Gates memo puts services at heart of Microsoft

The 'next sea change' in computing has arrived, according to Microsoft founder Bill Gates

Bill Gates has backed a sweeping plan to reshape Microsoft’s development efforts to adapt to the threats and opportunities presented by the rapid growth of new internet-based services.

In an email to his top lieutenants dated October 30, Microsoft’s chairman and chief software architect proclaimed that “the next sea change” in computing has arrived and called on his company to focus more sharply on internet services as it develops new products and technologies.

“Today the opportunity is to utilise the internet to make software far more powerful by incorporating a services model,” Gates writes. “However, to lead we need to do far more ... we will build our strategies around internet services.”

Gates’ email was reported last week by the Wall Street Journal. A spokeswoman for Microsoft in the UK confirmed the authenticity of the email and the parts of it quoted by the Journal.

For businesses and consumers, the push from Gates will lead to more of the company’s software applications being offered for use over the web as services, supported by advertising or subscription fees, says Gary Barnett, a research director at UK analyst company Ovum.

Gates’ email draws heavily from an internal memo by Ray Ozzie, Microsoft’s recently-appointed chief technology officer (CTO). In his memo, Ozzie talks of the emergence of a business model in which companies make money from internet-based services supported by advertising. He also pointed to the success of online services companies such as Google and Skype Technologies.

“The model has the potential to fundamentally impact how we and other developers build, deliver and monetise innovations,” Ozzie writes.

He suggests that businesses can make more money by offering software and services supported by advertising than by the traditional software licensing model. If Microsoft does not respond to the changes, “our business as we know it is at risk”, Ozzie writes. “We must respond quickly and decisively.”

The internal missives suggest the urgency with which Microsoft views the threat posed by emerging internet-based services and applications. They also throw some light on Microsoft’s announcement last week that it will offer some online services to complement its Windows and Office product lines.

The emails also highlight Ozzie’s growing influence at Microsoft since he joined the company through an acquisition only eight months ago, the Wall Street Journal notes.

In September, Microsoft reorganised itself into three broad business divisions. Ozzie’s role as CTO was expanded to include leading Microsoft’s services strategy across those three divisions, Gates wrote in his email.

“We did this because we believe our services challenges and opportunities will impact most everything we do,” he writes.

In his memo, Ozzie called on the three business units to plan out their strategy for developing internet-based services and talks of appointing a top executive for each division by December 15. He also called on Microsoft’s MSN and Windows divisions to collaborate on a “next-generation internet services platform” to spur innovation inside and outside the company.

This marks the third time that Gates has rallied his company in the face of challenges from a new type of computing. Most famously, in 1995, he pushed Microsoft to respond to the “internet tidal wave” by developing software for the web, resulting in Internet Explorer. And in 2000 he laid out Microsoft’s broad .Net strategy for developing internet-based applications.

As it gears up for this latest challenge, Ozzie talked candidly in his email about Microsoft’s successes and failures.

“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,” Ozzie writes.

Analysts weren’t surprised by the company’s new focus on internet services.

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