Microsofts Strategy Memos Dont Tell All

Industry experts question whether Microsoft's services road map contains a destination.

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The memos from Microsoft leaders made public last week raised more questions than they answered, observers said.

Both Bill Gates, Microsoft chairman and chief software architect, and Ray Ozzie, the companys chief technology officer, wrote memos designed to detail the companys emerging services strategy.

Microsoft CEO Steve Ballmer told eWEEK in an interview, "I think youre going to have all three models [sales of software licenses, subscriptions and software as a service]."

Going further, Ballmer said, "Youre going to have the transaction model where you sell something, therell be a subscription model where you pay for something as you use it, and therell be some things thatll be funded via advertising or essentially as part of a bigger idea.

"What are we doing with our Express editions? The fact that theyre available for free downloads doesnt mean weve given up being a profit-making company, but we do recognize theres just a budget limitation that students have.

"And yet we want to create a funnel so that over time some percentage of those people actually, themselves, or the companies they work for, end up buying a full Visual Studio and a full SQL Server.

"So I think youre going to see a variety of business models and were embracing all of them."

/zimages/1/28571.gifClick here to read more about what the memos Microsoft released say about the companys vision for on-demand computing.

Stephen OGrady, principal analyst with RedMonk LLC in Denver, Colo., said, "The memos underscore the fact, as was implied during their announcement and demo of the Live technologies, that both Gates and Ozzie perceive services as both a threat and opportunity for Microsofts business."

OGrady said the implications are unclear, adding, "Microsoft, as Ozzie discusses, should have been out in front of the AJAX [Asynchronous JavaScript and XML] curve. That they were not is a testament to the Innovators Dilemma that Microsoft faces with both its Office and Windows franchises. … On the one hand, [those franchises] have been and likely will continue to be for some time de facto licenses to print money.

"On the other hand, the protection of those franchises kept Microsoft from assuming the leadership position Ozzie feels they should have had in a newly emerging, and quite lucrative, advertising-driven services world."

Ballmer said Microsoft "grew up, certainly, on the transaction business model, but what we really talked about last week is were going to have a variety of things we do that are ad funded, and a variety of things we do that are subscription funded."

In particular, "We already sell almost $2 billion a year in advertising, so I cant tell you its small," Ballmer said. "And depending on how you look at some of our enterprise agreements, a number of those are kind of subscription based, so its hard for me to tell you thats small. I think theres a lot of economic promise in all three for different scenarios. Each has its own place, if you will."

Ballmer added, "Do I actually think ad funding is going to be the primary source of revenue for mission-critical applications in the enterprise? No, I dont think so. I think thats still going to be either transaction- or perhaps some time in the future, more subscription-oriented revenue."

/zimages/1/28571.gifDo Microsofts memos reveal anxiety about its on-demand strategy? Read more here.

Eric Newcomer, chief technology officer at IONA Technologies Inc. of Waltham, Mass., said, "I thought the e-mail was right on target. But I do not see evidence in Ozzies memo of any plan of attack. The description of the problem seems pretty good, but theres nothing about a solution, or how exactly he expects Microsoft folks to go about implementing the proposed change.

"Hes asking for a study, for each division to respond with a proposal to solve the problems he describes, and he has created a process within which he will be assigning people to work on solving the problems. But again, nothing concrete about how its going to happen, or what it will mean in terms of products and technologies. We all know the problem—what we are looking for is what Microsoft will do about it, and theres nothing here about that."

And despite Microsofts efforts to become more transparent, Newcomer said, "Traditional Microsoft innovation is performed behind closed doors, and even if you sign an NDA [nondisclosure agreement] you may still not get access to everything theyre doing or thinking."

And, noting that Gates and Ozzie mentioned earlier sea change strategies Microsoft has undergone, Newcomer added, "Unlike earlier efforts they cite as precedent, such as the famous Internet memo and bet the company on .NET and XML/Web services, theres no concrete action here other than a call to work on proposals and processes for solving the problem. No solutions are proposed."

Also, beyond the technical challenges, which Microsoft acknowledges amount to turning around in midstream, the current challenge also represents a cultural challenge, since Microsoft has built up its entire business around the shrink-wrapped license, as Ballmer admits.

Microsoft needs to get its teams on the same page to execute on this strategy, Newcomer said. "I think the recent reorg into divisions will work against this proposed change to services. Ozzie is asking each of the divisions to come up with plans and proposals to address the problems he outlines, but they are as likely to compete with each other as cooperate."

Next Page: What users think of Microsofts memos.