Saturday, December 10, 2005

Ray Ozzie at Microsoft -- strategy


December 11, 2005
Can This Man Reprogram Microsoft?

Redmond, Wash.

THINK back to Round 1 of the Internet, when things really got rolling in 1995. The computing landscape was shifting, and a cool, fast-growing young company symbolized the new order: Netscape. At the time, Microsoft looked to be a lumbering old war horse, trapped in the yesteryear of desktop personal computer software, word processors, spreadsheets and operating systems. It seemed, in other words, so 1980's.

But, of course, Microsoft emerged a winner. It embraced the Internet and vanquished the Netscape threat with hard work, ingenuity and strong-arm tactics that a federal court ruled violated the nation's antitrust laws. Microsoft's shares soared to a record high at the end of 1999.

The Internet, Round 2, is now under way. Again, the computing terrain is changing remarkably, helped along by free software like Linux and the spread of high-speed Internet access. Today, all kinds of computing experiences can be delivered as services over the Internet, often free and supported by advertising. Clever Internet software can now turn flat, view-and-read Web pages into snappy services that look and respond to a user's keystrokes much like the big software applications that reside on a PC hard drive. New companies are even sprouting up to offer Web-based word processors and spreadsheets, products long regarded as mature - and long dominated by Microsoft's desktop programs.

Champions of the Internet services model range from I.B.M. to start-ups. But the totemic company in this next big evolutionary step in computing is Google, the Internet search power whose ambitions appear to be growing as fast as its profits.

And Microsoft? It once more finds itself surrounded by doubt and dismissed as a laggard. Some of its own senior engineers have defected to Google and elsewhere, and its stock price has barely budged in three years, despite solid earnings growth, because others appear to be winning the race for the future.

The familiar pattern of a decade ago begs the question that Bill Gates was asked when he met last month with a group of executives and journalists from The New York Times: Will you do to Google what you did to Netscape?

Mr. Gates, the Microsoft co-founder and chairman, paused, looked down at his folded hands and smiled broadly, as if enjoying a private joke. "Nah," he replied, "we'll do something different."

The man whom Mr. Gates is counting on to make a difference is Ray Ozzie, a soft-spoken 50-year-old who joined the company just eight months ago. He has the daunting task of galvanizing the troops to address the Internet services challenge, shaking things up and quickening the corporate pulse.

The forces arrayed against Microsoft, analysts say, may well prove more formidable than ever. "The problem Microsoft faces today is that there is a totally different model emerging for how software is created, distributed, used and paid for," said George F. Colony, the chairman of Forrester Research, a technology consultant. "That's why it's going to be so difficult for Microsoft this time."

Yet there are optimists. Big industry shifts, they say, create opportunity. Inevitably, they note, Internet computing erodes Microsoft's power to set technology standards, but the company can still benefit as the overall market expands. That's what happened in the 1990's. They say that if Microsoft shrewdly devises, for example, online versions of its Office products, supported by advertising or subscription fees, it may be a big winner in Internet Round 2.

"There's a tremendous opportunity for Microsoft to expand its business," said Richard Sherlund, an analyst at Goldman Sachs, who has a buy recommendation on the company. "But Microsoft had better be sure it is the one that capitalizes before others cannibalize their business."

AT first blush, Mr. Ozzie, whose title is chief technical officer, seems an unlikely person to meet the threat of Google and its brethren. He has only a small staff and no direct control over Microsoft's vast product groups. "It's soft power," Mr. Ozzie said in an interview here last week, referring to the foreign-policy concept that influence need not be measured in bombs and battleships.

And few doubt Mr. Ozzie's influence. "Ray Ozzie is someone with a tremendous technical reputation and an outsider, who Bill Gates trusts, and he's come in and said things have to change," said Michael A. Cusumano, a professor at the Sloan School of Management at the Massachusetts Institute of Technology.

Mr. Ozzie is a software wizard whose geek gene was evident early. Growing up in suburban Chicago, he had a passion for Heathkits, which were do-it-yourself projects for electronics hobbyists. He was constantly building radios, tape players and other electronics gear, recalled Jack Ozzie, his younger brother. "There was always a smell of solder in the back bedroom," said Jack, who is a software engineer.

At the University of Illinois at Urbana-Champaign in the early 1970's, Mr. Ozzie wandered into the building that housed Plato, a computer system with terminals linked to a mainframe in a network that, remarkably for its time, had instant messaging, e-mail and online discussions. Mr. Ozzie became a senior programmer on the Plato system.

Mr. Ozzie recalled that he was "forever changed" by his experience with Plato. It gave him, he said, "a peek at what the Internet would ultimately become. It was a microcosm, an online community in an era when there weren't online communities."

