Microsoft vs Google: The empire prepares to strike back

Ray Ozzie has his hands full countering Google, says Neil McAllister

It can't be easy being Ray Ozzie. Microsoft's chief software architect is just 18 months into the job as Bill Gates' handpicked successor. Yet, depending on whom you ask, his tenure will either signal a bold new era for the company or mark the beginning of its terminal decline.

From the perspective of Microsoft shareholders, the picture certainly looks grim. After a decade of timid stock performance, the fiscal year that ended June 2009 saw Microsoft's net revenue decrease for the first time in its history. The company had its first-ever layoffs and has exceeded the original estimate of 5000 pink slips. But worst of all, for the first time in recent memory, Microsoft confronts a rival of goliath proportions that actually seems capable of going the distance with the software giant.

That rival, of course, is Google, and the search leader's relentless expansion is battering Microsoft on virtually every front. Google's emphasis on the web as an application platform challenges the primacy of PC software and operating systems, Microsoft's traditional cash cows. Its forays into mobile devices call into question the very concept of desktop computing. Its web-based services and open source software fly in the face of Microsoft's core business model. Philosophically speaking, Google is the anti-Microsoft - and the company is making a killing at it.

By comparison, the world's largest software vendor has adapted poorly to the changing market landscape. On the web, Internet Explorer is last in standards compliance, and its critical security flaws sometimes go unpatched for months. Windows Mobile claims just 7.9 percent of the smartphone market, and according to Gartner, sales are slowing. Microsoft's vaunted new search service, Bing, has won few converts from Google, except where Microsoft has strong-armed them into using it. In short, while it may be first in desktop software, Microsoft's track record outside the company's comfort zone has been fairly dismal, enough so that in 2007, venture capitalist Paul Graham declared, "Microsoft is dead".

But Ray Ozzie has a plan. With the Windows division back on track and new version of Office set to debut this year, "software plus services" is the new mantra at Microsoft's Redmond headquarters. It marks a strategic shift that will transform everything about the company, from how it develops, markets and deploys software, to relationships with its customers. Ozzie doesn't want to beat Google at its own game. Rather, he wants to remind Google that the software game has been and remains Microsoft's. But to succeed, he is going to have to rewrite Microsoft's playbook along the way.

Ozzie rules: The "software plus services" vision

Nearly five years ago Ozzie, then Microsoft's newly minted CTO, issued a memo outlining his vision of the next step in the company's ongoing evolution. "[People are] increasingly drawn toward the simplicity of services and service-enabled software that 'just works'," he wrote. "Businesses are increasingly considering what services-based economics of scale might do to help them reduce infrastructure costs or deploy solutions as-needed and on subscription basis."

In other words, Ozzie felt it was high time for Microsoft to compete with Google on its home turf. But in Ozzie's vision, Microsoft would embrace the web differently than how the search titan has. While Google sees the browser as the ultimate client UI for software large and small, with the cloud as the ultimate repository for all data, Ozzie sees an opportunity for Microsoft to offer services that augment and enhance traditional desktop software. Where Google sees thin clients interfacing with powerful applications, Ozzie sees rich client applications consuming lightweight services.

That's no surprise. Before joining Microsoft, Ozzie built a career on the concept that a PC and a network together are greater than the sum of their parts. In the mid-1980s, Ozzie and his company Iris Associates developed the networked groupware platform that became Lotus Notes. He then went on to found Groove Networks, a maker of peer-to-peer collaboration software, after Lotus was acquired by IBM in 1994. When Microsoft acquired Groove in 2005, Ozzie went along for the ride.

Today, Ozzie is leading Microsoft's 36,000 developers in a multipronged effort to reboot Redmond for the cloud computing era. His plan includes free, ad-supported services for consumers; hosted software as a service (SaaS) for businesses; tight integration of services with desktop software; and new platforms to allow Microsoft's vast developer community to build web applications and services of their own.

The plan got off to a slow start. For much of Ozzie's early tenure, Microsoft's developers were embroiled with Office 2007, Windows Vista and Windows 7. But behind the scenes, Microsoft was restructuring its product groups and assembling teams to put Ozzie's services-oriented vision in motion. As a result, Office 2010, due later this year, will be a milestone for two reasons: Alongside Windows 7, it will complete the upgrade cycle of Microsoft's flagship products. More important, it will be the first major salvo in Ray Ozzie's "software plus services" assault against Google.

Taking Office to the web

Office 2010's most innovative feature - and its most direct challenge to Google - is the highly anticipated Office Web Apps: Web-based versions of Word, Excel, PowerPoint, and OneNote that allow viewing and editing of Office documents using any standards-compliant browser. On the surface, Office Web Apps are Microsoft's answer to Google Docs, but the two differ in strategically important ways.

