Microsoft Memos Reveal On-Demand Anxiety

By John Pallatto  |  Posted 2005-11-11

Microsoft Memos Reveal On-Demand Anxiety

It must be tough being Microsoft and believing that you have to dominate every significant software technology sector.

But if you are Bill Gates and you are running the worlds biggest software company, you always have to be paranoid about what might come along and relegate your company to a lower rank or, even worse, to a position of technological irrelevance.

Just how much Microsoft worries about this was demonstrated this week when two internal memos from Gates and Chief Technology Officer Ray Ozzie leaked to Web. Its clear the memos were deliberately leaked to prove that Microsoft really has thought a lot about what it needs to do about on-demand software.

Microsoft apparently felt compelled to do this because industry commentators, including this one, have been asking whether Microsoft really understood the implications of software as a service based on what it has announced so far. Then again, maybe they decided to leak the memos because they felt they were so widely distributed inside the company that somebody was bound to leak them anyway.

Click here to read more about the Gates and Ozzie memos and the reaction to them.

Its clear from reading their memos that Gates and Ozzie have done a thorough job of analyzing what has been happening in on-demand services over the past five years.

But it is also true that Microsoft is such a big and complex organization that it has all it can do just to keep its current product lines on track and making money. It is suffering from a problem that afflicts many enterprises when they become massive, lumbering behemoths that are as hard to turn as the Queen Mary ocean liner—the old one, not the new model.

Even with all its wealth, Microsoft isnt nimble enough to recognize every opportunity that comes along. While it can claim that it has pioneered a number of on-demand information services and Web service APIs, such as .Net and its MapPoint service, it was also in response to what was being done by Sun Microsystems with Java or by Yahoo with its mapping service.

When other companies come along with fresh ideas such as search engines or browsers and turn them into successful business models, that doesnt necessarily mean that Microsoft somehow failed because it didnt recognize the potential of a lucrative new business model before any other software engineer or entrepreneur.

Nor does it mean that Microsoft should automatically respond to these developments as fundamental threats to its existence that have to be matched and if possible crushed in the marketplace. But that is how it has responded in the past, and the memos show that this is how it plans to respond to this latest challenge.

Next Page: Riding the services wave.

The Next Wave

In his memo Gates says the "coming services wave will be very disruptive." Microsoft, he said, "must recognize this change as an opportunity to 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."

Most of all he is determined that it wont be Microsofts business that gets disrupted. But Gates and Ozzie arent specific about how they are going to achieve that requirement.

Both say that advertising-supported services and software are the "most challenging and promising" opportunity in the industry. But we dont know yet how Microsoft would modify its software development and distribution model to take advantage of this.

Read more here about Microsofts "Live" software service offerings.

Certainly Microsoft can take greater advantage of advertising in its MSN search, information and marketplace services in the same way that Google, Yahoo, AOL and many other online information sites have done. But it will be interesting to see whether Microsoft can find a way to profitably trade software services for advertising.

Another question is whether there are simply enough advertising dollars in the market to support a model in which Internet users would be confronted with a marketing pitch every time they use an online application or information service. Then there is the question of whether Internet users have already reached the saturation point for online advertising. At what point will they simply turn it off and tune it all out?

What is clear is that Microsofts recently announced Windows Live and Office Live—suites of Internet-based search, communications, security, information, presence and collaboration services—are just the first tentative steps of what Microsoft intends to offer. This is a relief because industry analysts were surprised that Microsofts first major services announcement was as low key as it turned out to be.

It was so low key that Microsoft decided that it had to release those high-level memos to prove that they really do get on-demand services.

Click here to read why executives at competing on-demand software companies say Microsoft will have a hard time catching up with the market.

I wont believe that they really get it until they show how they are going to deliver major business applications as on-demand services because that is one of those disruptive services that Microsoft seems to be so concerned about.

Last week I opined that Microsoft was being short-sighted because it said it would leave it to partners to offer its CRM 3.0 as a hosted service, since ignoring this opportunity in the long run presents a threat to its long-established business model of selling on-premises licenses for business applications.

This week Microsoft showed it is thinking deeply about on-demand software services. But it will be months before we learn how Microsoft, in Gates words, will successfully deliver compelling on-demand services that "dramatically change the nature and cost of solutions deliverable to enterprises or small businesses."

John Pallatto is a veteran journalist in the field of enterprise software and Internet technology. He can be reached at

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