A climate change in the software environment

[29 August 2007]

By Benjamin J. Romano

The Seattle Times (MCT)

SEATTLE - Consumers are getting used to retrieving their digital information and collections - contacts, photographs, e-mail, documents - on practically any computer and a growing number of mobile devices.

These Internet services are replacing much of what was done only a few years ago with software firmly rooted to an individual computer.

The software industry is in the midst of a transformation that will see an expanding range of desktop-software functions delivered to users as Internet services.

Even functions of the computer hardware itself, such as data storage and processing power, can be provided by remote data centers or “server farms” and accessed anywhere in the world with a high-speed Internet connection.

And the trend - called “software as a service,” or, in Microsoft’s parlance, “software plus services” - is not limited to consumers. Businesses of all sizes are adopting this new model to access software functions they previously had to buy, install and host on their own servers.

Microsoft has embraced this trend and is investing billions - as is its top online competitor, Google - in building a complicated, global system of hardware, software and expertise to deliver these Internet services. Eventually, all of its products will have some Internet-services component, Microsoft executives said recently.

As it undertakes this fundamental change to its business and software-development models, Microsoft is also halfway through a monumental leadership transition.

The man leading the company’s transformation to an Internet services model is not Bill Gates, who plans to begin working full time at his philanthropic foundation next July. It is Ray Ozzie, who assumed the title of chief software architect from Gates a year ago as one of two Microsoft executives charged with taking over Gates’ responsibilities.

Ozzie said recently that Microsoft’s broad range of customers leave it well positioned to take advantage of the opportunities that Internet services present.

Microsoft aims to gain economies of scale by building a single underlying system to support myriad end-user applications that would appeal to consumers, businesses and even third-party software developers.

It’s a familiar concept for a company used to building broad platforms such as the Windows operating system.

“We’re taking a platform approach to services, giving each of our products the common benefits of cost, speed, scale and monetization that a platform approach offers,” Ozzie told an audience of analysts and investors last month.

“... This platform will ultimately be used by and will benefit all of the audiences that we at Microsoft serve, because each audience is undergoing some transformation that’s relevant to them, from software-based solutions to software plus services, or services alone,” he said.

Ozzie, speaking to a meeting of financial analysts and investors, gave the most detailed description yet of how that underlying system, often referred to as “the cloud,” will be structured at Microsoft. His highly technical architectural tour provides insights into the company’s investments and strategy in a new era of the industry. (See accompanying story.)

Ozzie said Microsoft will introduce important components for the platform and end-user applications in the next year to 18 months.

“It’ll be a very critical aspect of all of our offerings over the next few years,” he said.

There are several business and technology reasons for Microsoft and other companies to head in this direction.

“They know that there are significant benefits both for customers and their own businesses in moving to services,” said Matt Rosoff, an analyst at Directions on Microsoft.

Widespread high-speed Internet connections allow consumers and small businesses to access a new category of compelling “rich Internet applications” that behave more like desktop software.

They also tend to be easier to use and require less technical expertise than traditional software does, Rosoff said during a briefing on Microsoft’s strategy for Directions clients earlier this month.

Software companies see opportunities to make money selling advertising in or around online services, in which case they usually come at no cost to the user.

This is a key piece of the formula and Microsoft is investing heavily in becoming an advertising company, most recently with its high-profile acquisition of aQuantive.

Ozzie said Microsoft’s cloud-services platform will allow “us to observe how and why consumers use the different properties and to refine these services quickly and make them better, and also to optimize the advertising and better target the users based on their activities, respectful of their privacy.”

Larger business customers are interested in the software-as-a-service model for its lower cost of operation, Rosoff said. Companies can use software on a trial or as-needed basis and save the cost of buying and maintaining it with their own IT departments.

Salesforce.com’s customer-relationship-management software is the most prominent example of this model.

For Microsoft, the services model is appealing because it could offer a more predictable revenue stream, smoothing out the peaks and valleys associated with major product launches, Rosoff said. Also, in this model, customers must continue with subscription payments if they want the service, whereas now Microsoft has to convince customers it’s worth paying to upgrade to new versions of its software.

But Microsoft isn’t about to drop the business model it rode to supremacy in software. “Microsoft is still very much a thick-client software company,” Rosoff said.

The groups that sell Windows, Office and server software accounted for $42.5 billion, 83 percent of the company’s revenue in the last fiscal year. These three offset losses in Microsoft’s other three business segments - including online services.

The company is clearly aiming to connect its profitable desktop and server applications with its emerging services in the cloud to give users what it calls the best of both worlds, and to maintain the relevance of its highly profitable franchises.

To emphasize the continuing importance of its legacy business model, Microsoft describes its strategy as “software plus services,” rather than “software as a service” - the phrase used by much of the rest of the industry.

“Our services platform will enable us to rapidly develop and deploy new consumer services as well as services that attach to our existing PC products,” Ozzie said.

Kevin Johnson, president of the Microsoft division responsible for both Windows and the online services business, emphasized the importance of that link when he announced an update to the Windows Live suite due out this fall.

“This next release of Windows Live is the must-have free upgrade to the Windows experience,” he said.

Published at: http://www.popmatters.com/pm/article/a-climate-change-in-the-software-environment/