In-Depth

Flying Solo: Ozzie Takes Microsoft to the Cloud

As his boss Bill Gates departs, Ozzie takes Microsoft's online strategy into the cloud.

While departing Microsoft Chairman Bill Gates handed over the chief software architect title a full two years ago, Ray Ozzie now grips the controls of Microsoft's flight into the icy altitudes of cloud computing without a backseat co-pilot. The flight promises to be adventurous -- full of the usual pockets of turbulence Microsoft hits when venturing into new markets -- but it's one Ozzie seems ready to take.

Since he has been the chief software architect, Ozzie's impact on the world's largest software development organization has been significant. He has served as the prime mover in shaping Microsoft's Software plus Services (S+S) initiative. He has also fostered a more enlightened attitude about Microsoft's once bellicose approach to open source. That's no easy task for a Microsoft "outsider" to accomplish in a relatively short period of time.

However, the hardest days of achieving meaningful success in the online market still lie ahead for Ozzie. He'll have to continue evolving Microsoft's online server-based products and strategies to remain competitive with the likes of Salesforce.com Inc. and the raft of more traditional competitors such as IBM Corp. and Oracle Corp. At the same time, he's playing a game of catch-up against Google Inc. and its online disciples on the consumer side.

Microsoft first thought it could dramatically close the gaping lead Google has with one fell swoop by trying to acquire, and then hostilely take over, Yahoo! Inc. That maneuver was designed to better fill out the "Services" side of the company's S+S equation.

"They looked at Yahoo! and said, 'We have the software and they have the services. Put them together like peanut butter and chocolate and we have the best treat on the market,'" says Dana Gardner, principal analyst with Interarbor Solutions Inc. in Gilford, N.H. "Well, that didn't work, so now they have to come up with things like services and search technology -- but do it in a way that doesn't drive people into the arms of Google."

Tough Transitions
Since the Yahoo! deal crumbled -- and with no other major online competitors left to acquire -- Ozzie's job has become a lot harder. Microsoft is left to organically grow its own online technologies, products and services. This is particularly true in search, where the company holds less than 10 percent of the market, advertising platforms and Web services. Despite the extent of Microsoft's influence and the size of its war chest, making a successful transition to the online world may prove to be one of the most difficult transitions the company has ever had to face in its 33-year history.

"Microsoft's online strategies so far have been not particularly effective. They're either losing money while increasing revenue or they've been able to be profitable, but at the expense of increasing revenues. So I don't know if that on its own is going to be enough," says Matt Rosoff, an analyst with Directions on Microsoft.

Financially, Redmond comes from way back in the online pack. For this year's third quarter, Microsoft's Internet operations suffered a loss of $228 million, compared to a $171 million loss in the same period last year. During that period, however, sales increased from $603 million to $843 million. In comparison, Google's revenues for the quarter -- just from its own search sites -- were $3.4 billion, an increase of 9 percent over the previous quarter.

Improving its fortunes in this market-some analysts believe-will take a monumental shift in Microsoft's corporate culture, competitive mindset and eventually its business model. "Instead of simply buying out a rival, Microsoft would be better off reinventing itself to better compete with Google. But [Microsoft CEO Steve] Ballmer will have to reform the culture, the people, the company's speed, how it sees software, its design sense, its quality of standards, its tired and annoying strategy of migrating customers through predictable software versions and its old method of developing software (which produced the Vista flop)," writes George Colony, CEO and chairman of Forrester Research Inc., in a recent blog entry.

Working in Microsoft's favor is the fact it has been forced to make challenging transitions before. The company had to switch gears in the mid-1980s when it took on and conquered Lotus in the desktop apps market. Again, in December 1995, it almost overnight changed its direction to focus on the Internet. Most recently, it began working cooperatively with the open source community, described only a few years earlier as a "cancer" by Ballmer.

In a presentation at the Sanford Bernstein Strategic Decisions Conference in late May, Ozzie attributed Microsoft's ability to adapt to wave after wave of new competitors to a "culture of crisis" the company has created.

"Microsoft is a very interesting company in that, by necessity, it's had to build up a culture of crisis. Since the early days, the company has faced some amazing competitor that looked like it was going to be a roadblock to success," he said. "It takes perseverance, investment and an understanding that you can't compete by just chasing taillights. You have to find some way of outflanking or leapfrogging, because [when you're] facing somebody who's running very fast and they're ahead, you have to find alternative ways," Ozzie continued.

Going Live
Ozzie and other Microsoft executives are not making it abundantly clear, however, how they plan to catch Google's taillights. As company executives explain why they're confident about narrowing the gap, they often pepper their speech with stats about the large numbers of active users of their core online products, which include Windows Live, Hotmail and Messenger, among others.

