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November 9, 2005

Bill Gates preps Microsoft for “disruptive services wave”

Microsoft Corp almost missed the boat on software-as-services, and needs to catch up to its new wave of younger, nimbler competitors, according to two memos sent by chairman Bill Gates to Microsoft staff recently.

By CBR Staff Writer

A memo from Gates to senior executives and engineers shows how seriously Microsoft is taking its new software-as-a-service strategy, and provides insight into the company’s recent restructuring, services focus, and the Office Live and Windows Live announcements.

This coming ‘services wave’ will be very disruptive, Gates wrote. We have competitors who will seize on these approaches and challenge us–still, the opportunity for us to lead is very clear.

The memo, sent by Gates on October 30 and leaked to the web yesterday, focuses on the need to better address the technologies and trends that are behind a new way of money-making on the internet.

Attached was an earlier memo from chief technical officer Ray Ozzie, who has been placed in charge of the services strategy, which starkly outlines Microsoft’s missed opportunities and sets out a strategy to regain ground against the likes of Google, Skype and Adobe.

In his introduction to Ozzie’s observations, Gates stressed the need for the company to make the most of the current opportunity to use the internet as a platform to enable a services model.

We will build our strategies around Internet services and we will provide a broad set of service APIs and use them in all of our key applications, he wrote. But in order to execute on this opportunity, as we’ve done before we must act quickly and decisively.

He said the services strategy will have an impact on almost everything Microsoft does.

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The next sea change is upon us, he said 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.

Ozzie was more direct, saying that although Microsoft has made good progress on the internet services front, a set of very strong and determined competitors is laser-focused on internet services and service-enabled software.

The implication is that Microsoft identified areas of opportunity but failed to pursue them.

We should’ve been leaders with all our web properties in harnessing the potential of AJAX, following our pioneering work in OWA, Ozzie wrote. We knew search would be important, but through Google’s focus they’ve gained a tremendously strong position.

He warned that even though it is difficult to predict what will happen given the hype level, Google’s broad investments in the internet might ultimately grow to substantially challenge our offerings.

Ozzie continued: Office is not yet the source of key web data formats-surely not to the level of PDF. While we’ve led with great capabilities in Messenger & Communicator, it was Skype, not us, who made VoIP broadly popular and created a new category.

He also referred to the success of Research In Motion Ltd’s BlackBerry devices, saying that despite Microsoft’s long understanding of mobile messaging, it is only now starting to pass RIM on the email front.

Ozzie indicated that inter-departmental tension has played a part in retarding Microsoft’s internet development.

These teams must work together, benefiting from each others’ strengths, he said. We cannot allow the seams in our organization, or our methods of making decisions, show through in our products.

The implication is that without the tension Microsoft could have better focused its efforts and prevented players like Google, Skype, and RIM from establishing their leads.

The comments from Gates and Ozzie provide insight into the restructuring announced in September whereby the company was reorganized into three divisions and each division was asked to produce online services. Ozzie is driving the push across all three organizations and has asked each of the units to start mapping out a strategy for developing their own services.

By December 15, executives will be appointed to each unit to enact the directive, and by January they will be working on the details of how to make the changes needed to tap into internet advertising and online services in general.

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

The Office Live and Windows Live announcements are the first tangible signs of Microsoft’s new direction.

The depth of change needed within Microsoft should not be underestimated. Ozzie warned that the slow speed of development Microsoft has settled into is a risk to the business. Microsoft’s approach is becoming less relevant as developers choose simpler techniques that allow them to quickly create web services that users can sample.

To address this threat, he said the operating-system and MSN units must join forces to define a new formula for creating services, a next-generation internet services platform designed to drive internal and external innovation.

As well as outlining the thinking behind Microsoft’s new strategy, the memo also confirms Ozzie as the emerging technology visionary within Microsoft. He joined the company eight months ago when Microsoft acquired the company he founded and was CEO of, Groove Networks. He is also the architect behind Lotus Notes.

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