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AFTER BILL
Jun 26th 2008

Microsoft knows what it wants to do when Bill Gates leaves--but the
road ahead will not be easy

"DOES Microsoft still have a big, hairy audacious goal?" Not everybody
would presume to ask Bill Gates a question like that. But Mr Gates was
this week due to remove himself from the firm's day-to-day business, to
become its non-executive chairman, and Tim O'Reilly, a noted internet
guru, felt emboldened to commit LeSE MAJESTe. Putting "a computer on
every desk and in every home" had been the original mission of
Microsoft, which Mr Gates founded more than 30 years ago. But now the
job is pretty much done, at least in the West, and Microsoft is the
world's largest software company. What is its mission now, Mr O'Reilly
recently asked at a technological shindig, called "All Things
Digital"--other than just to sell as much software as it can?

Mr Gates (pictured with Craig Mundie, Microsoft's chief research and
strategy officer, left, and Ray Ozzie, chief software architect, right)
is leaving Microsoft for the charitable foundation he set up with his
wife, Melinda, even as his firm is in some disorder. Windows,
Microsoft's all-conquering operating system, has become so complex,
some say, that it is collapsing under its own weight. Its latest
version, Vista, is not a complete flop, but it is a huge
disappointment. Many users prefer the previous one, XP, and Microsoft
is already hyping the next, Windows 7. Microsoft is also struggling to
keep up with Google, its main rival. It recently announced a product
that pays consumers money if they buy something through an
advertisement next to its search results--a gambit that smacks of
desperation. And the firm's aborted bid for Yahoo!, an online giant,
has done nothing to reassure investors. As a result, Microsoft's shares
continue to do worse than the industry average. Some observers have
started to wonder whether Microsoft should not break itself up--for
instance into a legacy business, containing Windows and Office, a
service unit, and games, where the company has recently been most
innovative.

Mr Gates's reply to Mr O'Reilly was not entirely reassuring. The firm,
he said, now has dozens of "quests"--revolutionising television,
automating data centres and creating software ten times faster. Perhaps
this fragmentation of Microsoft's ambition is only natural. In its 33
hectic years the company has swollen to nearly 90,000 employees (see
charts); revenues this year should exceed $60 billion and net income
reach almost $18 billion. Even Microsoft's own senior executives
struggle to grasp its growing empire. The firm now sells 75 different
products, many of them in lots of versions.

In fact Mr Gates could easily have given a more pointed answer. Of all
that Microsoft hopes to achieve in the post-Gates era, one goal
dominates all others--even catching Google. That is to become the
dominant force in the forthcoming era of cloud computing--or, to
refresh Microsoft's original mission: "to supply services to every
desk, to every home and to every hand". That ought to be big and hairy
enough to satisfy even Mr O'Reilly.

To understand what that means, and the difficulties it poses Microsoft,
start with the idea that computing is undergoing one of its great
periodic shifts. In its early days, most computing took place on
mainframes. Ever-falling costs led computing to shatter--first into
minicomputers, then into personal computers (PCs) and, more recently,
hand-held devices. Now communications is catching up with hardware and
software and, thanks to cheap broadband and wireless access, the
industry is witnessing a pull back to the middle. This is leading much
computing to migrate back into huge data centres. Networks of these
computing plants form "computing clouds"--vast, amorphous, delocalised
nebulae of processing power and storage.

SERVICE WITH A SIMILE
Marc Benioff, a cloud-computing pioneer and the boss of
Salesforce.com[1], which helps firms manage their customers on the web
thinks this will spell the "death of software". Rather than being a big
chunk of code sitting on a hard disk on your desk, software will come
"as a service" over the internet through a browser. This idea is also
espoused by Google. Although the online giant is best known as the
world's biggest online search and advertising firm, it now also offers
many other services--plenty of which compete with Microsoft's PC
programs.

Not so fast, says Mr Ozzie. He has been Microsoft's chief software
architect since 2006 and will steer its technology after Mr Gates goes,
while Mr Mundie will take over as the company's long-term thinker and
public face. "Whenever these things happen, people think that it is
going to be a complete extreme shift," Mr Ozzie says. "But in reality
customers are very pragmatic and figure out the right mix of old and
new stuff." This mix, he argues, will depend on where people are, which
device they use and what they want to do. Instead of the death of
software, Mr Ozzie speaks of "software plus services"--the title of
Microsoft's new strategy.

He thinks of cloud computing differently. Fewer people will put the PC
at the centre of their computing universe; it will be one of many
devices connected through the web, which Mr Ozzie calls the "hub". But
what sounds like bad news for a firm making PC software is in fact a
huge opportunity, he says--because this new set-up sits well with
Microsoft's DNA. The heart of its business has always contained a
simple, powerful idea: find a market that is global in scale--one that
is split between lots of vendors and so dysfunctional; then integrate
the various parts into a "platform" and develop its chief applications;
and finally, build an "ecosystem" of developers writing programs for it.

