groove this year to pick up its technology - and Ozzie.
Years ago, when Ozzie was a Microsoft competitor, Gates called him one of the world's great programmers. So, in Microsoft's engineering culture, Ozzie brings a lot of clout to his job.
He hit the ground quickly after he arrived in April. At first, he said, some executives told him that it was a big company and that he should get to know it for a year or so before deciding what to focus on. "That lasted about two weeks," he said.
In late October, Ozzie presented his ideas in a seven-page, 5000-word memo called "The Internet Services Disruption".
His memo analyses the internet services trend, the competition and Microsoft's strengths and shortcomings, and it suggests how the company must change. The document is also a call to action: "It's clear that if we fail to do so, our business as we know it is at risk," Ozzie wrote. "We must respond quickly and decisively."
The memo is peppered with technical acronyms and rivals are named. While Microsoft is progressing on several fronts, Ozzie writes, "a set of very strong and determined competitors is laser-focused on internet services and service-enabled software".
"Google is obviously the most visible here," he adds.
There is an implicit critique of Microsoft's software-building practice of relying so much on product cycles measured in years. The last major release of Windows - XP - was in 2001, while the next one, Vista, has been scheduled for next year after repeated delays. The memo chastises no product by name, but it extols the virtues of speed and simplicity in software design.
"Complexity kills," Ozzie wrote. "It sucks the life out of developers, it makes products difficult to plan, build and test, it introduces security challenges, and it causes end-user and administrator frustration."
Microsoft has announced it will selectively offer web services that do over the internet some of what Office and Windows do on the desktop. The company took measured steps in that direction last month, when it introduced Windows Live and Office Live. Windows Live lets consumers manage their email, instant messaging, blogs, photos and podcasts in one site. Office Live enables small businesses to set up websites and email systems, and to provide collaboration sites for teams. Both will be supported by advertising and perhaps some subscription fees.
In the future, Ozzie suggests, Microsoft will go further, offering parts of Office - like Word, Excel or PowerPoint - as web services.
The new approach, it seems, is a striking departure from Microsoft's long-time practice of bundling more and more software features into its big integrated products.
But internet services represent a more open, competitive model.
Recent innovations have enabled web-based software to look and respond more like desktop applications. Offering internet alternatives to traditional PC programs are a new breed of start-ups, including Writely.com, for word processing; NumSum, for spreadsheets; and Zimbra and Scalix, both email. IBM has web-based software called WorkPlace that is used by millions of workers. And Salesforce.com has built a fast-growing business by supplying customer relationship management software as an internet service.
"No piece of software will replace Microsoft's Outlook, Word or Excel, but web services will eat away at core areas of its Office suite over the next couple of years," says the chief executive of Salesforce.com, Marc Benioff.
If that happens, Microsoft's business could be battered.
Colony predicts that Microsoft's profit margins, under pressure from internet services, could fall by 40per cent or so over the next four years. A wild card is the hand that Google will play beyond search and how successful it may be.
Google has desktop search software and a web-based email service, two offerings aimed at parts of Microsoft's stronghold. How much further it plans to go in providing alternatives to Microsoft's software is uncertain, although it certainly looks interested.
For the past few months, Google has talked with Wyse Technology, a maker of so-called thin-client computers (without hard drives). The discussions are focused on a $US200 ($270) Google branded machine that would probably be marketed inco-operation with telecommunications companies in markets like China and India, where home PCs are less common, says Wyse chief executive John Kish.
For his part, Ozzie is curious about the plans at Google but is by no means obsessed by them. Google, he says, is "obviously a very strong technology company, and we'll see what they do with that".
The Microsoft strategy, he says, has to be to develop tools and technology that make it easier to build software for the internet-services era and easier for users to have more productive and enjoyable computing experiences. In a sense, it's a reinvention of the old Windows vision of computing, but in a very different competitive context from the desktop world that Microsoft ruled.
The new game plan, Ozzie says, is "obviously not an altruistic thing, but it doesn't even resemble the environment of old".
