Microsoft will offer Web services

Challenged by Internet companies from Google Inc. to Salesforce.com, Microsoft Corp. yesterday unveiled a new strategy that would let customers go online for e-mail, business automation tasks, and other software services that are now loaded on their computers.

Microsoft's new offerings, dubbed Windows Live and Office Live, were unveiled in San Francisco by its chairman and chief software architect, Bill Gates, and its new chief technology officer, Ray Ozzie.

Ozzie, a software industry innovator who created Lotus Notes, formerly led the collaboration software maker Groove Networks Inc. in Beverly, which Microsoft acquired in April. Ozzie moved to Seattle and was put in charge of Microsoft's new services push in a company reorganization in September.

The new Internet-based services, some of which supplant current Microsoft products, will range from instant messaging to computer-based phone calling on the consumer side, and from managing business tasks to collaborating with partners on the enterprise side. Taken as a whole, they point to a fundamental shift in Microsoft's business model.

With the new Microsoft tools, small businesses will be able to build an online presence and manage projects over the Internet, and consumers will be able to share digital photos and other files that can be accessed from home, the office, or on the road. The consumer services will be supported mostly by advertising, Google-style, while the business services will be ad-supported and sold through subscriptions.

''It's a revolution in how we think about software," Gates said.

Analysts said Microsoft was bowing to the new realities of the software business. Consumers are gravitating toward downloading applications from websites, and businesses toward buying them over the Internet from third parties rather than installing licensed software on their own servers.

But some questioned whether Microsoft will reap the same massive profits from a business model based on Internet services as it has by licensing its software.

''This will be a departure for Microsoft," said Robert P. Bois, research director for AMR Research in Boston. ''Their bread and butter has been licensed applications. But they see this emerging software delivery model, and for Microsoft to ignore it would be a mistake."

Microsoft will be playing catch-up, attempting to use its huge Windows and Office customer base as a platform to compete with rivals that have jumped out to a lead in Internet services. It has used the same tactic successfully in the past, most famously in countering Netscape's browser for searching the Web.

''You can never count Microsoft out," said Chris Winfield, president of 10e20, a search marketing firm in New York. ''As we've seen, Bill Gates doesn't like to lose. It's been rumored for a long time that Google's end game is to have your operating system online and control your entire computing experience. This is Microsoft being proactive, before Google comes out with an operating system on the Internet."

Gates and Ozzie stressed that Microsoft has no intention of abandoning its Windows operating system for personal computers or its Office productivity suite for businesses and other organizations, which provide the bulk of the company's profits. In the short run, at least, the new ''live services" will augment those traditional products, with customers paying more for higher-end applications. Customers will also be given the choice of running the services on their own computers or on the Internet.

While the Microsoft executives described their new releases as enhancements, the move toward untethering software from computer hard drives has been rapidly gaining momentum. Google, the Internet search giant, has made inroads into Microsoft's desktop franchise through its Web-based consumer applications, such as Google desktop search. On the business front, the software-as-service model pioneered by Salesforce.com has grown popular with small and mid-size companies that prefer to buy software over the Internet rather than license it.

''The new model creates different challenges, but certainly the revenues are there," Bois said, noting that larger vendors like IBM Corp. and Siebel Systems Inc. are moving to capitalize on the services model. ''If you capture the business upfront, you can get a stream of recurring revenue." At the same time, he said, services customers have fewer barriers to dropping a vendor than they do with licensed software.

By entrusting its strategic shift to Ozzie, whom Gates once called ''one of the top five programmers in the universe," Microsoft signaled both that the former Groove executive will be playing a pivotal role in the company's new direction and that Microsoft is serious about incorporating Ozzie's user-friendly design concepts to close a perceived innovation gap with Google, Yahoo Inc., and other Internet competitors.

''It's all about trying to be nimble," Winfield suggested. ''Microsoft sees a threat out there, and they're reacting to it."

Robert Weisman can be reached at weisman@globe.com.