Microsoft sets out internet growth strategy

Microsoft on Thursday laid out an ambitious goal to create a new generation of internet-based services to boost its growth rate, potentially bringing in advertising, subscription and transaction revenues to supplement its more mature businesses.

Besides existing services such as internet search and the Xbox Live online games service, new areas of interest were likely to involve communications, web-based storage and tools to help workers collaborate better, executives said at the company's annual analyst meeting.

They were also likely to extend beyond its MSN internet service to include new ways of generating income for the company's Windows and Office divisions, they added.

Steve Ballmer, chief executive, said the new emphasis on services reflected a broader transition in the software industry, which is shifting from “delivering bits [of data] to delivering bits and services.”

He added: “The internet's transformative impact on the software business has just begun.”

Microsoft's new focus on services reflects the success of internet companies like Google and eBay, as well as Apple's iTunes music service. While depending on advertising or transaction fees for their income, these and other internet applications are types of software application that are delivered over the internet, rivalling Microsoft's more traditional way of selling software.

The new emphasis on services could point to changes in Microsoft's core business model, and suggests that the company has digested the lessons from Google and others, said Rick Sherlund, software analyst at Goldman Sachs.

“It seems as though Microsoft is about to go on the offensive,” he said, using its large base of software products to spin off new ideas for businesses based on delivering services over the internet.

However, the company provided few details of specific plans and analysts cautioned that an earlier emphasis on web-based services, made at the end of 1990s when Microsoft launched its company-wide .Net initiative, had not led to the shift anticipated at that time.

The new focus on services also left questions about whether Microsoft was interested mainly in new ways to deliver its software to customers over the internet, or whether it was proposing new methods of charging for its software, for instance through subscriptions, said Rob Helm, an analyst at Directions on Microsoft, an independent research firm. “The devil will be in the detail,” he said.

Bill Gates, chairman, conceded that Microsoft was “playing catch-up on search” after starting late, but added that within three years it would have made technical advances that far outshine the current state of the technology.