Executive Memos Point to a Disrupted Microsoft

by Alex Woodie

Despite its historic successes, Microsoft's ability to compete and win in the new Web-based world is not a guarantee. There's a rapidly expanding base of grassroots competitors attacking the software behemoth's flanks, and Microsoft needs to be nimble if it wants to become a leader in this area. These are some of the disruptions--and related opportunities--that Microsoft chief software architect Bill Gates and Ray Ozzie, its chief technology officer, identified through internal memos written just before Halloween.

Every five years or so, Microsoft executives pen internal memos that lay out their view of the competitive marketplace and describe the moves the company should make to take hold of opportunities and stay on the cutting edge. Gates' famous 1995 memo forecasting the explosion of the Internet was dead-on accurate and is credited with sparking the then-20-year-old company to take action, which it did by bundling Internet Explorer with Windows--a move it benefited from greatly, and which almost led to Microsoft being forced to split into several smaller companies. In 2000, on the tail-end of the dot-com-bubble, the topic was XML and Web services, and the company responded with its .NET initiative, which has also benefited Microsoft, and which is also still playing out, unlike the browser wars, which are over.

2005's topic is a variation on the Web services theme of 2000. The online landscape has evolved tremendously over the last five years, and has spread into areas that few people could have predicted with 100 percent accuracy. Microsoft is, admittedly, one of the companies that did not foresee the changes afoot, and now the company needs to pull itself up by the bootstrap and remake itself, once again. At 30 years of age, the company doesn't move as fast as it once did, and there are questions whether the company has what it takes to effectively compete this time around.

To combat the malaise of contentedness, Microsoft's leadership is trying to shake things up a little and create a sense of disruption and un-right-ness in the Microsoft world. Today, Microsoft increasingly finds itself competing against what Gates called "grassroots" services on the Web. These services have a strong online advertising component, offer a "seamless" blend of software, services, and even hardware, and can scale to millions of users.

But pretty soon, Gates writes in his memo, this services wave is going to morph into something much bigger. "Services designed to scale to tens or hundreds of millions will dramatically change the nature and cost of solutions deliverable to enterprises or small businesses," Gates writes. "This coming 'services wave' will be very disruptive."

Microsoft's path out of this forest of seamlessly integrated, imminently scalable, advertising-supported Web services is to fight fire with fire, and Gates' chief fireman is none other than Ray Ozzie, who wrote a much longer and more detailed memo than Gates in late October, and who is apparently taking a much more active role in shaping the future of the company.

Ozzie didn't pull any punches in his internal memo, which bore the subject line "The Internet Services Disruption." In it, he listed several very successful Web and online services of the past few years--successes that were driven by companies other than Microsoft. In other words, he listed Microsoft's failures in:

* Web search, where Google has "a tremendously strong position," according to Ozzie

* online transmittal of documents, where HTML, XML, and Office are "surely not to the level of [Adobe's] PDF," he says

* voice over IP (VoIP), where "it was Skype, not us, who made VoIP broadly popular"

* mobile e-mail, where Research in Motion has led the way ("only now are we surpassing the Blackberry," Ozzie writes)

* online and portable music, where Apple has "done an enviable job integrating hardware, software, and services into a seamless experience with dotMac, iPod, and iTunes"

* photo sharing, where Flickr has done well

* low-end remote PC access and online meetings, where GoToMyPC and GoToMeeting have enjoyed success

Obviously, Microsoft failed to lead in these areas. But why? Ozzie says three "tenets" are driving the shift in the landscape. The first has to do with the "power of the advertising-supported economic model." Microsoft is obviously moving in this direction, not just for its online services, but for things like productivity apps and operating systems, too.

The second tenet has to do with the "effectiveness of a new [grassroots] delivery and adoption model." Users today are finding new applications over the Web by doing keyword searches, or hearing about them from friends, and then downloading them and trying them out, Ozzie writes. Having a centralized place where users can download trials of new apps, and then sign up for them, will be key to success here, he says.

The third tenet is users' requirements for applications that "just work." This is largely being driven by the rapid adoption of the "digital lifestyle," including digitized music, photos, and TV shows, the ubiquity of cell phones and other handheld devices, and the rapidly arriving era of "smart and connected" automobiles.

Out of the morass of "services disruption" and their causes, Ozzie has identified seven things that Microsoft can do to compete more effectively. The seven have to do with making the various parts of computing on the Web today "seamless," including:

* operating system, which Ozzie says should work the same in this "multi-PC, multi-device, work anywhere, web-based world"

* communications, including providing "continuous co-presence" across multiple devices

* productivity, where individuals and groups of users have a greater capability to search and share information

* entertainment, including the capability to cache and access your digital content anywhere you like

* marketplace, which has to do with billing and payment presentment, and allowing you to buy or sell anything that you want

* solutions, where Ozzie envisions "template-driven, semi-structured data-based applications and solutions that just work" from the Web, servers, or PCs

* IT, which has to do with managing the complexity of information technology, including doing it remotely over the Internet, if need be

"In many areas we have 80 percent of the product and technical infrastructure already built--we just need to close the 20 percent gap," Ozzie writes. The recent reorganization into three divisions is also a "significant step," he says.

The Windows Live and Office Live offerings Microsoft unveiled two weeks ago are also a key component of the company's strategy going forward. To read more about these initiatives, see "Microsoft Aims to Streamline Web Experience with "Live" Offerings").

Whether Ozzie and Microsoft can shift gears to catch up and pass its competitors has yet to be seen, but one thing is for certain: nobody is waiting around for a 2010 memo.