Google Docs is meant to be a new product that disrupts the traditional software paradigm. Rather than replicating the familiar files-and-folders metaphor used by most desktop operating systems, it stores documents in a chronological queue, similar to an email inbox. The applications' text formatting and graphics capabilities are minimal compared with Office's, and imported documents lose much of their formatting. Instead, Google Docs emphasises the innovative collaboration and web publishing capabilities inherent in the cloud computing model.

Microsoft's offerings are arguably more technologically advanced than Google's, yet their aim is less ambitious. SkyDrive, the Microsoft online storage service that plays host to Office Web Apps documents, mimics the Windows desktop. Users who have Office 2010 installed on their own machines can choose to open SkyDrive-hosted documents in the desktop versions of the applications at the click of a button. Sharing and collaboration over the web is just as easy as with Google Docs, but the Office Web Apps are clearly meant to complement their desktop siblings, rather than rendering them obsolete.

Underscoring this distinction is the Office Web Apps' ability to display Office file formats with total fidelity. In stark contrast to Google Docs, even complex page layouts are preserved. This has advantages: For customers, it means the Office Web Apps can be used with documents created by past or present versions Office without corrupting their formatting. For Microsoft, it emphasises the importance of not just Microsoft's Office file formats, but the concept of a file itself - and by extension, the importance of desktop software.

Microsoft has taken this approach to web apps before. Just as the Outlook Web Access component that ships with Exchange Server is not meant to replace the desktop Outlook client, the Office Web Apps provide a subset of the desktop suite's features in a convenient, web-based form. What is new, however, is that Microsoft will offer the Office Web Apps in three configurations: an ad-supported version available free of charge to anyone, an ad-free hosted service for businesses, and an enterprise version that can be hosted on-premises.

All roads lead to SharePoint

Customers who insist on hosting their own servers, of course, have long been Microsoft's bread and butter. Such customers can choose to deploy the Office Web Apps on SharePoint Server 2010, the forthcoming version of Microsoft's "Swiss Army knife" solution for intranet applications; this method has other advantages, as well.

SharePoint is a web-based platform that allows customers to rapidly build and deploy workgroup collaboration applications using preconfigured components. Although it has drawn criticism for being a proprietary platform in a market filled with open source alternatives, SharePoint's rich collection of services has earned enough converts to make it the fastest-growing product in Microsoft's history. The upcoming version sees SharePoint taking an even greater role as the central nexus of networked Office workgroups, providing improved integration with core Office 2010 apps.

In addition to Office Web Apps, SharePoint Server 2010 can play host to SharePoint Workspace, a rich, client-based collaborative environment. In reality, SharePoint Workspace is simply a retooled version of Ray Ozzie's Groove client. In its new guise, however, it becomes a true thick-client interface to SharePoint's traditionally web-based services. In a sense, SharePoint Workspace is to SharePoint what Outlook is to Exchange, complete with data synchronisation for intermittently connected users. In the same way that Outlook provides a richer experience than Outlook Web Access, Microsoft is betting customers will find SharePoint Workspace preferable to Google's strictly web-based collaboration services, including Google Wave and Google Sites.

Google's chief advantage is that its cloud-based applications require no on-premises hardware, no software installation and no ongoing maintenance. To offset this, Microsoft has begun offering SharePoint and Exchange servers hosted in its own datacentres on a subscription basis. Under this arrangement, customers get most of the benefits of running servers on their own premises, with fewer headaches.

Microsoft's datacentres are your datacentres

Microsoft's plans for its datacentres don't end with simple outsourcing, either. The last piece in Ozzie's puzzle, and by some accounts the most critical, is Windows Azure, the company's new "cloud services operating system". The product of collaboration between Microsoft's MSN and Windows platform teams, Azure is a set of services and APIs that allow customers to develop and deploy scalable internet services on Microsoft's own infrastructure, similar to competing cloud platforms from rivals such as Amazon and Google.

Unlike its competitors, however, Azure furthers Microsoft's message that cloud services work better when used in tandem with client-based software. For example, one application that Microsoft has built atop the Azure APIs is Live Mesh, a service that synchronises files between the cloud and multiple client computers.

From a developer's perspective, the relationship between the cloud and the client runs even deeper. Azure is based on Microsoft's .Net platform, and developers can write cloud applications in either ASP.Net or any .Net language. A Full Trust mode even allows applications to call DLLs containing unmanaged code. Further, Azure's close relationship with the Windows programming environment means developers can use familiar client-side tools to develop cloud services, including Microsoft's flagship Visual Studio IDE. (With Visual Studio 2010, Microsoft's flagship IDE also gains new features for developing SharePoint 2010 applications, making it something of a one-stop shop for developing server-side applications.)

