Why Microsoft Is Going "Live"


Almost no marketing buildup preceded Microsoft's announcement of a major new Internet initiative in San Francisco on Nov. 1. Some of the company's PR people even played down the event in advance. Yet when Chairman Bill Gates took the podium in a ballroom at the Palace Hotel, it soon became clear that this was arguably Microsoft's most important Net strategy announcement since it launched the so-called browser war against Internet pioneer Netscape a decade earlier.

In San Francisco, Gates proclaimed this the era of "Live" software and insisted that Microsoft (MSFT

) will play a major role in birthing a new generation of computing. He laid out plans to create two families of Web services, one for consumers, called Windows Live, and one for small businesses, called Office Live. Both are online counterparts to its Windows and Office software franchises, respectively.

Microsoft also plans to make it easy for customers or independent software developers to build their own Web services that interact with Redmond's technology. Unlike traditional programs, such as Microsoft's Office productivity suite, which reside on a PC, Web services run on Web sites and can be accessed via any browser. "The Live era is just starting," Gates says. "It's a new way to look at software and a better way to create opportunities."

STRUCK A NERVE. While Gates sounded like a pioneer, Microsoft has been late coming to terms with the newest phase of Internet technologies, commonly called Web 2.0. The trailblazers are Internet search giant Google (GOOG

), Web portal Yahoo! (YHOO

), business services provider Salesforce.com (CRM

), and a host of startups. Web surfers can write documents at Writely.com, create spreadsheets at Numsum.com, and manage photo albums at Flickr.com.

Not long ago, computer users had to buy software to handle those tasks. These outfits offer fun, easy-to-use services that are inexpensive or free, often supported by advertising. Their customer bases may be minuscule compared with Microsoft's, but their business models struck a nerve. "I would hope this changes the business model [at Microsoft] radically, because that's the way the business is going," says analyst Rick Sherlund of Goldman Sachs.

The software giant's competitors made light of its pronouncements. "They're under substantial attack by companies like Google, Yahoo, and Salesforce.com, and they have to recreate themselves -- they have no choice," says Salesforce.com Chief Executive Marc Benioff. But Benioff says even with a new Web strategy, Microsoft isn't yet capable of creating and introducing services as rapidly as its more nimble adversaries.

"USERS GET TO CHOOSE." Still, Microsoft's San Francisco event was eerily similar to its famous Internet strategy day of December 7, 1995. Even Gates made a passing reference to the earlier occasion, calling it "a big event, equivalent to this one." Back then, Netscape and its popular Web browser made Microsoft's Windows less relevant. Starting that day, Microsoft used its wealth, Windows monopoly, and influence with PC makers to overtake Netscape and turn the browser into little more than an extension of Windows. That strategy, in part, also resulted in a federal antitrust case that Microsoft settled in 2000.

Now, though, there's no hint that Microsoft will run afoul of the law. Its new services are based on widely accepted industry standards, rather than its own proprietary technologies. "I don't see them leveraging their monopolies this time," says analyst Charlene Li of tech market researcher Forrester Research. "This is about them having to convince users that their services are something they want. It's an acknowledgement that the users get to choose."

Possibly most appealing is Windows Live. Microsoft has created a Web site, Live.com, where people can create personalized Web pages and gather many of the things they enjoy doing on the Web. In addition to headlines about their favorite sports teams and local weather, surfers can get e-mail, use instant messenger, and check out feeds from blogs and audio podcasts.

"AN AMAZING JOB." And it lets users post content from their own PCs, such as documents they've recently read, giving Live.com features that don't exist at popular services, such as My Yahoo. Most of Microsoft's offerings will be free, though some will require paid subscriptions.

Office Live offers a similarly wide array of services -- this time for small businesses. Microsoft will give away Web sites, software for designing them, and Web-based applications to manage businesses, such as collaboration programs. It hopes to pay for that basic level of service with ad sales. Users can subscribe to additional applications, such as project management or time and billing management for a fee. And the services link to Office programs such as Outlook so that users can work both online and off.

Microsoft's revenues from the new businesses will be largely ad-supported. "Google has done an amazing job of getting that ad engine to click on all eight cylinders," says Microsoft Chief Technology Officer Ray Ozzie, who helped out with the announcements. "We've all learned a lot from them."

WHICH RISK IS WORSE? The strategy is as risky as it is bold. Microsoft's new online offerings will inevitably pull Web surfers -- and advertising dollars -- away from its long-established MSN Internet portal. While Microsoft isn't yet offering an online word-processing application, Ozzie says it's looking at the possibility. That could ultimately draw business away from its traditional Office products.

And most worrisome for Gates & Co.: The creation of a new Web-based ecosystem for software developers threatens to undermine the one it has long nurtured for its Windows operating system. "We're going to have to take some risks," Ozzie says.

Indeed, the risk of not doing anything is potentially much worse. Microsoft has had to maintain its Windows and Office empires, building ever more features into them to keep existing customers coming back for more. At the same time, new businesses emerged on the Web, threatening the relevance of those monopolies. As companies such as Google and Salesforce.com grew, Microsoft had to respond. Still, the new generation of Web services is designed to augment its traditional products, not supplant them.

FAMILIAR PATTERN. Microsoft's San Francisco event was high on vision and low on specifics. That may have been why the PR people set out to lower expectations. Much in the first batch of offerings are rebranded products from its MSN business, with some clever updates. Windows Live Messenger, for example, is the current MSN Messenger instant messenger service with some new features, including one that lets users share photo albums. Microsoft Office Live Essentials offers free Web design for small businesses that has the company's FrontPage software at its core.

But Microsoft is famous for starting late and winning in the end. Now, with a new Internet era dawning, it's trying do so once again.

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