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Is Microsoft getting ahead of itself?

As the software giant prepares to launch the first trials of its .Net My Services, key details of the plan are still "not figured out."

REDMOND, Wash.--As far back as 1999, Microsoft CEO Steve Ballmer looked ahead enthusiastically to the rise of Web services as "more significant than the development of the browser."

In typical Microsoft fashion, the world's largest software manufacturer dived headlong into the trend with a rush of marketing hyperbole. Also in character, at least according to critics, the company created much buzz about the new technology before fully developing its concept, let alone any actual products or services.

As Microsoft prepares to launch the first trials of .Net My Services this fall, key details of the plan are still "not figured out," said Jim Allchin, Microsoft's group vice president in charge of Windows and server software development. "I think we just got ahead of ourselves and didn't get clear enough thinking," he said, echoing similar concerns voiced last August.

That observation has become abundantly clear to those familiar with the initiative inside the company and beyond.

As originally envisioned, .Net My Services was to become a "digital safe-deposit box" for hosting and delivering personal information while providing an array of services ranging from commerce to communication in partnership with Web retailers such as eBay. The company had hoped consumers would pay fees that would cover the bulk of the expense to run these one-stop services, which would, in turn, manage passwords, calendars and other personal information.

Instead, the plan has been the source of continual confusion among potential customers, has encountered a series of problems with its underlying technologies, and has faced internal frustration that sources say even led to its lead executive being reassigned.

In surprisingly candid interviews with CNET News.com at company headquarters here, Ballmer and other top executives recently acknowledged that Microsoft is still in search of a business plan for the initiative and has not determined how to make money on .Net My Services, nearly a year after it was announced.

Ballmer said Microsoft has "put a lot of good talent" on the project but "could have mixed a little more business talent in with the technical talent...Sometimes we give too many bodies but not enough senior bodies."

He and Allchin are both critical of the original .Net My Services business strategy. The plan was "confusing and didn't fit with thinking on other areas. Some of the (software) released wasn't thought through from the tech side like we needed it to be," Allchin said.

Yet the company remains as committed as ever to finding the formula that will make the initiative a success, believing it is key to Microsoft's future as the traditional desktop PC business continues to see limited growth. If the company were to miss the Web services trend, Ballmer said, it would "be in tough shape."

A moving target
While analysts and others in the industry give Microsoft high marks for its long-term vision on consumer Web services, aspects of the plan and its reliance on Microsoft as the keeper of vast amounts of personal data have come under fire almost from the start.

see special report: Web services: The new buzz Privacy groups, potential partners and e-commerce users have balked at Microsoft's gatekeeper role, citing frequent security and privacy lapses at the company's MSN and Hotmail properties. Industry veterans doubted Microsoft's ability to run an operation as large and complicated as .Net My Services. And Microsoft competitors and some state regulators have complained that .Net My Services simply extends the company's monopoly to a new playing field.

"The bottom line is that Microsoft wasn't ready to be in the business of being a trusted provider, and it has come back to bite them," said Daryl Plummer, group vice president for software infrastructure at research firm Gartner. "Microsoft jumped in with both feet a little too early on the business and technical side of .Net My Services. They have no business plan. Where will that revenue come from, and will they be able to convince others to join?"

Sources close to the company said Ballmer, Allchin and Gates are unhappy with the number of partners signed to date. Microsoft hasn't disclosed a complete list, but outside of eBay and Verizon Communications, few big-name players have signed up. American Express, which took part in the .Net My Services launch last March, has no immediate plans to join the program, a representative for the financial powerhouse said.

"The almost universal response from potential partners was: 'We don't understand the business model; we don't know how we or Microsoft will make money on the plan; and we don't necessarily trust Microsoft to be the single repository or host for this model,'" said a source familiar with Microsoft's plans.

Concerns and confusion have taken their toll within the company as well. Last November, Microsoft replaced Bob Muglia, who was in charge of the .Net plan, with David Cole, who at one time ran Windows development. Cole is now head of a new Personal Services Group that oversees the .Net Internet strategy and reports directly to Ballmer.

Muglia was reassigned to run a new storage unit under Allchin. Sources close to the company said Muglia asked for the reassignment due to frustration in developing and implementing the .Net My Services business model.

Asked if Microsoft executives are rethinking the plan, Allchin replied: "You bet we are."

One idea strongly favored by Microsoft executives is to make .Net My Services more attractive to the company's traditional enterprise business customers and to find a way to sell more server software as part of the .Net My Services model. Microsoft will also play down its central role as host of consumer data in favor of a "federated" plan that lets Web businesses, big companies, and even rival Web services host .Net My Services data, sources close to the company said.

The basic concept of the .Net My Services plan remains the same. Microsoft will offer .Net My Services access through its MSN online service and through its new Windows XP operating system, among other avenues.

Big business push
The major change is that Microsoft will spend less time trying to recruit Web site partners and more time concentrating on selling software to let others host and manage consumer data. The company will appeal to business customers to use the .Net My Services model and Microsoft software as a way of doling out corporate data and using internal resources.

Microsoft has also said it will revamp Passport, the online identity system customers must use for access to .Net My Services. The company will use a security model called Kerberos so it can be federated with other authentication systems, much in the same way that automatic teller machines are linked into a network to share banking information.

"If they do federate, they get rid of one big objection to Passport and will also quell fears that Microsoft will take customers away and that they will be the only repository for customer data," Gartner's Plummer said.

Microsoft will soon detail a plan to offer .Net My Services to businesses, according to company representatives. The company may also create a new server software product so businesses can host their own .Net My Services data internally.

"We may offer it if some large ISP (Internet service provider) wants to host those services," said Adam Sohn, product manager for .Net Platform Strategy. "There absolutely will be an offering for corporate customers."

To make building and hosting those services within businesses easier, Microsoft will ship application templates in April for building Web services based on .Net My Services. "We'll define the framework, (provide) the guidance, for example, of what a user is," said Eric Rudder, senior vice president of developer and platform evangelism. "We'll make sure you can have a federation and can run services behind a firewall."

That plan makes more sense, given Microsoft's expertise and lack of service provider experience, said Matt Rosoff, an analyst with Directions on Microsoft. "Microsoft's traditional business model is selling servers--so there has to be a way to sell servers. Being a low-margin application service provider is not what Microsoft wants to do."

Even with a revised plan, however, Microsoft customers said they still don't understand many aspects of .Net My Services.

"I'm not completely clear on where they are going, and even they would say it's not clear to them," said Tony Scott, a chief technology officer at General Motors. "We had a meeting with Bill Gates, and even at that level, I think they see it as morphing over time."

Microsoft would do well to heed such concerns, as GM is one of the largest consumers of information technology products and services in the world. The company, which will spend more than $1.8 billion on information technology in North America alone this year, holds considerable sway over Microsoft and other tech companies.

"We have made the point with them multiple times: If you believe consumers or businesses want to put all of their eggs in one basket, that's just not a model that flies," Scott said. "We'd love to convince the world that all they needed to buy were GM cars, but that's just not the reality."

News.com's Wylie Wong contributed to this story.