But beyond offering a Windows-centric counterpunch to Google's cloud strategy, Microsoft has a business incentive for opening its datacentres with Azure. Although Microsoft has invested heavily in its web application infrastructure, so far its own online services have operated at a loss. By offering the use of its infrastructure to outside developers, Microsoft can better offset the cost of scaling its datacentres to compete with Google's, while it waits for Bing and other services to gain traction.

More than just a technical shift

In a nutshell, Ozzie's strategy is to offer customers the benefits of Google's cloud computing approach without forcing them to give up the processes, practices, or software they use now. It's an intriguing message, and while some might argue that Microsoft's efforts to tie its desktop software more closely to its online services is reminiscent of the company's longstanding practice of integrating product lines to encourage cross-selling (and thus lock-in) — the benefits of "software plus services" may prove too compelling for customers to ignore.

The ad-supported versions of the Office Web Apps will undoubtedly appeal to consumers who are considering free Office competitors, such as Google Docs, Zoho and In addition, customers will no longer need to purchase the full Office suite if they only occasionally open, print, or make small changes to Office documents that contain complex formatting. That should particularly please Linux users, who until now could only run — with difficulty — older versions of the Office suite with the assistance of the Wine Project.

Microsoft's move to offer subscription-based, hosted versions of SharePoint and other server software should also meet approval. Small and midsize businesses that worry about their ability to manage and maintain servers for back-office functions should be particularly intrigued, but according to a recent IDC study, usage-based pricing models are increasingly attractive to many enterprises.

But perhaps the most significant aspect of Microsoft's new strategy may be how it changes the nature of the software giant's relationship with its customers. Rather than the annual sales cycle of yesterday's software industry, Microsoft plans to capture revenue from its customers on an ongoing, 24/7 basis - whether from software sales, usage-based subscription payments, or ad impressions.

That idea will make some customers nervous, but Microsoft's strategic shift could also have unintended positive consequences. For one, the need to reach a wide audience with its online services to increase ad revenue could encourage support for open web standards at Microsoft, which could lead to better standards compliance in future versions of Internet Explorer.

More fancifully, revenue from subscriptions, advertising, and the Azure platform could reduce Microsoft's dependence on its software cash cows. Freed from the need to guard its proprietary software portfolio jealously, Microsoft could then pursue improved relationships with the open source and open standards communities. Microsoft claims to be "committed to building bridges to other software providers, including open source technologies and products," and the company has made a few conciliatory gestures toward the open source world as of late, such as funding the CodePlex Foundation. But a more genuine, less patronising effort would be welcomed (even if past sins will not soon be forgotten).

Microsoft: Too big to succeed?

Critics argue, however, that such a rosy picture of Microsoft's future is unlikely. Before Ozzie can beat Google, they say, he must first confront an even scarier foe: Microsoft's own lumbering, bellicose corporate culture. Direct competition of Google's magnitude has been a rarity in Steve Ballmer's 10-year tenure as CEO, and some analysts fear Microsoft's competitive spirit has irreparably atrophied.

Insiders warn that Microsoft's ability to innovate is hampered by infighting and bureaucratic mismanagement. In an editorial for the New York Times, former Microsoft exec Dick Brass described the company as "a dysfunctional corporate culture in which the big established groups are allowed to prey upon emerging teams, belittle their efforts, compete unfairly against them for resources and, over time, hector them out of existence."

That description will sound familiar to Microsoft's competitors, who have long claimed the company tends to rely more on undisclosed file formats, hidden APIs, product tying, backroom deals, negative marketing campaigns and other anticompetitive tactics, than on innovation. In his 2005 memo, Ozzie urged Microsoft product groups to "compete energetically but also responsibly" - for example, by allowing outside developers full and equal access to Windows APIs. But old habits die hard and Microsoft is a big company.

If Ozzie cannot foster a culture of innovation at Microsoft, however, some battles may already be lost. Arguably the most critical challenge for the software giant is regaining a competitive position in the smartphone market. Steve Ballmer himself admits his company "screwed up" with the underfeatured Windows Mobile 6.5. Among the stated goals of Office 2010 is to deliver "the best productivity experience across the PC, phone, and browser", but if Windows Mobile 7 disappoints again, that goal will be stillborn.

Microsoft cannot afford such missteps. If the software giant's legendary intransigence prevents it from realigning itself with Ozzie's vision, there will be tough times ahead in Redmond. With its sky-high revenues — Microsoft earned US$20 billion in operating income in 2009 — the danger is not that Microsoft will disappear, but that it will drift into irrelevancy, leaving competitors such as Google to dictate the direction of the computing market. As the man with the job of reversing that drift, it can't be easy being Ray Ozzie — but it must be exciting.

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