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Microsoft turns to services in third decade

Software no longer the focus

The Windows operating system may have defined Microsoft since its inception, but it will be services, not software that give the world's largest software company its claim to fame in the future, according to analysts.

Microsoft, which celebrated its 30-year anniversary with a party at SafeCo Field in Seattle on Friday, fundamentally changed the computer industry with an operating system that now runs more than 90 percent of PCs in the market.

But that ubiquity itself poses a problem for Microsoft, said Joe Wilcox, analyst with Jupiter Research, because it means the company is currently facing the difficult task of trying to outdo itself. "Microsoft is at this juncture where it's the victim of its own success," he said.

Exacerbating this issue is the fact that conditions in the technology industry have changed drastically since 1975, thanks in large part to Windows. Today it is much harder for a comparable product to become as pervasive as Microsoft's operating system, said Rob Helm, an analyst with Directions on Microsoft.

Helm said the reason Windows was so successful is that it rode the wave of two events – the invention of the PC and the arrival of the internet. That subsequent chain of events "is not necessarily going to repeat itself in the next 30 years," he said.

"The days of the killer application are long gone," agreed Dan Kusnetzky, vice president of system software research at research firm IDC. He said that the packaged software that helped Microsoft rise to such a position of dominance is on its way to becoming obsolete, giving way to subscription models for services that customers buy to run the software they need.

So as Microsoft tries to carve out a niche for itself in a host of markets it will need to come up with new tricks to surpass the success of Windows, Kusnetzky said.

"What we're going to see Microsoft attempt to do is move away from a packaged software model and sell everything as a service," he said. "Microsoft wants to make sure people pay Microsoft for any use of computers anywhere. It's a very clever, intricate strategy based upon control and ownership of low-level things like APIs (application programming interfaces), tools, communications protocols and file formats."

The company's restructuring this week into three divisions whose services strategy will be overseen by former Lotus guru turned Microsoft chief technology officer Ray Ozzie clearly shows that services are now a major focus for the vendor.

Microsoft also last week mandated that enterprise customers buy its Software Assurance service along with the next version of Windows, Windows Vista – another move that proves Microsoft plans to drive a model where customers pay regularly for access to a network of software updates rather than a packaged product, Kusnetzky said.

One of the key services that might help Microsoft create a legacy beyond Windows in its next 30 years is (VoIP) voice over internet protocol, an emerging market ripe for domination by a large software company, Helm said. Microsoft has been "gradually getting the pieces in place" to provide VoIP service, a technology with the potential to be as disruptive as the internet was 10 years ago, he said.

Earlier this week Microsoft unveiled its first telecommunications customer, Qwest Communications International, to develop services using its VoIP software platform. And last month, Microsoft acquired Teleo, a developer of services and technology that allows users to make and receive voice phone calls on their PCs via the internet. The company plans to incorporate Teleo's VoIP technology into its own software to upgrade online services from its MSN division.

"If [Microsoft] could make the same economics of the PC apply to telephony – a small number of dominant hardware standards, a large number of hardware players and one big software company – it could yield returns [for the company] commensurate to the PC [market]," Helm said.


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