Microsoft ''bets'' on Web services

Daisuke Wakabayashi

BELLEVUE: Microsoft Corp. is making a "big bold bet" on Web services, which it sees as the most important technological development of the next decade, Chief Executive Steve Ballmer said on Tuesday.

But the software company, whose online division is losing money while rivals like Google Inc. thrive, has a unique vision of how these new services will evolve.

Microsoft believes Web services will work in tandem with PC-installed software, a vision that differs from that of "software as a service" advocates, such as Salesforce.com and Google, who expect services delivered over the Web to replace traditional software.

"We believe this shift is the most important technological transformation during the next decade," Ballmer said at the company's annual shareholder meeting.

Microsoft has invested heavily to expand data centers to house servers and provide the infrastructure to host blogs, e-mail services for small businesses and a slew of other new Web services as part of its "Live" strategy.

Calling Microsoft a company with multiple core businesses, Ballmer said its online services group is the software giant's "fourth core" in addition to desktop software, computer server software and its entertainment initiatives.

"As we look to the future, this fourth core represents our big bold bet on the shift to software plus online services," Ballmer said.

Google has already encroached on Microsoft's Office desktop turf with online spreadsheet and word processing software, while Microsoft's own Office Live lets small businesses set up Web sites, company-branded e-mail and Web applications to allow project management and collaboration.

Office Live is free for the ad-supported basic offering and Microsoft charges a monthly subscription for the more elaborate version. It works with the Office software suite but the programs are largely different from those on the desktop.

Having dominated the desktop with Office and its Windows operating system, Microsoft arrived late to the online services game and allowed smaller, more nimble competitors such as Web search leaders Google and Yahoo Inc. to build billion-dollar businesses around ad-supported Web services.

Microsoft's desktop business accounts for more than half of its $44 billion in annual sales and most of its profits.

But its online services group lost $136 million in the three months ended Sept. 30 as sales fell 4 percent to $539 million, due to a decline in its Web access business and investments to add staff and expand data centers.

By contrast, Google, which makes nearly all its money from advertising, made a net profit of $733 million last quarter and revenue surged 70 percent from a year ago to $2.69 billion.

Microsoft took the wraps off its Windows Live search engine in September, but it has made few inroads against Google, which is so closely associated with online search that its name is also a verb in the dictionary.

Microsoft rolled out a software system called adCenter in the United States this year to centralize advertising revenue for its ad-supported online services. Ballmer noted the company has introduced 20 online services in the last year alone.

There are signs of progress. Microsoft reported 5 percent ad revenue growth last quarter, driven by Web display ads that accompany its sites, e-mail and instant messaging services.

Still, analysts say don't expect results overnight. It was only a year ago that Microsoft co-founder Bill Gates called the company to arms in a memo, calling for a new approach to handle a "sea change" from online services.

Morningstar analyst Toan Tran says Microsoft's approach of augmenting desktop software with online services is sensible, adding that it has the cash to build the necessary technology.

"This is an initiative we have to wait at least five years to see how it pans out. The way people use their computers is not going to change overnight," Tran said