But he said Microsoft (MSFT) plans to do more than simply mimic Google by rolling out Web-based versions of desktop programs or following its particular search and advertising model.
Ozzie, who has only made a handful of appearances since his promotion last June to replace Bill Gates as chief software architect, told analysts and investors at a Goldman Sachs (GS) conference in Las Vegas that he has been laying the groundwork for programmers across the company to build Internet-based software.
• Click here for FOXNews.com's Personal Technology Center.
"There is a sea change going on in the industry," Ozzie said.
In a question-and-answer session broadcast over the Internet, he likened the current shift to the way the PC era that took off in the 1980s marked a move away from centralized mainframe computing.
But Microsoft has yet to offer a cohesive package of programs that run over the Internet instead of from a PC. Ozzie gave little indication of what might be coming, or when.
Meanwhile, Google has expanded beyond searches to offer free, Web-based programs similar to Microsoft's mainstays, Word and Excel.
Ozzie said Word, Excel and other parts of Microsoft's "Office" suite have weathered threats from both desktop and Web-based programs in part because competitors always compromised functionality.
For example, he said, users always have to be connected to the Internet to use a Web-based word processor.
Instead of jumping belatedly into the fray with Web-only programs, he said Microsoft will pursue a mix of software loaded on PCs and Internet services that also work with the growing array of mobile devices, a strategy he called "software-plus-service."
He said he sees free, Web-based, ad-supported software as a way to extend Microsoft Office's reach, but gave no specifics. He noted that this solution wasn't likely to appeal to the company's big business customers.
Sid Parakh, an analyst with McAdams Wright Ragen in Seattle, said that "what he's trying to say is that even though we are behind, we are not going to necessarily copy a model that's out there."
In the U.S. search market, Microsoft is stuck firmly in third place behind Google and Yahoo Inc. (YHOO), according to January data from research group Comscore Networks Inc.
Right now, Ozzie said, people rely on general Web search engines for all types of queries.
Under his leadership, Microsoft is betting that Internet users will want search capabilities built into all the different places they spend time, from video-game community sites to the Outlook e-mail and calendar program.
He pointed to the software maker's acquisition on Monday of Medstory Inc., a health search engine, as an example of Microsoft's plan to offer targeted groups of Web surfers to advertisers.
Parakh said the Medstory acquisition was solid.
"Advertisers do want a targeted audience," he said. If Microsoft can deliver it, "I don't see a reason why advertisers won't move."
Microsoft shares were down $1.20, 4.1 percent, to $27.87 on the Nasdaq Stock Market.