In the 1980's, Mr. Ozzie applied that perspective to the new technology of the day: personal computers. At the time, PC's were mainly stand-alone machines for word processing, spreadsheet calculations and desktop publishing. Mr. Ozzie recognized that PC's could also be powerful tools for communications and collaboration. He led the team that created Lotus Notes, an early program for corporate e-mail and sharing information in digital workspaces, anticipating the kind of computing that would become commonplace only later with the rise of the Internet and the Web. In 1995, I.B.M. paid $3.5 billion for Lotus Development Corporation and the prize was Lotus Notes.

In 1997, Mr. Ozzie founded Groove Networks to make advanced collaboration software using Internet peer-to-peer technology, well before the arrival of Napster and peer-to-peer networks for sharing music. Groove was a technological triumph, but not a big commercial success. Microsoft bought Groove this year to pick up its technology - and Mr. Ozzie.

Years ago, when Mr. Ozzie was a Microsoft competitor, Mr. Gates called him one of the world's great programmers. So, in Microsoft's engineering culture, Mr. Ozzie brings a lot of clout to his job.

He hit the ground quickly after he arrived in April. At first, he said, some executives told him that it was a big company and that he should get to know it for a year or so before deciding what to focus on. "That lasted about two weeks," he said.

In meetings of senior executives, the subject of how to cope with the Internet services shift in computing, how to turn it into an opportunity for Microsoft, was a constant theme - and one that deeply interested Mr. Ozzie. "Within a month, Ray was putting his thoughts on software-as-services on paper," noted Jeff Raikes, president of Microsoft's business division, which includes the Office products and corporate software.

Mr. Ozzie then spent the next few months meeting with people across the company to see what work was being done in product groups. Simultaneously, he was devising a plan to help Microsoft capitalize on Internet services by blending the new technology - and economic models - with Microsoft's traditional software business.

In late October, Mr. Ozzie presented his ideas in a seven-page, 5,000-word memo, "The Internet Services Disruption." At first, it was e-mailed to fewer than 100 senior managers and engineers at Microsoft. But they passed it along to colleagues, and by early November it had leaked out to the press; copies are now posted on the Web. Microsoft has used such memos over the years to educate its corporate troops and to stir them up to combat major competitive challenges.

In a two-page note that accompanied the Ozzie memo, Mr. Gates compared it to one he wrote in 1995, "The Internet Tidal Wave," which assessed the Internet challenge of a decade ago. Microsoft, he wrote in the introduction to the Ozzie memo, was at similar crossroads. "This coming 'services wave' will be very disruptive," Mr. Gates wrote, and later emphasized, "The next sea change is upon us."

The Ozzie memo analyzes the Internet services trend, the competition and Microsoft's strengths and shortcomings, and it suggests how the company must change. The document is also a call to action: "It's clear that if we fail to do so, our business as we know it is at risk," Mr. Ozzie wrote. "We must respond quickly and decisively."

The memo is peppered with technical acronyms, and rivals are named. While Microsoft is progressing on several fronts, Mr. Ozzie wrote, "a set of very strong and determined competitors is laser-focused on Internet services and service-enabled software."

"Google is obviously the most visible here," he added.

There is an implicit critique of Microsoft's software-building practice of relying so much on product cycles measured in years. The last major release of Windows - XP - was in 2001, while the next one, Vista, has been scheduled for next year after repeated delays. The memo chastises no product by name, but it extols the virtues of speed and simplicity in software design.

"Complexity kills," Mr. Ozzie wrote. "It sucks the life out of developers, it makes products difficult to plan, build and test, it introduces security challenges, and it causes end-user and administrator frustration."

HIS comments all but echo those of some estranged engineers who have left Microsoft recently. Mark Lucovsky, a former senior engineer at Microsoft who joined Google, wrote in his blog earlier this year, "Microsoft used to know how to ship software, but the world has changed." The companies to watch, Mr. Lucovsky wrote, have "embraced the network, deeply understand the concept of 'software as a service' and know how to deliver incredible value to their customers efficiently and quickly."

Mr. Ozzie is understandably careful in what he writes and says; his role at Microsoft is mainly to lead and encourage rather than to criticize. He emphasizes the importance of Microsoft's big desktop products like Windows and Office, and he says that Internet services should be seen primarily as a way to continually update and improve its offerings. Those updates and improvements, he said, should make Microsoft software teams happier by moving their work into the marketplace faster.

"People like to have fun doing what they're doing, and people who build software have fun by having people use their stuff," Mr. Ozzie said in the interview.

