Gates: Microsoft Making 'Sea Change' In Software Strategy

Microsoft on Tuesday said it's developing a new wave of "live software" that will blend the functions of its PC products with new capabilities on the Web.

Microsoft chairman Bill Gates described the new approach as a "sea change" in how the company develops and releases software.

By developing new Windows Live and Office Live products and other online offerings, Microsoft is betting it can build a business on software supported by advertising instead of licensing and leverage the millions of programmers proficient in Microsoft technology to help the company go up against Google and other competitors.

Microsoft's latest products are designed to capitalize on the rapid growth of online ads while delivering a steady stream of innovation to customers. "This affects everybody who uses software," said Gates at a press conference in San Francisco. "It's a dramatic sea change." The live software effort is a change in the company's technology and business plans on the order of its response to the Internet 10 years ago and embrace of Web services in 2000, Gates said.

The Internet has become as much a part of PC users' daily experience as software launched from their computer desktops, and so Microsoft needs to find ways to deliver new products on the Web that can complement its giant Windows and Office businesses. Google has been rapidly releasing free software for searching a PC's files, writing blogs, and making Internet phone calls, paying for development by selling ads on its Web pages. At the same time, businesses have become frustrated at the sometimes glacial pace of new product releases from Microsoft. The company's new operating system, Windows Vista, for example, is on schedule to arrive five years after Windows XP.

The live software direction demonstrates how Microsoft is using its franchises in Windows, Office, servers, and development tools to recapture momentum where Google has taken the lead. "This is showcasing Microsoft pointing the company at Google as opposed to one product," says Rob Enderle, principal at consulting company the Enderle Group. "They're turning the battleship to the side."

Windows Live, which the company is testing now, will combine a Web site that features a search engine, E-mail, instant-messaging software, online maps, an Internet phone, and other applications that can follow users around by automatically updating files and preferences across the various PCs, PDAs, and cell phones they interact with on a daily basis. Microsoft will build a new client-side layer of software that developers can program to so their apps can take advantage of Windows Live features. Windows Live will also let PC users share files over the Internet by dropping them into a special desktop folder. Microsoft plans to make Windows Live functions available free and sell ads on the site.

Office Live, which Microsoft plans to start testing early next year, will be available in free, ad-supported, and paid versions. It's primarily aimed at small businesses. Microsoft demonstrated the ability for users to collaborate over the Internet on a spreadsheet, for example.

Both products will be powered by new advertising software called AdSense that Microsoft is testing in France and Singapore. Currently, Microsoft outsources part of its online advertising delivery to Overture, which is owned by Yahoo Inc. The online ad market is worth about $15 billion today and forecast to grow to $150 billion by 2015, according to figures Microsoft cited. According to Gates, Microsoft will deliver to developers a platform they can use to write software that calls on Live services, and incorporates ads into their apps. Microsoft will release a new version of its development tools and other business software next week. "This advertising model has emerged as a very important thing," Gates said.

Microsoft is also hoping the new offerings can give boost the perception that the company can still turn out innovative software that people adopt at the grass roots, said Microsoft chief technical officer Ray Ozzie. "What becomes popular," he said, "is really a function of the conversation that takes place on the Internet."