Microsoft Corp. must change its business to better deliver software and services over the Internet to compete against new technology upstarts, Chairman Bill Gates said in a recent memo to executives.
Gates' memo acknowledged that Microsoft, which became the world's largest software maker by developing programs to be installed on personal computers, is facing increased heat from rivals such as Google Inc., Salesforce.com Inc., Yahoo Inc. and Skype Inc. that have built businesses by delivering such services over the Internet.
"We have competitors who will seize on these approaches and challenge us," Gates said.
"The broad and rich foundation of the Internet will unleash a 'services wave' of applications and experiences available instantly over the Internet to millions of users," Gates said in the memo, which was sent to senior Microsoft executives in late October and obtained by Reuters and other media outlets this week.
"The next sea change is upon us," Gates said, evoking his famous memo a decade ago calling for Microsoft to shift its focus to the Internet, which resulted in a company-wide effort to develop the Internet Explorer browser and unseat market leader Netscape -- and which also led to the landmark antitrust trial with the U.S. government.
Microsoft announced last week that it would offer some of the basic features of Windows and Office over the Internet, without the complexity of installing and maintaining the software in computer hard drives.
The Gates memo preceded that announcement, and Chief Executive Steve Ballmer reinforced the call on Wednesday.
"We believe this has potential over time to be a major new revenue stream," Ballmer told shareholders at the company's annual meeting.
"Just as we succeeded on the on the desktop, we will strive to succeed in services on the Web," Ballmer said.
While Gates' memo may mark a major strategy shift for the Redmond, Washington, software maker, the company has been working for a while toward adopting a new strategy.
Ray Ozzie, a longtime software services pioneer who sold his company Groove Networks to Microsoft in April and joined as one of Microsoft's chief technical officers, complained in a separate memo sent in October that Microsoft had moved too slowly to recognize industry trends and to use its technology to fend off new rivals.
"Just as in the past, we must reflect upon what's going on around us, and reflect upon our strengths, weaknesses and industry leadership responsibilities, and respond," said Ozzie, who was put in charge of Microsoft's efforts to deliver software services over the Web.
"As much as ever, it's clear that if we fail to do so, our business as we know it is at risk. We must respond quickly and decisively," he said.
Microsoft is offering its own search engine to compete against Google and has also begun selling advertisements that will be displayed alongside search results, which has fueled profits at Google.
The memos also reflect a recent company-wide reorganization at Microsoft that put the MSN Internet business under the Windows division and gave Ozzie his new role.
Microsoft shares fell 3 cents to $26.96 on Wednesday on Nasdaq, and are trading at 21 times projected fiscal 2006 earnings. Google, by comparison, has a price-earnings ratio of 47 for projected 2006 earnings.
At Wednesday's annual meeting, shareholders reelected Microsoft's board and ratified the selection of the company's auditor, Deloitte & Touche.