This has been Microsoft's approach to its largest products--with
Windows as the most successful. Versions of this operating system run
on over 90% of the 1 billion PCs in use, because Microsoft has excelled
at building an ecosystem around its platform, in particular by giving
developers the tools for their job. This supercharged what economists
call "network effects": the more applications run on Windows, the more
attractive it becomes for users; that, in turn, attracts more
developers, and so it goes on. Although Mr Ozzie hesitates to put it in
such terms, his goal is to create a kind of Windows in the cloud. "If
you were to build an operating system today," he explains, "it would
not be a single piece of software that operates a single computer."

He is first tackling device integration. In a recent internal memo,
which Microsoft made public, Mr Ozzie talks of "a personal mesh of
devices--a means by which all of your devices are brought together,
managed through the web as a seamless whole." This mesh will make sure,
for instance, that devices automatically synchronise important files,
such as an address book, and that one device can control the others.
Windows has other similarities with the platform Microsoft wants to
build in the cloud. The firm plans to provide developers with tools to
weave services together into new offerings. And it will give them
ready-made routines, such as checking a user's identity, tracking his
location and processing payments.

THE CLUB IN THE CLOUD
As with all big ideas emanating from Redmond, Mr Ozzie's vision has
provoked strong reactions. Here we go again, says one side, who think
they have spotted a monopolist's latest plan for world domination.
Welcome to the club, comes the retort from the other. Google, Facebook,
Salesforce.com and others are already building similar
platforms--Microsoft is just a Johnny-come-lately hedging its bets.

Needless to say, things are a bit more complicated. Mr Ozzie's plans
amount to more than a dominant software company trying to protect its
franchise. Building a platform for the cloud does not seem such a bad
idea, since it is precisely what many in the industry are trying to do.
Yet the cloud will be based more on open standards than on proprietary
technology. It is too big and too diverse to be dominated by one
provider. And governments would be unlikely to allow one firm to
control such an important infrastructure.

As Mr Ozzie rightly points out, it is the very essence of the shift
towards services, that computing now allows for applications and data
to sit where it is technically most appropriate--or, just as important,
where users prefer. And people are not about to throw out their
powerful PCs or other "client" devices anytime soon, not least because
they will sometimes be offline. Even Google is now offering software
that allows its applications to be used off the internet.

The problem is that, so far, Microsoft does not have much to show for
its plans, says Brent Thill, director of software research at Citi
Investment Research. Take Windows Live, a collection of online services
that in 2006 Mr Ozzie called the "hub to bring it all together". Many
of Windows Live's services are derivative and few have a lot of users.
Recently, Microsoft said that it will shut down some services,
including Windows Live Expo, a listing service for classified
advertisements.

Worse, Microsoft has not got much to show for its huge investments in
online search, the killer application in Google's cloud. The firm's
market share in search is only 8.5% in America, compared with Google's
share of more than 60%. As a result, Microsoft's online-advertisement
platform has not succeeded either. That matters, because even if
companies pay for their cloud services, most consumer services will be
funded by advertising. This explains why Steve Ballmer, Microsoft's
boss, was prepared to pay $47.5 billion for Yahoo! The online giant
would have been an "accelerator" in its quest to catch up with Google
in search and advertising.

But those setbacks should not obscure that Microsoft has a plan--and is
willing to put a lot of money behind it. It is spending billions to
build a network of data centres, a huge infrastructure to cope with the
expected demand for all its software-plus-services business. The
company does not disclose how many computers now populate its server
farms. It says only that it is adding 10,000 servers a month, which is
roughly the total number used by a company like Facebook.

What is more, Microsoft has already spent the past couple of years
writing software for its new platform. In April Mr Ozzie presented a
first chunk, called "Live Mesh"--in his words, the "connective tissue
that brings together devices in the cloud." It will enable users to
synchronise files on lots of computers as well as to a web desktop in
the cloud, for instance. More will come in the autumn, when Microsoft
is likely to publish some new tools for developers.

Microsoft is further along with its new services than most think.
Health Vault, launched in October, is not just a place where people can
store their medical details online, but a service that can connect to
all sorts of monitoring devices, as well as software used by hospitals
and doctors. Microsoft is likely to come up with combinations of
consumer and institutional data in other areas, such as education. It
hopes they will become the killer aps of the new platform, rather as
Word and Excel were for Windows.

Microsoft's familiar products are also being recast for the cloud.
Sometimes the change is modest. The latest versions of Office, the
software package that includes Word and Excel, enable users to share
files and collaborate. Mr Ozzie argues there is no demand for a fully
featured web-based version, (though, it has to be said, the old
desktop-bound Office is one of Microsoft's biggest money-makers and one
of the main reasons for people to use Windows). Other overhauls are
more ambitious. Customers will soon have the choice of running
Microsoft's business programs, such as its mail-server software,
Exchange, on their own computers or in the cloud. Chris Capossela, who
oversees this shift at Microsoft, expects half of the mailboxes managed
by Exchange to be online.

