"Live Labs," as the effort is called, will be a coupling of workers from Microsoft Research and MSN, and will be headed by Gary Flake, a top researcher hired away by Microsoft from Yahoo last year.
Some of the members of the unit will retain their day jobs in other parts of Microsoft, while others will be assigned full-time to the new project. The research unit is adding 30 positions for the Live Labs effort, while MSN is creating more than 70 new positions.
In an interview, Flake said that Live Labs is, in part, a recognition that the traditional modes of doing research and creating products take too long in the Internet world.
"Historically, the software industry has been an industry in which it was fine to have months or years in between product cycles," Flake said. "That is something that has been part of Microsoft's processes as well."
Similarly, science has focused on a method of developing a hypothesis, then an experiment to test the hypothesis. The results are then studied before the process is repeated.
The Internet, he said, allows both science and product development to be ongoing.
"It's a much more continuous process," said Flake, who also worked previously for Siemens Corporate Research and NEC Research Institute.
Although Microsoft is positioning the move as a way to improve society as a whole, the company has also said it will tap its research units to help it catch up to or leapfrog rivals such as Yahoo and Google.
"To the extent this helps us in any sort of competition, that's great, but that's actually a side effect," Flake said. "It's a happy side effect, nonetheless."
In November, Microsoft announced its, an effort to add online components to much of the company's existing software portfolio. The company announced plans for both Windows Live and Office Live components--the former aimed at consumers and the latter at small businesses.
Many of the Windows Live components, some of which are available in beta testing form, are features that had been offered previously. Office Live, meanwhile, is slated to enter limited testing in the next quarter.
Some within the company have been arguing that Microsoft, perhaps even offering free, ad-supported versions of its traditional consumer software packages.
Flake has authored a "manifesto" in which he says that Live Labs can bring to the table things like rapid prototyping and a "sandbox" in which products can be built without putting together a full product team.
"This pattern is not merely about new applications," Flake said. "It's about a revolution in how we create, share and refine anything that can be digitally encoded--be it news and information, artistic forms, scientific breakthroughs, personal communications, economic transactions, and, yes, even software. This is not Web 2.0. It's World 2.0."
Microsoft hopes to spur development both within Microsoft and in the broader community, particularly academia. The company is initially offering $1 million worth of doctoral fellowships and $500,000 in research grants, with other efforts planned, Flake said. The company is also launching a "Search Labs" component specifically focused on that area of research.
Internally, Flake's work will be assisted by an advisory board of Microsoft's three chief technical officers: Ray Ozzie, Craig Mundie and David Vaskevitch. Ozzie has been the champion of Microsoft's live services push,saying that the company needed to do more in this area in order to remain relevant.