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Windows Azure: The End Of Software?

Forget the marketing hype, Windows Azure isn't the latest Microsoft operating system. It's a business strategy. One that shows Redmond believes the days in which it can make fat profits from software alone are numbered.

Let's deal with the technology for a moment. Windows Azure is a hosted, runtime version of Windows Server. OK, that's out of the way. Now let's look at the business plan.

Under Windows Azure, the strategy, Microsoft is entering the hosted services market in a big way. Earlier this year, the company opened vast new data centers in Washington state and San Antonio, Texas. It also plans to open server farms in Chicago and Dublin in the near future. Now it's clear why.

Microsoft is betting that an increasing number of its customers will want their applications on tap -- from "the cloud" (i.e., the Internet) -- in the years ahead. And it's going to charge them subscription fees that cover hosting, maintenance, upgrades, and the software itself.

Microsoft's pitch to business: "Pay for the services you use and reduce capital costs associated with purchasing hardware and infrastructure." With Windows Azure, "You can scale at the click of a mouse to meet seasonal demands or spikes in traffic based on sales and promotions," the company assures.

Makes sense. In fact, it makes so much sense that IBM went down this road more than a decade ago.

IBM in the late '90s realized what Microsoft, as it watches Vista sales languish, is just now discovering. Software has become a commodity. There's so much free stuff out there -- from Linux to Gmail -- that making a buck off lines of code is getting harder every day. And each year, the free stuff gets better and better.

IBM's free Lotus Symphony office suite has seen more than 200,000 downloads to date. That's 200,000 users that don't need to buy Microsoft Office.

IBM correctly bet that the best way to make money from software was to sell hosting, installation, integration, and support services. Those are big, capital- and labor-intensive businesses where scale matters and barriers to entry are high. No pimply-faced geek living in his mother's basement in Latvia is going to open a 5-acre server farm and put you out of business.

Google, with its Google Apps offerings, has figured this out as well.

So the Windows Azure strategy is the right move -- but Microsoft is a tad late to the party. And the transition from packaged software seller to hosted services provider is not going to be an easy one. Microsoft still relies on old-school software sales for the bulk of its profits.

Still, does the company have any other choice?

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