Gates: Web-Based 'Sea Change' Could Swamp Microsoft

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The technology industry shift's to Internet-based software and services represents a massive and disruptive "sea change," Microsoft Chairman Bill Gates wrote to top-level executives in a memo aimed at rallying his troops against the new competitive threats the company faces.

In an e-mail to top executives, dated Oct. 30 and obtained late Tuesday by The Associated Press, Gates urged company leaders to "act quickly and decisively" to move further into the field of offering such services, in order to best formidable competitors. But he also warned that the company must be thoughtful in building the right technology to serve the right audience.

"This coming 'services wave' will be very disruptive," Gates wrote. "We have competitors who will seize on these approaches and challenge us — still, the opportunity to lead is very clear."

Gates compares the push toward such services — which range from online business software offerings to free Web-based e-mail — to the changes he saw nearly a decade ago.

Then, he wrote a now-famous memo, called "The Internet Tidal Wave," the prompted a massive shift at Microsoft toward Internet-based technology.

"The next sea change is upon us," Gates wrote to executives.

Gates included a memo from Ray Ozzie, one of Microsoft's three chief technical officers, which outlined ideas for broad companywide changes that can address the growing competitive threat.

In the memo, dated Oct. 28, Ozzie concedes that Microsoft has not led the pack on Internet-based software and services, and now faces intense competition from companies like Google Inc.

Ozzie said Microsoft needs to focus on key tenets of the new model, including a shift toward offering free, advertising-supported offerings and more sophisticated, Internet-based methods of delivering products.

"I believe at this juncture it's generally very clear to each of us why we need to transform — the competitors, the challenges, and the opportunities," Ozzie wrote.

Last week, Microsoft announced plans for Windows Live and Office Live, two Web-based offerings that aim to help the company compete with Google, Yahoo Inc., and other companies that are already seeing success with such Web-based offerings.

Microsoft Corp. has recently faced criticism that its model, which still relies mostly on delivering software in traditional packaging, could grow antiquated. The concern is that, as more companies offer online services for everything from word processing to storing photos, there will be less of a need for Microsoft's lucrative Windows operating system and Office business software.

Microsoft's nascent Windows Live and Office Live efforts aim to complement its valuable software franchises with online products that build on what people find on their desktop computers.