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Microsoft plays catch-up
Microsoft didn't buy 5 years ago. Now execs admit software as a service is a big deal
November 4, 2005: 2:50 PM EST
By David Kirkpatrick, FORTUNE senior editor
Microsoft CEO Steve Ballmer considered buying, according to Salesforce's CEO
Microsoft CEO Steve Ballmer considered buying, according to Salesforce's CEO

NEW YORK (FORTUNE) - Microsoft has gotten seriously behind. And this week Bill Gates finally admitted it, when he unveiled a new strategy for Microsoft to offer a wide range of software delivered over the Internet as a service, in contrast to the company's longstanding preference for software on a user's desktop.

Ironically, Microsoft (Research) apparently toyed with the idea five years ago when it considered buying, the company that even then was seen as the pioneer of delivering business software over the net. (Research) founder and CEO Marc Benioff told FORTUNE this week that Microsoft CEO Steve Ballmer visited him in San Francisco in 2000 to discuss buying, but that Ballmer was dissuaded by others inside Microsoft who believed that software as a service wouldn't allow the company to "pull through" its other products.

"Microsoft's whole strategy," says Benioff, "is based on pulling through, starting with Windows and pulling through everything else -- Office and all its products for servers." (Microsoft declined to comment on Benioff's remarks.)

In the intervening five years, Salesforce has become the undisputed leader of the software-as-a-service category, expanding steadily beyond its roots in software for salespeople.

Benioff is skeptical of Microsoft's about-face. "It's fine to announce something," he says, "but where is their advantage in this situation? They're saying now they'll have advertising in Excel. That's their innovation? Where do they say it will be better or cheaper than everyone else?"

Seeming to relish the growing battle with a one-time suitor, Benioff noted that while Microsoft is still nowhere near offering genuine hosted versions of its signature Office applications, others are way ahead of it -- has a Word alternative; looks like Excel; and perhaps most impressively, Goffice is a full suite of business applications available as an online service

'Why fight it?'

Industry observers note that the success of showed Microsoft that it was missing an opportunity. "Software as a service is something Microsoft wanted to pretend wasn't ever going to happen," says Bruce Richardson, a top analyst at AMR Research. "But when you see companies like and Netsuite doing this and customers taking it up, why fight it?"

Six-year-old Salesforce provides software as a service to businesses so that neither CIOs nor ordinary employees need to deal with the hassle of maintaining their own software. They just get it over the Web. now has 17,000 customers, mostly small businesses, and saw its revenues grow 77 percent in its most recent quarter.'s new AppExchange -- a marketplace for Web services from a variety of vendors, all built on the company's basic platform -- goes well beyond its roots as a provider of software for salespeople. The company slowly is becoming a nexus for enterprise software -- period.

Gates is promising to deliver a variety of services over the Internet, many for free and supported by advertising. While Microsoft has been taking baby steps in this direction for some time, this is a big leap away from the company's longstanding commitment to software on a customer's desktop that is sold for a license fee.

"Every five years or so we look at our strategy and make one of these big bets," said Gates at a press conference in San Francisco announcing the new strategy. He compared it to the company's move from DOS to Windows in the early 1990s, its embrace of the Internet in December 1995, and its launch of the .Net strategy for Web services in 2000.

But Microsoft is not really making a bet. It is instead backing belatedly into a set of businesses that are already essentially proven.

On the one hand, the move can be taken as an assault on a wide range of companies -- including Google (Research), Yahoo (Research), AOL,, NetSuite, Plaxo, Six Apart, Intuit (Research), Symantec (Research) and even IBM (Research). On the other hand, Microsoft should be worried that those companies are already mostly out in the marketplace with successful products in businesses that it is now targeting.

It is following, not leading. This isn't the first time Microsoft has played catch-up, but it may be harder this time.

AMR's Richardson says Microsoft has a problem with software as a service -- "customers want it." He adds: "Now more and more of the Microsoft franchise is being encroached upon, and not by a bunch of pimply kids like it was in the early Internet days, but by a company with a $100 billion market cap." (He was referring, of course, to Google.)

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