This flurry of activity in Redmond does not guarantee Microsoft success
in the cloud. Top of the list of Redmond watchers' worries is the
firm's culture and management. Mary Jo Foley, a long-time Microsoft
correspondent, thinks it will lose something vital when Mr Gates walks
out of the door. She concludes in her recently published book
"Microsoft 2.0" that if "Microsoft were still the company it was ten or
20 years ago, with the simultaneously ruthless and cautious Gates at
the helm," she would have "no qualms" about predicting its success.

The firm has become bloated, insiders say. "It's a huge problem.
Microsoft has so much raw potential, but it needs extreme leadership to
break out of the bureaucratic morass it encumbered itself with," says
the book's foreword, written by "Mini-Microsoft[2]", an anonymous
blogger-cum-employee who is required reading for Microsoft watchers.

If Microsoft has made one excellent hire in recent years, it is Mr
Ozzie. Although he is unlikely to become a public figure in the mould
of Mr Gates, he is more in tune with a style of computing in which
everything is connected. He understands that a take-no-prisoners
attitude will get you only so far. Mr Ozzie is also level-headed,
hands-on and a brilliant technologist. He himself wrote much of Lotus
Notes, an early collaborative program, and came to Microsoft when it
bought his latest start-up, Groove Networks, in 2005.

Yet some think Microsoft needs more fresh blood in its upper echelons.
Although some veterans have recently left and some new executives have
been hired, many senior positions are still filled by people who have
been with the company for more than a decade, says Michael Cusumano, a
professor at the MIT's Sloan School of Management and the author of a
book on the inner workings of Microsoft. Can a veteran leadership team,
he asks, foresee how the software business will change? And can it
attract a new generation of employees to the company?

BILLET DOUX
Microsoft is no longer the chosen workplace for many young geeks.
Second-generation internet firms, such as Google and Facebook, have
more "mind share". The same is true for investors and users, which is
partly why Microsoft will launch a $300m rebranding campaign later this
year. To make Microsoft hip again, the firm has hired one of America's
coolest advertising agencies, Crispin Porter+Bogusky.

Microsoft's image is still tarnished by the antitrust saga of a decade
ago, when it was judged to have abused its Windows monopoly. That would
prove a more serious stain if it stops consumers from trusting the firm
with their personal data, a necessary part of many cloud services.
After similar antitrust woes, IBM took decades to shed its reputation
for being overbearing and arrogant. It managed partly by becoming a
champion of industry standards and open-source software.

Microsoft is treading a similar path. The firm has already
changed--whether the American and the European antitrust actions have
tamed it, or customers want different behaviour, or Microsoft has just
grown up. It has become more open--it no longer wants to lock the world
into its own proprietary technology. "We have matured a lot," says Mr
Mundie, who spearheaded this opening-up.

Microsoft has indeed done many things that would not have seemed
possible a few years ago. It has embraced industry standards, published
"interoperability principles" that guide its developers, and released
thousands of pages describing how its programs work together, so that
rival products can join in. To boot, Microsoft has accepted that
open-source software is here to stay. It has adopted some of the
techniques of volunteer developers, given them code and even put some
open-source code in its programs.

Still, many do not believe in the new Microsoft. When INFORMATION WEEK,
an American computing magazine, surveyed some 500 technology
professionals, more than half said they thought that Microsoft's
openness was mostly a publicity campaign. In a recent speech that was
widely interpreted as taking a swipe at Microsoft, Neelie Kroes, the
European Union's competition commissioner, said that governments and
businesses would do well to use software based on open standards. And
Matt Asay, a blogger and executive of Alfresco, an open-source software
company, speaks for many in the open-source movement when he says that
Microsoft "is the only major software company other than SAP that has
not fully engaged with the open-source community."

Microsoft's approach to open source hints that the firm has not yet
made up its mind what it wants to be. Even as the company seemed to
have made peace with the other camp, signing licensing deals with
open-source companies, it accused open-source software fans of
violating 235 of its patents and threatened legal action.

The defining test of Microsoft's openness will be whether it tries to
use its monopoly on the desktop to gain an unfair advantage in the
cloud by tightly integrating--or "bundling"--software and services.
Critics say the firm has already tried to favour its online search
service in its Windows Vista operating system, but backed off when
Google complained. Mr Mundie, however, is eager to offer reassurance:
although Microsoft will make its software and services work well
together, it will do nothing unlawful, he says: "The company has been
quite clear how we are thinking about interoperability."

Microsoft is in transition. "The Road Ahead" will not be as straight or
as smooth as it was on the cover of Mr Gates's bestseller, written in
1995. Yet Microsoft is unlikely to hit a wall, as IBM did after Mr
Gates steered his own big shift in computing all those years ago--if
only because Microsoft has a clearer view of the future. And if the
worst happens, watch out for Mr Gates returning to put his creation
back in the fast lane.

-----
[1] http://www.salesforce.com
[2] http://minimsft.blogspot.com/

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