In a memo to top company executives, the software giant's chairman ponders the challenges posed by a host of online competitors.
"This coming 'services wave' will be very disruptive," Gates said in an Oct. 30 e-mail to top Microsoft employees, which was seen by CNET News.com. "We have competitors who will seize on these approaches and challenge us."
In the memo, Gates cites an earlier missive from Ray Ozzie, outlining the importance of tapping online advertising and services as new revenue sources.
Memo references another memo sent by the new services chief, who cited a laundry list of missed opportunities for the software maker, citing competitive threats from rivals such as Google, Skype, Research In Motion and Adobe.
"It's clear that if we fail to do so, our business as we know it is at risk," Ozzie wrote. "We must respond quickly and decisively."
Ozzie's memo, which was also seen by CNET News.com, includes a laundry list of missed opportunities for the software maker, citing competitive threats from rivals such as Google, Skype, Research In Motion and Adobe.In September, Microsoft announced that it was reorganizing itself into three units and tapping Ozzie to lead a companywide services push. Last week, Microsoft announced the first fruits of that effort--products called Windows Live and Office Live. Windows Live combines many of Microsoft's existing MSN services into an advertising-supported product for consumers, while Office Live is a set of services, some free and some paid, aimed at small businesses.
Although Microsoft had already announced those moves, the two memos shed light on the urgency and importance the company is attaching to these plans.
Ozzie notes areas that Microsoft could have led, such as Web-based applications, but where other companies are instead more heavily focused.
"We should've been leaders with all our web properties in harnessing the potential of Ajax, following our pioneering work in OWA (Outlook Web Access)," Ozzie wrote. "We knew search would be important, but through Google's focus they've gained a tremendously strong position."
In the memo, Ozzie talks about Google as the most prominent of Microsoft's emerging competitors, but also makes reference to Yahoo and Apple Computer.
"Google is obviously the most visible here, although given the hype level it is difficult to ascertain which of their myriad initiatives are simply adjuncts intended to drive scale for their advertising business, or which might ultimately grow to substantively challenge our offerings," Ozzie wrote. "Although Yahoo also has significant communications assets that combine software and services, they are more of a media company and--with the notable exception of their advertising platform--they seem to be utilizing their platform capabilities largely as an internal asset.
"The same is true of Apple, which has done an enviable job integrating hardware, software and services into a seamless experience with dotMac, iPod and iTunes, but seems less focused on enabling developers to build substantial products and businesses," wrote Ozzie, who joined Microsoft as chief technical officer earlier this year when his company, Groove Networks, was acquired by the software maker.
He also cites smaller, emerging companies that are developing software and services that use the Internet, rather than Windows, as their base platform.
"Developers needing tools and libraries to do their work just search the Internet, download, develop and integrate, deploy, refine," Ozzie wrote. "Speed, simplicity and loose coupling are paramount."
At the same time, Ozzie sees an opportunity if Microsoft can create a Web-based development platform.
"The work of these startups could be improved with a 'services platform'," Ozzie said. "Ironically, the same things that enable and catalyze rapid innovation can also be constraints to their success. "
Microsoft has talked of a developer platform in conjunction with Windows Live, but the company has offered few details of how third parties will be able to build on top of Microsoft's work.
He also points to the fact that although Microsoft's Office is ubiquitous, it is Adobe's PDF file that has emerged as the key means of sending formatted documents on the Web. Microsoft is proposing its own rival to PDF, known as Metro, with Windows Vista, its new operating system that is due out next year. The company will also support PDF in the next version of Office, due next year.
Gates says that despite the threats, "the opportunity for us to lead is very clear."
"More than any other company, we have the vision, assets, experience, and aspirations to deliver experiences and solutions across the entire range of digital workstyle & digital lifestyle scenarios, and to do so at scale, reaching users, developers and businesses across all markets."
Details of the memos were reported late Tuesday by the Wall Street Journal.