Microsoft Revamp For Online Push Gains Urgency
By ROBERT A. GUTH
Staff Reporter of THE WALL STREET JOURNAL
November 9, 2005; Page A3

Microsoft Corp. Chairman Bill Gates has endorsed a radical reshaping of how his company develops software and services, citing an internal memo that says much about the challenges Microsoft faces, and underscores the rise of an emerging technical leader at the company.

In an email dated Oct. 30 sent to top Microsoft executives and engineers, Mr. Gates said the software giant needs to better address technologies and trends that are fueling a new wave of money-making on the Internet. "The next sea change is upon us," Mr. Gates wrote.
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The core of Mr. Gates's email, which was examined by The Wall Street Journal, is a memo from Ray Ozzie, Microsoft's chief technology officer, who describes some of Microsoft's missed opportunities and also tips a hat to companies such as Google Inc., Salesforce.com Inc., Skype Technologies SA and other start-ups that have pioneered Internet services.

The memo by Mr. Ozzie is a window to the announcement in September that Microsoft would reorganize into three major business divisions, each tasked with adding new online services to the company's existing product lines.

It also confirms the role that Mr. Ozzie is playing in pushing the newly formed groups to create online services that can be paid for by subscription or through advertising. Last week, Messrs. Gates and Ozzie announced a step toward that goal -- new online services coupled with Microsoft's Windows operating system and Office suite of software. (See related Portals column.)

In his memo, Mr. Ozzie directs each of Microsoft's three business units to start mapping out a strategy for developing their own services -- two of which were announced last week. He also describes a plan to appoint by Dec. 15 top executives at each of the three business groups.

By January, those executives will work to map the changes needed to better tap into the Internet's advertising boom and online services in general, Mr. Ozzie said.

"It's clear that if we fail to do so, our business as we know it is at risk," Mr. Ozzie concluded, "We must respond quickly and decisively."

The emails are the clearest evidence yet of how seriously the company views the threats posed by a new generation of fast-changing Internet services. Mr. Gates compares the situation to two earlier times of crisis for the company -- the initial advent of the Web, described as "the Internet Tidal Wave" in a 1995 memo from Mr. Gates, and a shift to Internet-focused software development in 2000, the focus of another high-profile internal memo.

In the latest phase of competition, the Internet has spawned services that can take the place of licensed software, often funded by advertising revenue. Microsoft already has begun to react to the changes, through its MSN online unit and services announced last week, called Windows Live and Office Live.

But the company still gets most of its revenue from selling software that is installed on users' computers, and has become painstakingly slow to develop. The company, which draws much of its influence from setting technology standards that are followed by other programmers, is becoming less relevant as developers choose simpler techniques that allow them to quickly create Web services that users can sample, Mr. Ozzie's memo suggests.

Microsoft's operating-system and MSN unit, Mr. Ozzie writes in his memo, must join forces to define a new kind of software cookbook for creating services -- a "next-generation Internet services platform," to drive innovation both inside and outside the company.

The memo highlights the broad power being afforded to Mr. Ozzie. In just eight months after joining Microsoft through an acquisition, Mr. Ozzie, a onetime rival while he worked at Lotus Development Corp., has been given broad power to reshape Microsoft's technical vision. How he performs in coming years could determine whether he in the future takes on a broader role as Microsoft's technology chief.

Mr. Gates, to be sure, retains that role as Microsoft's chief software architect, and isn't expected to give up the title anytime soon. In recent public statements, the Microsoft co-founder says he expects to play a role at the company long into the future, even as he increases the amount of time he focuses on philanthropy over the next 10 years. But he is trying to groom a top technical head at the company, and other broad technology thinkers that could take over more of his responsibilities, say people familiar with his thinking.

A recent restructuring led by Steve Ballmer, Microsoft's chief executive, created three business divisions each headed by an executive from the sales and marketing side of the company. Some analysts pointed to the need for Microsoft to balance those executives with some high-level technology experts.

