Gates pens disruptive memo

Aiming to stir up the same kind of momentum as his Internet Tidal Wave memo of a decade earlier, Microsoft chairman Bill Gates has penned a memo outlining the challenges Microsoft faces from a host of online competitors.

In a 30 October email to top Microsoft employees, Gates said: "This coming 'services wave' will be very disruptive. 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.

Ozzie, who joined Microsoft as chief technical officer earlier this year when his company, Groove Networks, was acquired by the software maker, wrote: "It's clear that if we fail to do so, our business as we know it is at risk. We must respond quickly and decisively."

Ozzie's memo includes a laundry list of missed opportunities for the software maker, citing competitive threats from rivals such as Adobe, Google, RIM and Skype.

In September, Microsoft announced that it was reorganising 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.

He wrote: "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]. 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 Microsoft's most prominent of the emerging competitors but also makes reference to Apple and Yahoo!.

Ozzie wrote: "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.

"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 utilising 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."

Ozzie also makes reference to smaller, emerging companies that are developing software and services that use the internet, rather than Windows, as their base platform.

He wrote: "Developers needing tools and libraries to do their work just search the internet, download, develop and integrate, deploy, refine. Speed, simplicity and loose coupling are paramount."

At the same time, Ozzie sees an opportunity if Microsoft can create a web-based development platform.

He said: "The work of these start-ups could be improved with a 'services platform'. Ironically, the same things that enable and catalyse 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.

Gates said that despite the threats, "the opportunity for us to lead is very clear".

He added: "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 and digital lifestyle scenarios, and to do so at scale, reaching users, developers and businesses across all markets."

Details of the memos were reported late on Tuesday by the Wall Street Journal.

Ina Fried writes for CNET News.com