Trend: Software as a service threatens traditional software applications.
Microsoft (MSFT) must reshape its businesses to respond to the growing threat from Internet-based software and services, Microsoft Chairman Bill Gates warned senior executives in a recent memo.
The trend toward Internet services represents a massive and disruptive "sea change" for the information technology industry, and Microsoft must respond quickly, Gates wrote in the Oct. 30 memo, which leaked to the media Tuesday.
Analysts say the memo was meant to rally employees around a strategy to take on new competitors, such as Google (GOOG) and Salesforce.com. (CRM) Many of the company's new rivals offer software as a hosted service, which means it's delivered online.
To some observers, the Gates memo is more about posturing than taking immediate action.
The leaked memo looks like a "classic vaporware maneuver," said Jupiter Research analyst Joe Wilcox, using a term for companies that hype nonexistent software. Microsoft doesn't have any products to announce, he says, but it wants to signal to potential customers and rivals that they're on the way.
Microsoft is an entrenched incumbent and isn't threatened in the short term, Wilcox says. But Internet services from rivals pose a long-term threat because they don't require Windows. Some services also look to replace Office. "Bill Gates is thinking down the road — three, four or five years — at what could happen, and he's trying to nip that in the bud now," Wilcox said. "There's a lot of competition out there now."
Internet services pose a threat — everything from Web-based e-mail and other applications from Google and Yahoo, (YHOO) to business software from Intuit (INTU) and Salesforce.com. Google could present the biggest challenge. The search engine is expanding its reach with Web e-mail, PC search software and photo-editing programs.
"Microsoft realizes that Google is really only the first of what's likely to be many new competitors," Enderle said. Its success is prompting venture capitalists to fund other Internet services firms, he says.
Ozzie's memo criticizes Microsoft for moving too slowly to react to industry trends. In particular, Microsoft missed the growth of ad-supported Internet search and let Google become a powerhouse.