Mr. Ozzie seems to be taking on a large part of that mantle. His memo also is surprising in its candor; though his language is polite, the executive doesn't shirk from pointing out the company's problems.

In his plan, Mr. Ozzie acknowledged "tension" between Microsoft divisions that have held back its Internet businesses. "These teams must work together, benefiting from each others' strengths," Mr. Ozzie wrote. Microsoft, he wrote, has made "good progress," in Internet services, but "a set of very strong and determined competitors is laser-focused on Internet services and service-enabled software."

Though Microsoft knew Internet search would be important, "through Google's focus they've gained a tremendously strong position," he wrote, later adding that Google's broad investments in the Internet -- though it is hard to predict which will pan out -- "might ultimately grow to substantially challenge our offerings."

Though Microsoft's communication software such as Messenger can handle Internet phone calls, known by the acronym VoIP, "it was Skype, not us, who made VoIP broadly popular and created a new category," he said.

Microsoft, he wrote, has "long understood mobile messaging," but "only now are we surpassing the Blackberry," a reference to Research in Motion Ltd.'s popular email device.

Though Office uses important Web technologies, it "is not yet the source of key Web data formats" such as PDF, a technology from Adobe Systems Inc. for handling electronic documents.

Mr. Ozzie doesn't define specifically what kind of services and software the company will create, but emphasizes that they will be "seamless" -- designed for the current environment in which users move between PCs, laptops, hand-held computers, cellphones and videogame consoles. Such a seamless operating system, for example, would "deploy software automatically and as appropriate to all of your devices," Mr. Ozzie wrote.

The coming "services wave" will be "very disruptive," Mr. Gates writes in his introductory email. "We have competitors who will seize on these approaches and challenge us -- still, the opportunity for us to lead is very clear."

Write to Robert A. Guth at rob.guth@wsj.com

Excerpts From Gates Email,
Ozzie Memo on Internet Push
November 9, 2005 6:54 a.m.

Below are excerpts from an Oct. 30 email from Microsoft Chairman Bill Gates and from a memo by Ray Ozzie, Microsoft's chief technology officer, discussing how the software giant needs to better address technologies and trends on the Internet:

From Bill Gates's introduction to Ray Ozzie's memo:

"Today the opportunity is to utilize the Internet to make software far more powerful by incorporating a services model."

"However, to lead we need to do far more. … We will build our strategies around Internet services."

"Steve [Ballmer, Microsoft chief executive] and I recently expanded Ray Ozzie's role as CTO to include leading our services strategy across three divisions. We did this because we believe our services challenges and opportunities will impact most everything we do."

"The next sea change is upon us. We must recognize this change as an opportunity and take our offerings to the next level, compete in a manner commensurate with our industry responsibilities, and utilize our assets and our broad reach to reshape our business for the benefit of the users of our products, our customers, our partners and ourselves."

From Ray Ozzie's memo:

"Most challenging and promising to our business, though, is that a new business model has emerged in the form of advertising-supported services and software. The model has the potential to fundamentally impact how we and other developers build, deliver and monetize innovations."

"Our products have embraced the Internet in many amazing ways. … But for all our great progress, our efforts have not always led to the degree that perhaps they could have."

"Even beyond our large competitors, tremendous software-and-services activity is occurring within startups and at the grassroots level."

"In some cases, it may be possible for one to obtain more (software) revenue through the advertising model than through a traditional licensing model."

"As an outsider, I was repeatedly impressed and awed over the years by how this company's talent has swarmed to effectively respond to huge business challenges and transitions. That said, even when we've been solidly in pursuit of a common vision, our end-to-end execution of key scenarios has often been uneven – in large part because of the complexity of doing such substantial undertakings."

"We cannot allow the seams in our organization, or our methods of making decisions, show through in our products."

"We're in a tremendous position to succeed, but doing so will require your belief, creativity, support, leadership, follower-ship and action."

"I very much look forward to embarking on this journey with all of you."