According to Brian Hall, general manager of Microsoft's Windows Live business, Microsoft currently has 448 million active Windows Live users, 350 million Hotmail accounts and 300 million Messenger users. Another number meant to impress people with Microsoft's online presence is that its products account for 11 percent of all Internet minutes.

However, Hall contends, it's not all just numbers, but the amount of content being generated and stored in these products. It's also the level of collaboration being conducted by both business users and consumers. It's about how Microsoft might use this content and collaboration to extend and build up other facets of its consumer-oriented online strategies such as social computing, Hall adds.

"It's not just the number of e-mail addresses, but the fact that people are actively spending time communicating with others through these tools and creating content through all the attachments," Hall says. "This is something that can help draw you into your social networks in a way that's more than just a set of links and a Web site."

Another important piece of Microsoft's online strategy is Live Mesh, though company officials have not clearly articulated how it will integrate with the other pieces. Another Ozzie-driven project, the concept of Live Mesh is to help pull together a seamless network of users and a wide range of devices and make the content of each accessible to a single user or groups.

"Live Mesh creates a file system that, through compatible applications, can access storage on a PC, phone or a lot of other devices without necessarily knowing where those files are. The mesh service takes responsibility for coordinating all that," Hall explains.

In his presentation at the Sanford Bernstein conference, Ozzie said the opportunity for Live Mesh to flourish is here, thanks to the abundance of cheap storage, computing power and the ubiquitous communications that have saturated data centers and homes alike. He said the confluence of these elements gives architects like himself a clearer idea of where to allocate resources to solve problems for both business users and consumers.

Based on these resources, Ozzie says he has come up with three guiding principles for Microsoft's product groups to help structure their thinking about online products and services:

  • The Web is the hub of a mesh for people and devices.

  • Business users have the power of choice as they transition from data centers to cloud-based computing.

  • Developers must gravitate away from creating monolithic applications on a single computer and toward a world where they use tools to create applications on many computers existing up in the cloud that can run on a wide range of devices.

Will They Come?
More important to Microsoft's online success than simply integrating the core components of Windows Live, Live Mesh and its MSN portal will be the number and range of services the company and its third parties can build on top of those components. This is something the Yahoo! acquisition might have covered. Now there's more pressure on Microsoft than ever to develop platforms attractive enough for the old-school and new-age developers upon whom it has always depended.

"The question is, can Microsoft come up with enough compelling services to turn that pile of gold -- the millions of active Windows Live users -- into an ongoing set of opportunities for themselves? That's what this services play is all about," says Scott Gode, VP of marketing and product management for Azaleos Corp.-a provider of remote managed services for Exchange-and a 15-year veteran of Microsoft.

While this collection of online products and technologies is aimed primarily at consumers, Hall says some of them will find their way into IT shops, where corporate users could take advantage of the same time- and cost-savings and productivity benefits. He says corporate users, especially if they're working from home, need to tightly integrate their e-mails, mobile phones, calendaring and contact lists with server products like Exchange and SharePoint.

"A key part of our Live Mesh vision is making something that's enterprise or IT controllable, federates into the enterprise and works with storage and applications models," Hall says. "This is in line with the general trend of the consumerization of IT."

Bulletproof by Design
Despite Google's huge lead, some analysts believe Microsoft could prove more bulletproof than Google over the long haul. Redmond's strength across several large and lucrative markets that span both the business and consumer sectors, and its greater international presence help with that perception, as do generous investments made in Microsoft Research.

"Everyone is going gaga over Google, but [Google] could prove the riskier proposition given the business unknowns and its being very dependent on one technology breakthrough, namely search. Microsoft is much more diversified across markets, geographies and developer ecosystems," says Dwight Davis, a vice president with Ovum Summit, an IT consulting and analyst firm with offices in Boston.

Far from the media glare of its frantic chase to catch Google in the consumer market is Microsoft's online battle in the corporate world. Here the company is quietly having a bit more success. But even here, the company isn't much past the first phase of its strategy. At least on this battlefront, Redmond isn't facing a foe attempting to fundamentally redefine both the technology landscape and introduce a new business model at the same time.

So far, the company has shipped CRM Online, Exchange Online and SharePoint Online. The first two have received favorable reviews from many users. The online version of SQL Server and the Business Productivity Online Suite -- made up of Exchange Online, Outlook Web Access, SharePoint Online and LiveMeeting -- are in beta. The online version of Communications Suite is about to tiptoe into beta.

"I think of Microsoft as an adolescent even in this [enterprise] market. You know they're likely to grow into a dashing man, but right now they're still in that awkward phase of trying to figure out how to make it all work," Azaleos' Gode says.

