Bill Gates rallies Microsoft troops to set new course

SEATTLE — From time to time, Microsoft Chairman Bill Gates issues a sea-change memo to set a fresh course for the world’s largest software company.

He did it in 1995, to focus the company on the Internet, and again in 2002 to make software security a top priority. He’s done it once more, this time rallying the troops to do a better job selling software over the

Internet as a

service.

The notion is not new. Microsoft has poured billions into Internet- related initiatives over the past decade, with comparatively little to show.

But now key competitors — especially Google in Internet search advertising, and Apple in paid music and video downloads — are proving the right kind of Internet services can be highly lucrative.

In an Oct. 30 memo to his top executives, Gates alludes to a “ disruptive” wave of new Internet services. Gates sounds the alarm against “ competitorswho will seize on these approaches and challenge us,” while urging his charges to “ deliver experiences and solutions across the entire range of digital work- style and digital lifestyle scenarios.”

Translation: Microsoft wants to deliver software over the Internet to consumers and businesses, for a subscription fee, and also to generate advertising revenue, à la Google.

“ And, separately, they want to become the clearinghouse for all forms of digital media entertainment,” says Piper Jaffray tech analyst Gene Munster.

Easier said than done. Microsoft’s cash cows remain Windows and Of H ce, the staid operating system and suite of clerical programs loaded onto nine out of 10 PCs.

In an accompanying memo, Ray Ozzie, one of Microsoft’s three chief technical of H cers, acknowledges that a similar initiative a few years back, dubbed HailStorm, H zzled.

“ Regardless of past aspirations, this is the right time to be focusing on services for two speci H c reasons: The increasing ubiquity of broadband has made it viable, and the proven economics of the advertising model has made it pro H table,” Ozzie said.

But Microsoft has yet to prove it can deliver compelling online services. And it faces nimble competitors in two broad competitions:

uThe Google factor.

Google could deal a crushing blow to Microsoft MSN’s competing search services if it acquires America Online, a big online ad generator.

Thus, Microsoft is reportedly discussing a partnership to lock up AOL’s ad revenue.

“ The bigger picture for Microsoft boils down to two words: beat Google,” says tech consultant Chris Pirillo of Lockergnome.com.

Meanwhile, NetSuite and Salesforce. com are thriving delivering accounting software as an online service. Last week, Microsoft announced a test version of Of H ce Live, a free, advertising- supported tier of basic services.

“ Microsoft believes it can deliver services that businesses are really demanding, integrating them better with one another and with Microsoft software,” says Directions on Microsoft analyst Matt Rosoff.

uDigital dust-up.

Apple last month unveiled a v ersion o f its iconic iPod portable music player that plays video. Paid TV program downloads are now prominently featured in the iTunes Music Store.

Munster, t he P iper J a fray analyst, believes the next- generation iPod will sit on the coffee table and relay music and video downloads wirelessly to a stereo or high-de H nition television.

If that happens, Apple would control the Q ow of digital entertainment.

Microsoft continues to push Windows Media Center PCs, pricey computers with TiVo- like capability built in, as the preferable home hub for digital entertainment.

And the company’s new Xbox 360 video game console, due on store shelves later this month, factors in. It comes with a year’s free subscription to the Xbox Live gaming service and is designed to relay music and video from a Media Center PC to a stereo or TV.

But competitor Nintendo is on the move. In partnership with McDonald’s, it will roll out a free WiFi-enabled online gaming service, built around its Nintendo DS handheld gaming console, at 6,000 restaurants.

Given such competitive pressures, Gates urged company leaders to “ act quickly and decisively.”

“ The next sea change is upon us,” Gates said.