As Gates Travels The World, His Protege Ozzie Mulls The Web

Since Ray Ozzie became Microsoft's chief software architect last month, he's been devoting much of his time trying to merge the company's multibillion-dollar software franchises with the booming market for software on the Web. He's also spending time on a decidedly lower-tech pursuit: drawing up movie-style storyboards that show how ordinary people use PCs to write blogs, read news, send e-mail, crunch numbers, and play games.

Ozzie's artistic tinkering supports a crucial goal--turning burgeoning demand for Internet-based software into something that makes Microsoft products more valuable, not less. "I strongly believe that Internet services will play a very important role for Microsoft," he said at a meeting with financial analysts at Microsoft's Redmond, Wash., campus last week. Ozzie assumed the chief software architect title when chairman Bill Gates split his technical responsibilities between two deputies--Ozzie and chief research and strategy officer Craig Mundie. Gates plans to give up his daily role at the company in two years.

Microsoft is planning Internet services that enhance the value of its desktop software and that potentially could encourage business and retail customers to buy new PCs or Windows-powered handheld computers that can run the new services. Microsoft may deliver online software that lets Outlook users publish their calendars to the Web so colleagues or friends can view them, and a version of its OneNote note-taking application that uses Web components to let people take notes with a handheld computer, then transfer them to a PC. Such online tools would make Office more valuable and could provide the spark for people to buy new devices capable of supporting the services, Ozzie said. CEO Steve Ballmer said Microsoft may eventually license its desktop Office suite and its new Office Live online software together.

Investors worry about whether online software could cannibalize Microsoft's desktop businesses, says Charles Di Bona, a senior analyst at Sanford C. Bernstein & Co. "Ray is saying you won't stop using your PC [just] because you can get it online," he says. "Everything's going to have some component of advertising monetization."

Businesses may subscribe to Microsoft's new Live software if it makes it easier for employees to grab files when they're out of the office, and online apps could drive sales of new cell phones that run Windows, Di Bona says. "The problem is, the [cell phone] operating system is much less expensive." Microsoft collects about $15 for versions of Windows that support e-mail-capable cell phones, versus $70 to $75 for PC operating systems. But Live software won't add any meaningful revenue to Microsoft's top line for at least another two years, Di Bona says.

Online software should be "additive" to Microsoft's traditional PC and server software, not compete with it, Ozzie said. CIOs will need to make choices about "cost versus control" when deciding whether to use Microsoft's Web products, he said. "I do not believe the Web is the be all and end all of experience delivery." Over time, however, the cost benefits of Web-based software may be difficult to ignore, Ozzie added. As part of its online effort, Microsoft will start tracking more data about how PC users consume online software, in a way that respects their privacy.

Not Dead Yet

As for Microsoft's traditional PC products, executives at the conference forecast that revenue from desktop versions of Windows would grow by 8% to 10% during the fiscal year that began July 1, to $14.3 billion to $14.5 billion. Desktop Windows sales in fiscal 2006 were $13.2 billion. Microsoft is on track to distribute the first release candidate of Windows Vista by the end of September. RC1 will replace the current beta 2 for companies evaluating the forthcoming operating system.

In one sign of changing times, Ballmer said he spends more time these days meeting with advertising and telecom companies than CIOs. Ballmer opened the meeting in place of Gates, who traditionally kicks off the conference. Gates was vacationing in Africa.