Yet Microsoft will also selectively offer Web services that do over the Internet some of what Office and Windows do on the desktop. The company took measured steps in that direction last month, when it introduced Windows Live and Office Live. Windows Live lets consumers manage their e-mail, instant messaging, blogs, photos and podcasts in one site. Office Live enables small businesses to set up Web sites and e-mail systems, and to provide collaboration sites for teams. Both will be supported by advertising and perhaps some subscription fees.

In the future, Mr. Ozzie suggests, Microsoft will go further, offering parts of Office - like Word, Excel or PowerPoint - as Web services. "I think there are potentially different or enhanced ways that we can take things that have traditionally been done with the Office suite and offer that to customers," Mr. Ozzie said. "That's absolutely what we're focused on."

The new approach, it seems, is a striking departure from Microsoft's longtime practice of bundling more and more software features into its big integrated products. The bundling has not been merely a design preference, but also a business strategy. With more than 90 percent of the desktop PC market for operating systems and office productivity applications, Microsoft has bundled outstanding programs with mediocre ones, and all of them typically became the industry standards.

But Internet services represent a more open, competitive model. "Software itself is going to be free, and you get paid for services that are supported either by ads or by subscription charges," said Mitchell Kapor, the founder of Lotus Development who is president of the Open Source Applications Foundation, which develops free software for personal information like calendars and contacts. "For Microsoft, this is a bigger challenge than the rise of the Internet itself in 1995."

RECENT innovations have enabled Web-based software to look and respond more like desktop applications. Offering Internet alternatives to traditional PC programs are a new breed of start-ups, including, for word processing; NumSum, for spreadsheets; and Zimbra and Scalix, both e-mail. I.B.M. has Web-based software called WorkPlace that is used by millions of workers. And has built a fast-growing business by supplying customer relationship management software as an Internet service.

"No piece of software will replace Microsoft's Outlook, Word or Excel, but Web services will eat away at core areas of its Office suite over the next couple of years," said Marc Benioff, chief executive of

If that happens, Microsoft's business could be battered. Mr. Colony of Forrester Research predicts that Microsoft's profit margins, under pressure from Internet services, could fall by 40 percent or so over the next four years. A wild card is the hand that Google will play beyond search and how successful it may be. Mr. Colony, for example, says he thinks that Google will make a big difference. "I believe Google will revolutionize the software business," he wrote in a recent report.

Google has desktop search software and a Web-based e-mail service, two offerings aimed at parts of Microsoft's stronghold. How much further it plans to go in providing alternatives to Microsoft's software is uncertain, though it certainly looks interested.

Google was among the companies that attended a meeting last month at I.B.M.'s headquarters in Armonk, N.Y., of the Open Document Foundation, a group formed to agree on freely available formats for word processing, spreadsheets and other office documents; the idea is to come up with alternatives to Microsoft's proprietary Office formats. And for the last few months, Google has talked with Wyse Technology, a maker of so-called thin-client computers (without hard drives).

The discussions are focused on a $200 Google-branded machine that would likely be marketed in cooperation with telecommunications companies in markets like China and India, where home PC's are less common, said John Kish, chief executive of Wyse. "Google is on a path to developing a stack of software in competition with the Microsoft desktop, and one that is much more network-centric, more an Internet service," Mr. Kish said. "And this fits right into that."

For his part, Mr. Ozzie is curious about the plans at Google but is by no means obsessed by it. Google, he said, is "obviously a very strong technology company, and we'll see what they do with that."

Yet Mr. Ozzie's view is that Microsoft's fate is in its own hands. If it charts its technology and business plans wisely, harnessing the talents of its army of smart people, he said, it should grow and prosper in this next wave of Internet computing. He speaks of a thriving "ecosystem" of open competition in which developers and customers have many choices and in which Microsoft's future is not in crushing rivals but in becoming an attractive choice.

In the past, Microsoft executives have decried free software, with its collaborative open-source development style, as akin to communism, if not downright evil. Not Mr. Ozzie. "I consider open-source software to be part of the environment, like the Internet," he said. "It's not the enemy and it's not going to go away. It's great for developers.

"And if we don't keep continually updating our offerings and develop better offerings," Mr. Ozzie added, "then shame on us."

The Microsoft strategy, he said, has to be to develop tools and technology that make it easier to build software for the Internet-services era and easier for users to have more productive and enjoyable computing experiences. In a sense, it's a reinvention of old Windows vision of computing, but in a very different competitive context from the desktop world that Microsoft ruled.

The new game plan, Mr. Ozzie said, is "obviously not an altruistic thing, but it doesn't even resemble the environment of old."

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