There was clear evidence of Microsoft's ambitions for its server-based online products in comments made in late May by Chris Capossela, senior vice president of Microsoft's Information Worker Product Management Group. Capossela said that by 2012, some 50 percent of all Exchange seats would be hosted. By comparison, a recent Gartner Inc. report predicted that in that same time frame, only 20 percent of those seats would be hosted.

"If you believe the analyst numbers that there are 150 or 160 million Exchange seats out there now, and so in four years it could get up to perhaps over 200 million, that's a pretty extraordinary claim," Gode says. "To me 20 percent is a more believable number."

New Business, New Model
The fact that it has taken Microsoft a long time to pull together its enterprise online strategy isn't surprising. There are a number of reasons for this, not the least of which is the company's reluctance to gravitate to a new business model where it would charge customers monthly fees for server-based products and services. This type of revenue would come in much smaller chunks than the up-front, one-time fees Redmond takes in for its physical products.

Most analysts think Microsoft wouldn't necessarily take in less revenue over the course of the year if it could gracefully move to a heavily flavored annuity business model. They believe the company's reluctance is rooted more in what Wall Street and investors would have to say about the switch from the old business model to the new riskier model.

"Software plus Services is about protecting [Microsoft's] presence on the desktop and the old [business] model. Who can blame them? No one wants to be the guy at the next shareholders meeting who says, 'We were getting $500 a pop for this product, but now we'll be getting $5 a month,'" says Jim Burleigh, CEO of on-demand inventory and warehouse management solutions provider SmartTurn Inc., based in Oakland, Calif.

Analysts also believe Redmond doesn't want to cannibalize sales of its lavishly profitable core server products by moving to an online model too soon.

"It's a momentous decision to go from a non-annuity to an annuity pricing scheme. Once Microsoft picks out annuity pricing it will be hard to go back and make it more expensive," says Azaleos' Gode. "They certainly don't want to leave money on the table, but they don't want to allow competitors to undercut them too much either."

Another reason for the slow, perhaps calculated move to online products is Microsoft's fear of alienating its large network of third-party companies that host and support products like Exchange. Redmond needs to find the right pricing model for its online server products, and determine how to clearly differentiate the services it offers from those of its partners.

Microsoft must also better fine-tune the set of capabilities it includes or doesn't include in online server versions, as compared to the core product. For instance, with the first hosted versions of Exchange, the company omitted unified messaging. That was part and parcel of the core product and Microsoft didn't make it clear what the subsequent responsibilities were for customers who now had to manage their own communications.

"One of the nice features of Exchange 2007 was unified messaging, but they made it clear that capability would not be in the hosted version. And it was the same thing with the hosted version of SharePoint. They're going to have to work out this services-server parity and make clearer to users the advantages of either managing these server environments themselves or having someone else do it for them," says Gode.

While Microsoft does have its online server products rolling, an even bigger question left hanging is when and if the company will deliver an online or hosted version of Office. The venerable desktop suite accounts for approximately $18 billion of the $51 billion in 2007 revenues, and it still delivers fat margins. With no serious competitors in the corporate space, many observers believe Redmond will wait as long as possible before delivering an online version that may not be as profitable.

"The $18 billion question is when or will they ever have a Microsoft-hosted version of Office. Office is a great and profitable business for them right now, so I wouldn't expect it any time soon," Directions on Microsoft's Rosoff says.

Rosoff and others have suggested that it wouldn't be a difficult step to turn Office 2007 into an online or hosted service from a technical perspective. Microsoft could use its Soft Grid application virtualization it acquired from Softricity two years ago, which could adapt Office as a hosted service without having to rewrite the whole suite.

Like many of its core server applications, though, Microsoft's desktop suite shows little signs of weakening in the corporate arena. Office still has no serious competition from traditional competitors such as OpenOffice.org, Office Suite or StarOffice, nor from the Web-based Google Apps.

"They may have to do something with Office for online, but not anytime soon. The other reality is that for the Software as a Service model, the server stuff is more amenable to moving into the cloud than the desktop stuff," Ovum's Davis says.

With Microsoft's energies and capital focused on online technologies and services the last few years, some observers believe its online progress has come at the expense of neglecting the products that continue to pay the bills. The outstanding example, some point out, is Windows Vista. This is a disaster Microsoft can't afford to repeat with any more of its bread-and-butter products competing in the physical world.

"All the flash, glamour and cool surrounding Live Windows and Mesh is blinding [Microsoft] to the fact that someone still has to keep the basic revenue flow coming in from the core products," says Michael Cherry, an analyst with Directions on Microsoft. "One of the things I'd like to see come out of all this is a focus back on the fundamentals of running a Windows and desktop apps business."

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