Microsoft touts new era of software, services

Microsoft this week indicated it is entering a new era that will be marked less by monolithic programs licensed to corporate users and more by the integration of client and server software with Internet-based services.

The company used its annual financial analysts meeting in part to lay out its plans for corporate software and services. It plans to spend US$500 million in fiscal 2007, which began July 1, on R&D in the area of services.

Microsoft officials said that in addition to services, the company's enterprise focus will include evolving its high-performance computing platform, enterprise search tools, virtualization technology and security software for the edge of networks.

Company officials also hedged on the November release date they had set for Vista, saying development of the software was on schedule but that it would not ship until it was ready. Financial firm Goldman Sachs has already built a Vista delay into its earnings model for the company.

The biggest change was Microsoft's most detailed explanation yet of its software-as-a-service model, which company officials say will first appeal to consumers before branching out to small businesses and eventually large corporate customers. Microsoft is facing up to an emerging battle with Google, Yahoo and a host of start-ups developing services that could become alternatives to Microsoft's traditional platform and application portfolio.

"The world has evolved into one with amazingly powerful edge devices, amazingly powerful centralized services and high-bandwidth pipes connecting the two," said Ray Ozzie, who last month took over the role of chief software architect from Bill Gates.

"Rather than having to have a limited client and putting all the intelligence on the service, we can for the first time consider how to intentionally balance where to put the applications, where to put the data and how rich to make the user experience based on factors such as mobility, the nature of the device and the nature of the Internet connection."

Ozzie said Microsoft doesn't plan to turn its software portfolio into a lineup of service offerings, but will focus on an additive model in which enterprise users can complement client software such as Office and server software such as Exchange with services available over the Internet from Microsoft or third-party providers.

"It seems that Microsoft is becoming more serious about services and moving beyond being a desktop company, a software company," says Matt Rosoff, an analyst with Directions on Microsoft.

Ozzie said Windows Live, which is focused on consumer services, would serve as a strategic hub connecting client and server software and Internet-based services.

Skeptics say Ozzie isn't telling a new story but reviving Microsoft's Web services and .Net initiative introduced years ago that envisioned a set of software modules running locally or on the Internet that could be tied together on the fly to create composite applications.

"Microsoft is missing the ball in their marketing to IT," says Dwight Davis, an analyst with Ovum. Davis says Microsoft is reluctant to use the term service-oriented architecture to describe its efforts around services and integration of software components.

Microsoft says the forthcoming releases of Office 2007 and Vista will form the foundation on which to build out its services, as well as integrate with software from its mobile and entertainment division.

CEO Steve Ballmer said Microsoft's services and entertainment businesses, which includes Windows Live and Office Live, as well as IPTV and Microsoft's new iPod competitor Zune, have been tagged as the next big growth areas in terms of revenue and profit, joining client and server software.

Client software in the form of Office and Windows has been Microsoft's historical cash cow, generating well over 90% of its revenue. The company's server and tools business has posted double-digit revenue growth for the past 16 quarters.

"I think about how the company will move forward, about our growth, where we are going, and I think we have many things to be excited about," Ballmer said. "This next era of Microsoft will allow us to generate more shareholder value, more innovation and have more impact to change the world positively."

The company plans to focus on advertising-supported services, subscription-based software models and Internet-based delivery of software across its product line, Ballmer said. He added that the company's new era begins with him transitioning to fill Gate's role as Microsoft's champion of innovation.

The annual meeting, which brings in hundreds of financial analysts to the Microsoft campus, certainly had the flavor of a new Microsoft as it was the first time Gates was not in attendance. Gates, who plans to significantly diminish his role at Microsoft over the next 24 months, was on vacation in Africa.

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John Fontana

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