Microsoft reorg a bulwark against Google?

In an effort to speed up decision making, Microsoft said Tuesday, the company will restructure into three divisions led by individual presidents. Significantly, the reorganization signals an accelerated commitment to hosted-software services.

In a memo to employees, company CEO Steve Ballmer said the goal of the changes is to "achieve greater agility in managing the incredible growth ahead and executing our software-based services strategy."

To make hosted services a more central part of the company, Microsoft has folded its MSN Web portal business into its platform product development group. Ballmer has also tasked Chief Technical Officer Ray Ozzie with expanding software services throughout the company.

Microsoft's decision to combine MSN with its platform products group is "a Google reaction," said Frank Gillett, an analyst at Forrester Research. "Microsoft is certainly alerted to the impact Google is having on what Microsoft thinks is their domain."

Google has an expanding roster of Web services, which are not reliant on having Microsoft Windows on a user's desktop PC, he noted. The Sidebar feature on Google's recently introduced Google Desktop Search, for example, has ties to Google-delivered information services.

Indeed, Microsoft's bet on software services reflects the growing interest in Web-delivered services and the need to find new avenues to deliver its goods, said analysts. The company is facing a slowing pace of contract renewals and upgrades for its traditional desktop software, they said.

"It's pretty clear Microsoft is seeing some heat from this emerging market of software on demand," said Israel Hernandez, an analyst with Lehman Brothers. "Microsoft has not put people and processes in place to pursue that."

At Microsoft's financial analysts meeting in July, and at a partner conference last month, Ballmer outlined the company's growing investment in managed services, such as running a company's desktop PCs.

And last week at Microsoft's Professional Developers Conference, Chairman Bill Gates provided more insight into the company's thinking with services.

Long term, Gates said, the company intends to add more features to its MSN Web properties, such as Hotmail, and introduce hosted options for its server-based products, such as its Exchange e-mail program. By blurring the line between servers and services, Microsoft will offer businesses and consumers better hosted options, he said.

"As we bring these things together, we give you the richness and also the choice of having it as server or as a service," Gates said. "Everything we're doing--this idea of server equals service (and) getting the symmetry there--is part of our long-term architecture."

In the area of Web development, Microsoft has already taken steps to foster collaboration between its MSN Web properties and its server and tools division. Last week it released programming interfaces designed to let developers write applications that run in conjunction with MSN properties, such as MSN Search and Messenger.

In the corporate market, Microsoft's stepped-up commitment to software services reflects moves by competitors IBM, Sun Microsystems and Oracle, all of which have sizable investments in that area, as do upstarts such as Salesforce.com.

Though details are not totally clear, Microsoft will likely bring its own twist to the market, said Rob Helm, an analyst at Directions on Microsoft. Pointing to existing hosted offerings, such as e-mail security service FrontBridge and Web conference application Live Meeting, Helm said the company is apt to create strong ties between its software products and hosted services.

"Microsoft is not trying to eliminate software, but make it less painful to manage or take care of tasks for you," Helm said. "You won't see any 'No Software' signs like you do at Salesforce."

Gillett expects that more technology providers will try to find ways to incorporate services into software products. For example, Microsoft could embed monitoring code in a client's Windows server software that would alert Microsoft to problems that could be fixed remotely.

"It's not enough to hand people a shrink-wrapped box and a wet kiss and say, 'Good luck with my complex product.' You have to create ways to improve the customer experience with the product," Gillett said. "And if you're stuck with four-year product cycles, you aren't delivering much on the customer experience."

CNET News.com's Dawn Kawamoto contributed to this report.