(Business 2.0 Magazine) - Ray Ozzie spent most of his career competing with Microsoft. Now, as one of its top executives, he's trying to jolt the company out of complacency and help it figure out how to compete with the likes of Google.

The key problem Microsoft (Research) faces is that its old model of building software - spend years perfecting it, then freeze it and ship it out the door - doesn't work in an age when coders can constantly change and improve Web-based software. Delays in Microsoft's latest versions of Windows and Office are just symptoms of the problem.

Microsoft chief technical officer Ray Ozzie.

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Ozzie, famous in the computer industry for creating Lotus Notes, launched startup Groove Networks eight and a half years ago. Groove had a revolutionary notion: Merge desktop and Web-based software to create something that's stronger than either. (Think of how MSN lets you search both your PC's hard drive and the Web, and you'll get a glimmer of how this works.) Just over a year ago, Microsoft snapped up Groove's workplace collaboration tools - and got Ozzie in the bargain. After Ozzie finished integrating Groove's product into Microsoft Office, Microsoft chairman Bill Gates tapped him as chief technical officer to apply the Groove model of combining software and services to everything Microsoft does, from Windows and Office to the Xbox videogame console.

The new push is called Live, and stitching together Windows and the Web is proving a Promethean task. But if Ozzie pulls it off and makes Microsoft as powerful online as it is on the PC, that will be electrifying.

When the deal went down, people wondered, Was it Groove that was getting acquired, or was it Ray Ozzie?

The answer's "Yes."

At such a big company, there's so much to tackle. What did you do first?

The first few months I spent doing what anyone who sells a company should do - make sure the acquiring party doesn't screw up the acquisition. Fortunately the culture that we had built at Groove matched the Microsoft Office development culture, and Groove will be part of Office moving forward. After a few months, I started spending a lot more time in Redmond. Before doing anything, I just wanted to get to know people and understand the map of projects. It's very broad. Every organization is the product of its leaders and its culture and the negative and positive things that have happened to it over time. So I tried to just learn from people there.

The Microsoft culture is famous for its bureaucracy. People joke about how hard it is to get battleship Microsoft to tack. Did you find that to be true?

It's true in different ways in different parts of the company. The Windows organization has completely different processes than the Office side, which is completely different than MSN. The MSN culture is younger they're used to more rapid turnaround in getting their products out. Both the Windows and Office sides ship a product with a mentality of 10-year support. The MSN side puts code into an Internet ecosystem where people don't expect 10-year support. Users expect to be on the latest version all the time.

What's different at Microsoft?

They see things from more of a platform-and-capabilities perspective, sometimes to a fault. At the opposite end of the spectrum, like Apple with the iPod, that's a scenario-based design. They start with the user experience of listening to music and aim for the minimum necessary to accomplish that experience. Microsoft's culture is "Build it, and they will come." There are still a lot of people there who build technology that's very capable, but it isn't packaged in such a way that people see the value of it.

That reminds me of Office. I'm a heavy Word and Excel user, but I'm probably only using 0.5 percent of what they have to offer. I can't be bothered to figure out the rest. Is that one of the challenges you're tackling?

That, frankly, is one of the things that I'm excited about. In Office 2007, menus are now gone. There's a whole new user interface. It takes advantage of the fact that the displays are larger now, and it groups the most used commands at the top of the screen. It's not about adding tons of new features; it's about exposing what's already there.

What's Live about? Is Microsoft finally getting away from the idea of software as a packaged good?

Microsoft is a big place, but over time online services will reshape almost everything the company does. The Net has finally gotten pervasive enough that you can design software that assumes the presence of services on the back end. And I think, as we go from release to release of different products, you're going to see companion services to the software that enable it to have more capabilities.

Like Apple's (Research) iTunes?

Sort of. Take Xbox Live. You can get an Xbox, crack the shrink-wrap, use it, and it's great. But if you happen to have a network adapter, suddenly you've got the whole Xbox Live world--downloads, music, video chat, and more. In each product, you'll see that kind of thinking.

Many people are confused by the name of Office Live. You'd expect it to be a Web-based version of Word and Excel and the rest, but it's not.

Right. It's really more oriented toward small-business users. But that will extend its way down into the actual desktop application suite.

Meanwhile, Google (Research) just bought Writely, an online word processor, in what some say is a bid to supplant Office. Does that have Microsoft worried?

It's odd to see those battles being waged again. In terms of what Office is, it's hard for me to believe that people will just simply want to use something else. If it's a cost issue, then we have lots of valves we can turn to address different markets with variable pricing, like the student/teacher edition of Office, which costs $149. People might do things on the Web that don't need the full Office capabilities, and that's OK. People use a variety of tools. But I don't see that being a huge battleground. Time will tell.

Most of these Web applications are free. Isn't it hard to compete with that price?

Well, the business model of services in the consumer realm is largely advertising. That's the economic engine that Google has proven out, one that generates cash that can be used to disrupt other things. To take advantage of it, Microsoft just has to build that economic engine itself. But we're not going to be reckless about introducing free services in markets where consumers are willing to pay for software. And my intuition says that people don't want ads jumping around in cells on a spreadsheet. Still, there are many developing markets where we can't even sell our software right now because the people there can't afford it.

A lot has been made about Google's computing infrastructure - those hundreds of thousands of CPUs distributed around the globe. Why haven't we heard anything about Microsoft's?

If you just step back and forget about this year or next year, in five or 10 years there will be very few companies on the face of the earth with both the capacity and the willingness to spend billions of dollars on the capital equipment and operating expenses it takes to field that kind of infrastructure. Microsoft will be one of those, Google will be one of those, and by all indications Yahoo will be one of those. I don't think any one of them will have a substantial advantage.

What does Windows look like in five to 10 years? Are we going to lose folders, icons, and mice?

I don't know. The general-purpose computer has had more resilience than I would have thought. The question is, What do we want to do with the fusion of our mobile devices, our PCs, and the Web itself? We're in the early stages of that. When I work with groups at Microsoft, I say that when you're envisioning the user environment, don't tell me what the next desktop is going to look like. Tell me how I'm going to use the desktop with my other devices tied together by the Web.

Has Microsoft's culture been reinvigorated by this competition?

I'd been competing with Microsoft for many, many years before I got there, and you could tell it's a company that operates more effectively when it has something to benchmark its own performance against. If you've got an issue that you want to fix, having another player in the market to use as a reference point to guide your arguments is a very useful thing. You can say, "But they do it this way." It's good to have benchmarks. It's not good to be behind. You can see that people are reinvigorated. It catalyzes a lot of action and leads to quicker decisions than you might have seen otherwise.

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John Battelle is the chairman and publisher of Federated Media Publishing and the author of "The Search." 

To send a letter to the editor about this story, click here.