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Last Updated: Wednesday, 2 November 2005, 12:28 GMT
Microsoft hails 'strategic shift'
Bill Gates presenting Windows and Office Live
Software giant Microsoft has announced a major push into online software services, in what is seen as a move to counter rivals like Google and Yahoo.

Microsoft founder Bill Gates called it a "revolution" and the firm's biggest strategic shift in five years.

Several key products and services - from office software to e-mail and instant messaging services - will be delivered online and on demand.

Similar to Google, Microsoft hopes to finance the move through advertising.

The new services will be called Windows Live and Office Live, and Mr Gates said they were "a revolution in how we think about software".

The new service will ultimately replace popular features like MSN Messenger and Hotmail.

Competing with free

The planned change is a huge gamble for Microsoft, as it could undermine its two main revenue drivers: the sale of so-called "shrink-wrapped" software that needs to be installed on users' computers, and the licensing of its software to corporate customers.

Companies such as Yahoo and Google have recently invaded Microsoft's turf by offering free online software tools like e-mail and instant messaging that make people less dependent on Microsoft applications, and saves them from maintaining the software on their own computers.

This is all about Microsoft really pointing all its resources at Google
Rob Enderle, technology analyst

Free office software like OpenOffice, meanwhile, could become more popular since the programme's backer Sun Microsystems recently announced a strategic alliance with Google.

All this could make users much less dependent on Microsoft's biggest profit engine: the Windows operating system which powers more than 90% of the world's personal computers.

Google and its rivals make money by placing small context-driven adverts alongside their "free" online services.

Microsoft hopes to cash in on their success. The company estimates that the market is currently worth $15bn, but will grow to about $150bn by 2015.

Advertising, subscription, premium price

However, Microsoft is hedging its bets and plans to offer three different pricing models for its new on-demand services.

At the entry level there will be free online tools accompanied by advertising.

There will be a second tier of services that offers these online tools with extra features, but will cost a small subscription fee.

Power users, meanwhile, can buy a fully-featured premium service.

'Service plus software' mentality

The move to online software services is closely linked to the spread of high-speed access to the internet, as online software services are only as good as a user's access to the web.

Mr Gates, who is Microsoft's chairman and chief software architect, said the strategic shift would change his company's approach to doing business: "We are trying to put a 'service plus software' mentality into many of the product groups inside Microsoft."

Technology industry analyst Rob Enderle said the move was "all about Microsoft really pointing all its resources at Google."

But competitors were dismissive of Microsoft's move.

Marc Benioff, who runs on-demand software firm salesforce.com, said online products like Writely, NumSum, Zimbra and others were already replacing Microsoft applications like Word, Excel and Outlook because Microsoft had "let us down on innovation".

"With 'Live' appended to some familiar names: Windows Live, Microsoft Office Live, Windows Live Messenger and so on, the clear implication is that their current product line should be renamed with similar zeal: Windows Dead, Microsoft Office Dead, and Windows Messenger Dead," Mr Benioff said.

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