This marks the third time that Gates has rallied his company in the face of challenges from a new type of computing. Most famously, in 1995, he pushed Microsoft to respond to the "Internet tidal wave" by developing software for the Web, resulting in Internet Explorer. And in 2000 he laid out Microsoft's broad .Net strategy for developing Internet-based applications.
As it gears up for this latest challenge, Ozzie talked candidly in his e-mail about Microsoft's successes and failures.
"Our products have embraced the Internet in many amazing ways. ... But for all our great progress, our efforts have not always led to the degree that perhaps they could have," Ozzie wrote.
Analysts weren't surprised by the company's decision to increase its focus on Internet services. In the mid-90s Microsoft was forced to adapt itself for the first, "narrowband" phase of the Internet, when most users had slow dial-up connections, Ovum's Barnett said. Now in the second, broadband phase of the Internet, the conditions are right for storing applications and data on the Web and accessing it through a browser, he said.
"The importance of having masses of data and software stored on a local drive becomes less obvious. This is the classic 'Google play' -- Google has convinced millions of customers that they can now keep their data online," Barnett said.
"I think Microsoft has caught onto this, perhaps a little late ... but they have caught onto it. What we can expect to see now is Microsoft being prompted into another phase of innovation, another phase of thinking about what is the interplay between the online world and the locally stored and attached world," he said.
Microsoft may not find it easy to extend its dominance from the narrowband world into the broadband world, Barnett said, but it is healthy for the company and its customers that it is being forced to compete in a new area.
Tony Lock, chief analyst at U.K. research company Bloor Research, said Microsoft is pursuing a familiar pattern: "They wait to see whether a particular strategy or solution will be accepted, and then when it reaches a certain level of success they say, OK this is looking good, let's really push it."
Its increased focus on Internet services will ultimately benefit customers, Lock agreed.
"This is a market where there are already some relatively well-known incumbents -- Skype for voice-over IP, Salesforce.com for online CRM and Google for search and other services. That means it won't be easy for Microsoft to dominate any one area, which is good from a competitive point of view," he said.