Leaked Gates Memo Highlights Perceived Threat From Google

An email from Microsoft chairman Bill Gates and a related memo from Ray Ozzie, one of the software giant's three chief technology officers, have been leaked onto the Web. The documents are kicking off intense interest in the company's apparent internal discussions about missed opportunities in the wake of Google's success.

The Ozzie memo, and Gates's email, can be found on Dave Winer's blog.

"While we continue to make good progress on many fronts, a set of very strong and determined competitors is laser-focused on Internet services and service-enabled software," Ozzie wrote in the memo directed at Microsoft's executive staff. He then singled out several rivals, Google in particular.

"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," he continued. "We knew search would be important, but through Google’s focus they’ve gained a tremendously strong position."

The Microsoft-Google rivalry certainly isn't news -- the recent Microsoft launch of its Windows Live and Office Live services were seen as direct response to Web-based, service-oriented vendors like Google -- but Ozzie's comments were the most specific to date on the threat Microsoft sees in the search leader.Ozzie also acknowledged that Adobe leads in the electronic document format battle, a fact he bemoaned. "For all its tremendous innovation and its embracing of HTML and XML, [Microsoft] Office is not yet the source of key web data formats – surely not to the level of PDF."

There, too, Microsoft has recently taken steps to position itself in more direct competition. A month ago, Microsoft said that its next application suite, dubbed Office 12, will include a Save As feature to export documents in Adobe's PDF format.

"While we’ve led with great capabilities in Messenger & Communicator, it was Skype, not us, who made VoIP broadly popular and created a new category," Ozzie continued. "We have long understood the importance of mobile messaging scenarios and have made significant investment in device software, yet only now are we surpassing the Blackberry." Ozzie also named some of the usual suspects, citing Apple, for example, and its iPod and iTunes as a slick integration of hardware, software, and services.

But he also warned that Microsoft faces competition from startup efforts like GoToMyPC, and more importantly, from grassroots adoption of technology that essentially sidesteps the company's traditional methods of pushing products into the enterprise via software licensing.

"Products are now discovered through a combination of blogs, search keyword-based advertising, online product marketing and word-of-mouth," Ozzie wrote. "Even enterprise products now more often than not enter an organization through the Internet-based research and trial of a business unit that understands a product’s value.""More than anything, this involves the leading-edge users, that body of technically adept and adventurous people who help spread technology by grabbing it off the Internet," said Rob Helm, an analyst with Directions on Microsoft. "But Microsoft doesn't have as big a share of that group as its size would indicate. Microsoft has to get into that group."

To reach those users, Ozzie said Microsoft will need to revamp its Web sites, rethink its products, and in some cases offer up software or services for frees.

"Products must now embrace a 'discover, learn, try, buy, recommend' cycle – sometimes with one of those phases being free, another ad-supported, and yet another being subscription-based," Ozzie wrote. "Products must be easily understood by the user upon trial, and useful out-of-the-box with little or no configuration or administrative intervention."

That's not as big a change as some might think, said Helm. "This is something that Microsoft has done before -- take the example of desktop search, which was once to be a part of Windows, but was broken out and made free -- but the company's decided it's time to ratchet it up.

"Ozzie is definitely headed in the right direction," Helm went on. "The question is, can he [and Bill Gates] make the company follow them? It's a different ball game than in 1994, when Gates put out his famous memo about the Internet. It's not just the difference in Microsoft's size today compared to '94, but it's the fact that the company's two biggest businesses, Windows and Office, are much more entrenched."There may be resistance to what they think they can do on the Internet without cannibalizing Office and Windows."