Posted By: Tom Hustler

By Daisuke Wakabayashi

BELLEVUE, Washington (Reuters) - Microsoft Corp. is making
a "big bold bet" on Web services, which it sees as the most
important technological development of the next decade, Chief
Executive Steve Ballmer said on Tuesday.
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But the software company, whose online division is losing
money while rivals like Google Inc. thrive, has a unique vision
of how these new services will evolve.

Microsoft believes Web services will work in tandem with
PC-installed software, a vision that differs from that of
"software as a service" advocates, such as Salesforce.com and
Google, who expect services delivered over the Web to replace
traditional software.

"We believe this shift is the most important technological
transformation during the next decade," Ballmer said at the
company's annual shareholder meeting.

Microsoft has invested heavily to expand data centers to
house servers and provide the infrastructure to host blogs,
e-mail services for small businesses and a slew of other new
Web services as part of its "Live" strategy.

Calling Microsoft a company with multiple core businesses,
Ballmer said its online services group is the software giant's
"fourth core" in addition to desktop software, computer server
software and its entertainment initiatives.

"As we look to the future, this fourth core represents our
big bold bet on the shift to software plus online services,"
Ballmer said.

Google has already encroached on Microsoft's Office desktop
turf with online spreadsheet and word processing software,
while Microsoft's own Office Live lets small businesses set up
Web sites, company-branded e-mail and Web applications to allow
project management and collaboration.

Office Live is free for the ad-supported basic offering and
Microsoft charges a monthly subscription for the more elaborate
version. It works with the Office software suite but the
programs are largely different from those on the desktop.

Having dominated the desktop with Office and its Windows
operating system, Microsoft arrived late to the online services
game and allowed smaller, more nimble competitors such as Web
search leaders Google and Yahoo Inc. (Nasdaq:YHOO - news) to build billion-dollar
businesses around ad-supported Web services.

Microsoft's desktop business accounts for more than half of
its $44 billion in annual sales and most of its profits.

But its online services group lost $136 million in the
three months ended September 30 as sales fell 4 percent to $539
million, due to a decline in its Web access business and
investments to add staff and expand data centers.

By contrast, Google, which makes nearly all its money from
advertising, made a net profit of $733 million last quarter and
revenue surged 70 percent from a year ago to $2.69 billion.

Microsoft took the wraps off its Windows Live search engine
in September, but it has made few inroads against Google, which
is so closely associated with online search that its name is
also a verb in the dictionary.

Microsoft rolled out a software system called adCenter in
the United States this year to centralize advertising revenue
for its ad-supported online services. Ballmer noted the company
has introduced 20 online services in the last year alone.

There are signs of progress. Microsoft reported 5 percent
ad revenue growth last quarter, driven by Web display ads that
accompany its sites, e-mail and instant messaging services.

Still, analysts say don't expect results overnight. It was
only a year ago that Microsoft co-founder Bill Gates called the
company to arms in a memo, calling for a new approach to handle
a "sea change" from online services.

Morningstar analyst Toan Tran says Microsoft's approach of
augmenting desktop software with online services is sensible,
adding that it has the cash to build the necessary technology.

"This is an initiative we have to wait at least five years
to see how it pans out. The way people use their computers is
not going to change overnight," Tran said.

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