Microsoft ( MSFT) Chairman Bill Gates came to San Francisco on Wednesday to reinforce what the software giant has said for nearly two years: that the .Net initiative is key to the company's future.

Speaking to thousands of developers in a huge ballroom with nine large video screens, Gates kicked off the retail launch of Visual Studio .Net, the company's new set of tools for developers to create Web services -- the next generation of applications designed to help automate business processes by sharing information across different programs and devices.

Converting developers to the new tools is essential for Microsoft's quest to control the delivery of software on the Internet. The company is betting big on its software-as-service, announced in June 2000. Gates said Wednesday its entire R&D budget -- about $5 billion a year -- is focused on the .Net initiative.

But Visual Studio .Net by itself is not such a big deal, said David Readerman, an analyst with Thomas Weisel Partners, who estimates the product will generate sales of only $200 million to $250 million in the current quarter. Rather, it's important as a piece of the larger Microsoft .Net portfolio, he said. Visual Studio .Net is what software developers will use to write Web services applications to run on the Microsoft Windows operating system and Microsoft's SQL servers, he said.

"The product is a strategic release for them," said Readerman, who rates Microsoft buy. His firm hasn't done any business with Microsoft.

Indeed, Readerman said he has yet to see a compelling Web service application. And it's going to have to be pretty compelling to get companies to shift IT spending in these tough economic times, he added. "Spending on new, new things is over," he said.

Shares of Microsoft rose $1.68, or 2.8%, to close at $61.82 in regular trading.

More Bumps in the Road

For Microsoft's .Net initiative to succeed, it's also going to have to overcome security concerns, as well as competition from rivals such as Sun Microsystems ( SUNW). Last week, Sun was noticeably absent from a new consortium of companies, including Microsoft and IBM ( IBM), formed to agree on standards for Web services. Such standards are crucial to enabling different programs to work together.

Gates on Wednesday highlighted the creation of that consortium by showing a PowerPoint slide packed with logos of the participating companies. It includes "everybody except maybe one," Gates said in a veiled reference to Sun. "A lot of nice companies," he added in a little barb at Sun that drew laughter from the audience.

Goldman Sachs software analyst Rick Sherlund said in a research note that he believes Microsoft will succeed at winning over small- and middle-market businesses to its platform, but suggested the Visual Studio .Net launch marks the start of Microsoft's effort to expand its target to larger enterprises.

"We believe the high end will be a long uphill battle for Microsoft given religious issues in this space over Unix and Java," he said, referring to the competing standards being pushed by companies such as Sun and Oracle ( ORCL). His firm has done banking business for Microsoft.