Microsoft makes big push on ad-based Web software

SAN FRANCISCO - Microsoft Corp., the world'slargest software maker, on Tuesday said it is embarking on amajor new way of doing business in which it offers its softwareas free online services, funded by advertising, while seekingto fend off rivals like Google Inc.

Outlining what it said was its biggest strategy shift infive years, the Redmond, Washington company told a meeting ofanalysts and reporters that it would deliver many of its keyproducts and services as online services as well as sellingsubscriptions or licenses for software installed on computers.

Windows Live and Office Live will give users some of thebasic features of the software giant's two most-profitableproducts, but without the complexity of installing andmaintaining the software in computer hard drives.

"We are trying to put a 'services plus software' mentalityinto many of the product groups inside Microsoft," said , Microsoft's chairman and chief software architect.

Microsoft also said it planned to fold many well-knownproducts in its MSN division into a new brand called WindowsLive. The move will combine its instant-messaging service, anew online e-mail service replacing Hotmail, Web security, datastorage and other features, all available via the Internet.

The software giant is looking to defend its mainstayWindows and Office software franchises by borrowing from ideasused by challengers such as Google, Salesforce.com, WebEx,Yahoo Inc. (Nasdaq: - ) and scores of start-ups.

While most of these rival programs have tiny audiencesrelative to Microsoft's hundreds of millions of Office users,the simplicity and power of Web-based software has captured theimagination of many software developers across the industry.

"(Microsoft) clearly gets where the focus of thecompetition needs to be," said Tim O'Reilly, publisher andsoftware design guru, on the sidelines of the event.

"There are going to be some fabulous new services. Butwhether they are built by Microsoft or by Yahoo or Google orSalesforce remains to be seen," O'Reilly said.

AD-SUPPORTED SOFTWARE

Three tiers of service will be offered, starting with afree, ad-supported one, a second tier with more features paidfor 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 whichindividual users can sign up for a "live" home page that pullsin constantly updating content from a range of informationsources including Web searches, e-mail, syndicated headlinesfrom other sites and photos and audio from across the Web.

Office Live will give smaller companies access to many ofthe features in Microsoft's collection of programs for businesstasks, as well as the ability to maintain corporate e-mailaccounts and data.

The pay-per-click advertising system pioneered in thedot-com era by Overture and fine-tuned by Google has created anew way of supporting innovative services and software on theWeb, Microsoft executives said.

"Google has done an amazing job of making that ad engineclick on eight cylinders. We have all learned quite a bit fromthem," Ray Ozzie, Microsoft's recently named chief technicalofficer said. "They and we have barely scratched the surface."

Microsoft is testing its own adCenter software in Franceand Singapore and will begin offering it for use by advertisersand partner Web sites worldwide over the next year, he said.

"We currently have about a 10 percent share of the onlinemarket. We fully intend to grow this share," Ozzie said.

"This advertising model has emerged as a very importantthing," Gates said. "We want all software developers to tapinto these models," he said of how many start-ups now depend onadvertising from rival Google to fund their new Web projects.

Analysts attending the meeting said Microsoft demonstratedit clearly grasps how the industry is shifting to deliversoftware 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-widereorganization at Microsoft that put MSN under the Windowsdivision and put Ozzie in charge of Microsoft's efforts todeliver software services over the Web.

"It shows that they get it," said Goldman Sachs analystRick Sherlund, but added that he had many questions how Webservices would meld with its existing businesses.

(Additional reporting by Reed Stevenson in Seattle)

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