Ray Ozzie Speaks 'Live'

Asked, in a roundabout way, what investment Microsoft must make to deliver its vision of software plus services, Ozzie demurred. "I have nothing to add that [Microsoft CEO] Steve [Ballmer] hasn't talked about, and we can talk in a more nuanced way about it at the financial analyst meeting in July," Ozzie said. The questioner was longtime Microsoft watcher Rick Sherlund, general partner at Goldman Sachs, which hosted the Las Vegas event.

Last April, Microsoft execs sent financial analysts scrambling when they hinted that the Redmond, Wash., software giant would devote a whopping $2 billion to its high-priority "Live" software-as-a-service (SaaS) push over the next year. But at the Goldman Sachs event, Ozzie didn't want to get into that.

Still, Ozzie put some context around Microsoft's services strategy and did his best to portray the "Google threat" as an opportunity for Microsoft. Whereas onlookers view Google and its expert SaaS and ad-supported free software push as Microsoft's nemesis, he said the challenge sparked new thinking in Redmond.

"Rather than examining the specific mechanism by which Microsoft competed with one competitor, what's fascinating is to see the broader opportunities created inside [the company] as a side effect of the new competitor," Ozzie said.

Case in point: Sony's PlayStation 2 spurred Microsoft's game console push but also led the software company to go beyond gaming and into expanded media scenarios. Similarly, Ozzie said, Linux gave Microsoft's server and tools group a chance to compete beyond the server operating system alone.

"In the Google case, what's fascinating to me is that although you can characterize Google as a search compete, there are two very significant things that happened at Microsoft [as a result]. One was the recognition of advertising as an economic engine," Ozzie said. "And the other was services-based infrastructure. Once the realization was made by different groups that every product would have a services component, you go back to the company's platform roots and figure out what kind of platform treats the services layer as a system."

Microsoft is building out that platform, which underlies its Office Live and Windows Live efforts.

Ozzie portrayed Microsoft's legacy strengths -- in desktop applications, MSN and Hotmail -- as beneficial to the SaaS strategy. Naysayers and competitors in the SaaS world maintain that Microsoft can't afford to push too aggressively into services because the company will cannibalize shrink-wrapped software sales.

Most onlookers see Microsoft attacking Google's search hegemony while Google edges ever nearer to offering an Office rival in Google Apps Premier Edition.

When asked about cannibalization, Ozzie said, "The answer, in most cases, is [services] won't be cannibalistic, but in certain specific cases at the fringes there will be substitution of one thing for another."

NEXT: The "sweet spot" for Office Live The sweet spot of the Office Live hosted SharePoint environment is small businesses without IT staffs. In that case, "we have a partner channel for Small Business Server for the low end of the midsize market and the high end of small-business market," Ozzie said.

"There is some subset of Small Business Server customers that will switch over to Office Live," he explained. "The partners who would have sold SBS are now building Office Live applications. But I really believe ... we've found as an industry that whenever there's a big tech shift, it tends to be more additive to the business rather than significantly deleterious."

Paul DeGroot, analyst with Directions on Microsoft, did not hear the conference, but said Ozzie's look-on-the-bright side world view is typical of Microsoft positioning.

"Microsoft will see its search market share fall from 12 percent to 8 percent and say they've opened up 4 percent more upside," he noted.

DeGroot also said Microsoft execs do a good job looking back at what's happened in services and illustrating how some of their offerings fit in in retrospect but "what I haven't heard so far is any kind of coherent strategy going forward."

Ozzie gave Google search credit for fueling software services but said many users want more from search. Search statistics show that roughly half the people who conduct Web searches use more than one search engine, he noted.

"That really says that while people are amazed by search, they are not completely satisfied by the results and are looking to other means," Ozzie said.

Although Ozzie said many view search as the "command line of the Internet," there are customer segments with different entry points to the Web. For example, many business users use Outlook, and game players may use their portal. The goal is to find "the best way to weave search into their places," he said.

He cited Microsoft's recently announced plans to buy Medstory, a health information search engine. Microsoft will roll that capability into its MSN Health site and ultimately into mainline search, he said.

Some industry observers say structural issues at Microsoft could hamper its services effort. While Ozzie is tasked with getting each product group to assess and develop services around their core businesses, none of the operational group heads report to him. Ozzie proponents, however, say his powers of persuasion and long tenure in the industry will help him overcome any such internal hurdles.

Also at the event, Ozzie said innovation is alive and well at Microsoft. He mentioned PhotoSynth software, which grew out of his Live Labs group.

The software "takes a large collection of photos of a place or an object, analyzes them for similarities, and then displays the photos in a reconstructed, three-dimensional space, showing you how each one relates to the next," according to Microsoft. "In our collections, you can access gigabytes of photos in seconds, view a scene from nearly any angle, find similar photos with a single click and zoom in to make the smallest detail as big as your monitor," the company said.