Microsoft and its cheerleaders are all running around giving each other high-fives and throwing their hands up in the air and shouting "Hooray for us!" following the announcement of the company's Live initiative. But what, exactly, are they congratulating themselves for? So far, the Live initiative is a big ol' bucket of vaporware, combined with technology, products and service that were already available or announced quite some time ago, and are just being repackaged.

And when Microsoft talks about its future plans, they're describing a change in business model so broad and sweeping that it's completely unprecedented. I suspect Microsoft has no idea what it's letting itself in for.

The Windows Live site is your basic customizable home page. It's got e-mail. It's got online bookmarks. You can do Windows Messenger instant-messaging from that page. You can search the Web. These technologies were fresh and innovative during the Clinton Administration. Today? Not so much.

Live also includes OneCare online security services, which is pretty cool, but which was announced some time ago.

Microsoft's future plans involve online, hosted versions of all its applications, including subscription and advertiser-supported Office, and, possibly, hosted enterprise apps such as CRM.

If all of this sounds familiar, that's because it is. It all sounds a lot like Microsoft's .Net initiative, which it announced with a similar level of fanfare in 2000. Like Live, .Net involved Microsoft hosting a lot of applications, which would run across a range of devices, from smart phones to traditional PCs. That initiative fizzled, perhaps because it was simply too early. Or perhaps because customers simply aren't interested.

Update 11/03: Several readers in the comments section, below, point out that .Net isn't a hosted application business, it's a software development technology. They're half-right. .Net was originally launched in 2000 as both a technology and hosted applications business. The hosted applications business never went anywhere. The fact that people today don't remember that part of the business sort of underscores my point.

Our article by Aaron Ricadela provides more details on Live, including the fact that the new services will be ad-supported.

This is a completely new business model for Microsoft. Company Chairman Bill Gates compared the Live announcement to the change to Web services in 2000, and the embrace of the Internet in 1995. But this change runs much deeper than those--it makes those changes look as trivial as re-painting a conference room. Those changes were changes to Microsoft's technology, but what Gates is describing here is a fundamental change to Microsoft's way of earning revenue.

Here's how Microsoft makes most of its money: They sell their software to channel partners, who then sell it to the customer. These channel partners include PC vendors, like Dell, and also a whole class of service providers ranging from the little computer shop around the corner to IBM Global Services. The channel partners do the hard work of selling Microsoft software, installing it, customizing it, installing the hardware on customer premises, and--maybe most difficult of all--fixing it and training users in how it works.

If you work for a big business, you have a department in-house that either works with partners on doing those things, or does it themselves.

Visit the smallest, most remote town in America, one so small that it doesn't even have a traffic light, and you're likely to be able to find two things: a pizza parlor, and a place where you can get your PC fixed. (The pizza is probably awful--I can't speak for the quality of the tech support.)

Microsoft mostly doesn't get its hands dirty with this stuff.

This has been Microsoft's business model for 20-plus years, ever since the days of MS-DOS and eight-bit computing. It's been constantly adjusted, but fundamentally unchanged, as Microsoft added applications and server software to its portfolio, and embraced the Internet in 1995. While online services, such as MSN, have proven popular, the operating systems and applications businesses carry the company.

But now, Microsoft is taking on the task of maintaining its own applications, sidestepping the channel, and providing those applications directly to the user.

In doing so, Microsoft is not only significantly adding to its cost of doing business, but it's depriving itself of its chief competitive weapon. The U.S. anti-trust lawsuit against Microsoft described how Microsoft crushed Netscape in part by denying Netscape access to the channel. Microsoft saw to it that Internet Explorer was installed on all the systems shipped by PC vendors, and demanded that the PC vendors refuse to install Netscape, on threat cutting off the PC vendors' access to Windows. It's classic monopolist strong-arm tactics--Microsoft referred to it as cutting off the competition's air supply. Without Windows, the PC vendors would go out of business, so of course they acquiesced to Microsoft's demands.

But how are you going to do that when there's no software to install on the desktop, when the software is all accessed online? How is Microsoft going to cut off the air supply of Google and Salesforce.com?

On top of that, Microsoft is taking on the challenge of selling advertisements. These days on the Internet, "advertisement" is a code-word for easy money. Well, I have worked side-by-side with advertising salespeople my whole career (sometimes literally, when I worked in a small office) and I can tell you that it is hard work. It's like retail and the restaurant business--margins are usually thin, competition is fierce, and you have to think fast and smart, know a lot about the business, and work long hours to make money at it.

Advertising is, as a matter of fact, reminiscent of another business with thin margins that requires a lot of skill: The grocery and supermarket business. Remember Webvan? From 1999-2001, the company pioneered Web-based ordering combined with grocery delivery. They figured: We have the Web smarts--how hard can it be to bring bananas to people's houses? They learned it was plenty hard, and they went out of business. Now, online grocery delivery has made a comeback--led by the same companies who've been in the supermarket business for decades.

I expect many companies, like Microsoft, who think advertising is easy money will suffer the same fate as Webvan.