In an interview at the company'sin Los Angeles, Gates said the company will expand its "software as a service" offerings, particularly to businesses. The idea is that customers can choose to either purchase server software from Microsoft, such as mail or portal applications, or get that service delivered over the Internet.
To get to that point, Microsoft needs to converge the capabilities of software packages Exchange, SharePoint portal and Active Directory (AD) with those of online services Hotmail, MSN Spaces and Passport.
"A lot of our services have started as very inexpensive but not feature-rich, and our servers are very feature-rich," Gates said. "As we bring AD and Passport together, Hotmail and Exchange together, and MSN Spaces and SharePoint together, we give you the richness but also the choice of having it as a server or a service."
Already Microsoft has built a common technology foundation between its MSN Messenger service and, which allows customers to run the two products together.
This week, the company is offering an expanded set of application programming interfaces, or APIs, which will allow software developers to write Web applications that, including MSN Search and Virtual Earth. The company also presented developers with an early version of the toolkit, which will include software called MSN Frameworks designed to help build these online Web applications.
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The majority of Microsoft's own hosted services will be geared for corporate customers, Gates said.
"We're not just jamming a bunch of adds at people. We're giving people a choice in terms of how they do IT (so) that some of it is through services," he said. "Everything we're doing, this idea of server equals service (and) getting the symmetry there is part of our long-term architecture."
Gates' comments provide some insight into the company's long-term plans in the hosted software arena--an area that many other companies, including Saleforce.com, have championed.
In fact, Microsoft last week indicated that it intends to offer a hosted option for its customer relationship management applications to compete with Salesforce.com. In the past, it has dabbled with other services, such as a since-discontinued onlineit offered to small- and medium-size businesses.
Microsoft's software-as-a-service strategy contrasts with that of, which is aggressively pushing into the hosted software arena but relies on application partners such as Siebel to sell jointly to corporate customers.
Oracle, meanwhile, offers hosted versions of its packaged applications from its own data centers. And Sun Microsystems is focusing itsoffering on infrastructure services, such as computing power and storage, although it intends to work through partners to offer software.
Gates said that the company's hosted server products will come gradually--he noted that the first company meeting to discuss software as a service was in 1998. But a number of technology changes have made the option more realistic for both customers and software providers.
"Software as a service has been moving along. We needed the Internet. We needed low-cost connectivity. We needed some data standards like XML; that helps a lot. The scale economics of doing big server farms so you can do (hosting) well and at a low cost, that helps," Gates said. "You'll see the services thing increase."