Future Is Later for Microsoft

Bach said it will take three to five years to gain significant share in the portable-player market. The company will start by launching the Zune in the U.S. and move on to other countries and new kinds of players the following year.

Then there's Online Services, which will soak up $500 million of the $2.7 billion in extra spending. The company's MSN division alone lost $26 million on sales of $561 million in the fourth quarter at a time when other online players are growing strongly. When will the red ink turn black? Microsoft won't say -- but the company's commitment to a strategy of making the Web and software services a key part of every single thing it does -- came across loud and clear.

"It's our aspiration to create seamless Web, desktop and mobile experiences for all activities relevant to users and customers in all our markets," said Ray Ozzie, who succeeded Bill Gates as the company's chief software architect. "This new Web-based value delivery model has turned the technology industry on its head, from design to development to marketing and sales and customer relationships."

One very simple example: Users of the next version of Outlook will be able to access their calendars via the Web by using the company's Windows Live platform. Moreover, users of both the Xbox 360 and the Zune will be given multiple opportunities to play (or share) music online as a way of building virtual communities, a recipe Bach called "our secret sauce."

Advertising, not something at which Microsoft has ever excelled, is becoming a major concentration. "We have an absolutely relentless focus on advertisers," said Ballmer. "I'm probably spending more time today with advertisers than I am with enterprise customers."

It's worth noting that nearly all of Microsoft's profit comes from its core businesses, including Windows, Office and various server products, so Ballmer's decision to allocate so much of his time to a money-losing business seems significant.

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