Microsoft's Internet Do Or Die

To succeed with its software-plus-services approach, Microsoft must ensure a rich out-of-browser experience for Web-connected apps. "Programming in the browser is like programming with one arm behind your back," says InterKnowlogy's Huckaby. Windows Presentation Foundation was used to develop the New York Times Reader, which separates the online version of the Times from the browser and presents the reader with content that looks very similar to the printed newspaper. A small company called Thirteen23 has built client applications on top of WPF that provide out-of-browser experiences for popular Web services including Cine.view for Netflix and Nostalgia for Flickr.

Browser programming is still a critical piece, and a new technology from Microsoft called Silverlight--formerly known as Windows Presentation Foundation Everywhere--may help. A competitor to Adobe's Flash, it's a 2-Mbyte plug-in that runs inside the browser, even the Mac's Safari browser. Future versions will support C# and Visual Basic programming.

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So far, Microsoft's services record has been decidedly, well, mixed. The MSN Web portal has had more makeovers than Madonna. Though Microsoft essentially created Ajax as part of its Outlook Web Access product, and it led the development of satellite mapping with TerraServer, it let others capitalize on those areas, notably Google. A planned online productivity suite called NetDocs was shelved five years ago because of immature technology and concerns it would cannibalize Office.

Online services are only a small slice of Microsoft's overall revenue pie. Its adCenter online advertising business generated $462 million in the quarter ended Dec. 31--respectable but paltry compared with Google's staggering $3.2 billion in the same period--and its search engine has been steadily losing market share. Two key Live executives--Live Search VP Chris Payne and Windows Live platform engineering exec Blake Irving--recently left the company.

To jump-start online advertising and search, Microsoft is breaking them out from the Live organization with a new leader, former business app head Satya Nadella, who will report to Kevin Johnson, president of the company's platform products and services division. A new version of adCenter is in development, and Microsoft is integrating search technology into many of its products and targeting vertical, segmented search markets.

Still, where online advertising figures into a software-plus-services environment isn't entirely clear. Ozzie said in February that ad support won't be the predominant way Microsoft generates revenue from its online enterprise software--volume licensing or subscriptions are more appropriate--and it will play a mixed role in its small-business services offerings.

To succeed in the online environment, Microsoft will have to accommodate it. Web users highly value the ability of a service provider to implement quick, incremental updates, but that's not part of Microsoft's historical culture. Steve Berkowitz, senior VP of Microsoft's online business group, admitted at a conference last week that the company hasn't been "nimble enough or creative enough or bold enough" to exploit the technology innovations it has in development, and he promised that would change. "You're going to see us bring these technologies to the forefront in ways that we haven't before," he said.

Asked in February about the potential for online services to cannibalize Microsoft's traditional software business, Ozzie admitted there was a small chance, in certain markets, but that overall services would generate more business, not less. "Whenever there's a big technology shift like this," he said, "it tends to be more additive to the business net-net than significantly deleterious."

That's what Microsoft hopes, at any rate. Because if there's a company that might find the shift to online services significantly deleterious, it's Microsoft.