In a leaked memo to top Microsoft executives, Bill Gates has said the company is facing its biggest challenge in the current "services wave".
The memo, parts of which were published by The Wall Street Journal on Wednesday, compares online services – such as those developed by the likes of Google and Research In Motion – with other major trends that have threatened to disrupt Microsoft's business model over the years.
Those include the growing popularity of the web 10 years ago and a switch to internet-centric software development five years ago.
So far Microsoft has managed to move with the times and hang onto its lucrative near-monopolies in desktop operating systems and productivity software. Gates' memo, which was really just a few introductory remarks to a separate memo by Microsoft chief technology officer Ray Ozzie, says that internet services have the potential to sideline Microsoft while vastly enriching its competitors.
"The next sea change is upon us," Gates wrote, and this will be "very disruptive". That point of view is behind Microsoft's September reorganisation into units focused on online expansion. "We have competitors who will seize on these approaches and challenge us," Gates said. "Still, the opportunity for us to lead is very clear."
Internet services have been around for years, but recently a handful of companies have found ways of making them pay handsomely, through advertising sales or subscription services. Microsoft's revenues, meanwhile, still rely on traditional software licensing. "A new business model has emerged in the form of advertising-supported services and software," Ozzie wrote. "The model has the potential to fundamentally affect how we and other developers build, deliver and monetise innovations."
Ozzie's memo outlines some of Microsoft's missed opportunities of recent years, including the rise of Google, Salesforce.com, Skype and Research In Motion, which makes the BlackBerry wireless handheld. All succeeded despite facing competition from comparable Microsoft technologies.
Google's focus has enabled it to gain "a tremendously strong position", Ozzie wrote, and some of its evolving services "might ultimately grow to substantially challenge our offerings".
Despite MSN Messenger's voice over IP capabilities, "it was Skype, not us, who made VoIP broadly popular and created a new category," Ozzie wrote. And despite projects such as Windows Mobile, "only now are we surpassing the Blackberry," he added.
The success of formats such as Adobe's PDF for exchanging formatted documents also represents a loss for Microsoft, according to Ozzie. Microsoft is hoping to remedy the situation with a format called Metro, coming with Windows Vista.