Microsoft to partners: It's time to change

"We have to change faster internally than the world is changing externally or we will be obsolete," Turner said, as part of his speech, which kicked off Microsoft's Worldwide Partner Conference here.

While change is hard, Turner said Microsoft's partners need to be ready to offer customers the choice of running software on their own servers or subscribing to hosted services. "It doesn't mean locally based software is going away, but customers want the choice."

Microsoft is trying to keep its partners in the fold through the transition. With its new Live CRM service, set to go on sale next year, Microsoft is offering partners a 10 percent cut of ongoing subscription revenue for partners that help sell and support the product, for example. He also noted that an early access program for Live CRM, which kicks off this quarter, is only available through partners.

But the shift also opens the door to more conflict for the company and its partners. Turner talked about how, as software shifts, Microsoft will find itself both partnering with and competing against companies like SAP and Cisco.

Indeed, Microsoft may also find itself competing with its partners in the hosted software arena. While the company is pushing for its partners to help sell its hosted products, Turner acknowledged that some customers may want Microsoft and not partners to do the hosting, a task many partners offer today.

Turner also talked up the new opportunities that will be created by Microsoft services, pointing to the company's Office Live service for small businesses. Turner announced a new program that will allow partners to create add-on applets that Microsoft will host. He said that Office Live, which currently has 400,000 businesses signed up, has the potential to become one of the three or four most-used Microsoft products.

"There are millions and millions of small businesses we can reach," Turner said.

Earlier in his keynote, Turner touted the potential for the company and its partners to profit from the Office 2007 and Windows Vista products that Microsoft launched in its past fiscal year. During that year, some $20 billion in research and development investment came to market, he said.

"I see one thing in fiscal year (2008)," he said. "I see money...I can smell it. I can hear it. This is the year we are going to monetize that innovation."

Turner also announced that Microsoft's new server operating system, Windows Server 2008, won't have its formal launch until next year. Microsoft plans to launch that product, as well as the next version of its SQL Server database and Visual Studio developer tools at an event on February 27 in Los Angeles.