Microsoft says Google success a "wake-up call"
SEATTLE (Reuters) - The success of Google opened Microsoft's eyes to the riches available in Web advertising, the chief technologist for the world's largest software maker said on Tuesday.
"It was a wake-up call within Microsoft," company Chief Software Architect Ray Ozzie said at a Goldman Sachs investor conference in Las Vegas.
Google's success alerted Microsoft to the financial power of advertising and how it might complement revenue from subscriptions for its desktop software, he said.
"This very clearly caused an inflection point within our industry and within Microsoft of understanding advertising as an economic engine," Ozzie said in a question-and-answer session monitored online.
Ozzie stepped into the top technical position at Microsoft last year, replacing co-founder Bill Gates and spearheading an important transition for the $44 billion company to extend its reach beyond the computer desktop.
Google derives almost all of its $10.6 billion in annual revenue from advertising, while Microsoft's loss-making Internet arm generated $2.3 billion in sales last year. Microsoft makes most of its money from its dominant Windows operating system and Office software suite.
"It is critical for Ray Ozzie to rethink how Microsoft competes in the Web world, because it is a totally different landscape out there and if Microsoft doesn't adapt it will get left behind," said Morningstar analyst Toan Tran.
The challenge for Ozzie is to deliver a host of Web services alongside Microsoft's classic out-of-the-box software to remain competitive with online rivals like Salesforce.com, Yahoo Inc. and others without compromising its core business.
"In most cases it's not going to be cannibalistic, but on the fringes there will be some substitution of one thing for another," said Ozzie.
For example, Ozzie said some small businesses may opt for Office Live -- an online service that helps set up Web sites, company e-mail and Web applications for collaborative projects -- instead of a company server running on Windows.
Microsoft believes new Web services will work in tandem with software installed on the computer, a vision that differs from "software as a service" advocates who expect services delivered over the Web to eventually replace software that resides on local PCs.
"The services opportunity is ... really more than just taking what's on the PC and putting it up on the Web," said Ozzie, who gained respect as a technology guru by developing ground-breaking software including Lotus Notes and who has made only a few public appearances since taking over for Gates.
When Microsoft responded to a strong competitor in the past, the Redmond, Washington-based company discovered new, and sometimes unintended, business opportunities. Ozzie said he expects the Web services fight to be no different.
Out of Microsoft's competition with Sony Corp.'s PlayStation 2 video game console emerged the strategy for its Xbox Live online game platform, the backbone of its current entertainment strategy, according to Ozzie.
A side effect of its competition with Google, Ozzie said, is that Microsoft can now support businesses with advertising when traditional licenses wouldn't have worked. Also, the data centers and services platforms that Microsoft is building for itself could eventually be made available to customers.
"That's going to present tremendous business opportunities," said Ozzie, who joined the company in 2005 when Microsoft acquired Groove Networks, a company he started.
Shares of Microsoft closed down $1.20, or 4.1 percent, at $27.87 on Nasdaq in line with declines made by other major technology shares.
