Microsoft Follows the Web Money

Updated from Nov. 1

Microsoft(MSFT) has long envied the fat margins being harvested from the Web at Google(GOOG) and Yahoo!(YHOO).

On Tuesday, Bill Gates & Co. took a step toward narrowing the lead. Microsoft unveiled a new family of software products, "Software Live," that the company plans to offer on the Internet either free with advertising, or on a subscription basis. While nominally a software campaign, the success of competitors in search-based Internet advertising -- and Microsoft's inability to date to catch up to them -- is clearly a big driver behind the new offerings.

"We have 10% share of the online ad market today," said Ray Ozzie, the chief technology officer at Microsoft who is leading the company's software-as-services charge. "We fully intend to grow that share."

Building on its mature flagship products, the world's largest software maker will offer software-based service products called Windows Live to consumers and Office Live to small-business owners, which Microsoft said will be complementary to its desktop franchises.

The products offer many features available online from other companies and even from Microsoft on its MSN site, including Web sites for small businesses and personalized homepages for individual users. But Microsoft is offering at least some of those products for free -- while other firms charge for them -- and adding some unique features that also tap into its desktop products, which command a dominant position in the market.

"This is a big change for everybody -- not just users but businesses, developers, every part of the ecosystem," Microsoft Co-Founder, Chairman and Chief Software Architect Bill Gates told roughly 200 people at San Francisco's Palace Hotel. "It's a new way to look at software."

In fact, pieces of the model have already been pioneered by other companies such as Salesforce.com(CRM), Google(GOOG) and Apple(AAPL).

In addition to the attraction of the growing Internet advertising market, Microsoft also could face the threat of Google and Yahoo! going after Microsoft's core businesses by offering, for example, a free online version of Office-type software. Google's foray into desktop search -- ahead of Microsoft -- foreshadowed its power to encroach on Microsoft's turf even more, some analysts and tech observers believe.