Microsoft Vows To Chase iPod, Turn to Internet

"A new online value-delivery model has turned the industry on its head," Ray Ozzie, who has succeeded founder Bill Gates as Microsoft's chief software architect, tells financial analysts. (By Daniel Sheehan -- Microsoft Via Pr Newswire)
By Sara Kehaulani Goo
Washington Post Staff Writer
Friday, July 28, 2006

REDMOND, Wash. July 27 -- Microsoft Corp., trying to regain its dominance of consumer technology, announced plans Thursday to market a music player that challenges the iPod and to shift its business away from shrink-wrapped software and onto the Internet.

Chief executive Steve Ballmer pledged a "new era" to an annual gathering of financial analysts, even as executives hinted that the much-delayed update to the Windows operating system -- Vista -- could slip yet further beyond a promised January release date.

Ballmer pointed out that Bill Gates, the company founder who normally plays a central role in the annual analyst meeting on Microsoft's sprawling suburban campus, was notably absent while traveling in Africa. Gates is detaching himself from daily operations, and Ballmer said he sees himself as having "a new job . . . I have to become the full-time champion of innovation."

Along with Ray Ozzie, who is assuming Gates's title of chief software architect, Ballmer described a vision for the company that marries its software with services on the Internet built around a product under development called Windows Live. They also talked of making a big leap into the online advertising business to challenge search giant Google Inc. and of exploring ways to incorporate advertising in games and online video.

"We were a desktop company -- that's what people thought of us for many years," Ballmer said, adding that that identity is changing. "We're trying to build two new cores, one in online and one in entertainment."

Instead of addressing problems by thinking of software, Ozzie said Microsoft is now planning new technology products by thinking about the computer user first. "A new online-value delivery model has turned the technology industry on its head."

Ozzie and Ballmer acknowledge the company faces a number of challenges, including questions from shareholders about the stagnant stock price and about $2.7 billion in additional investments this year. Shares of Microsoft fell 2 percent to $23.87 Thursday.

The company also disappointed analysts over the prospects for Vista, the first new Windows operating system in seven years. Vista was originally scheduled to ship in time for the holidays later this year, but Gates said last week that it now had an "80 percent" chance of meeting its new target ship date of January 2007.

In a presentation at the conference, Kevin Johnson, co-president of Microsoft's platform and services division, was even less specific: "We will ship Windows Vista when the product is ready," he said. The crowd groaned.

Microsoft said it plans to spend "hundreds of millions" of dollars over the next three to five years to build an iPod competitor, which it calls Zune. The company explained it as a device built with social networking capabilities that would allow people to share music and video using wireless connections.

Robbie Bach, president of the company's entertainment and devices division, did not disclose a price for Zune, but said the first device will be ready for sale this fall in the United States, and several other versions will be available in 2007 in additional markets. Microsoft will build both the hardware and software for Zune -- a sharp departure from its usual practice of licensing software to outside manufacturers.

Analysts said they did not expect to see a real impact from Zune for at least a year or longer because of the fierce competition it faces from the industry-dominant Apple iPod and iTunes. Several analysts said they had hoped Microsoft would provide more details about how it plans to take on Google and move more quickly into the online advertising business. Microsoft lags far behind both Google and Yahoo Inc., and its revenue dropped 2 percent in fiscal year 2006, although the company expects to rebound with a 7 percent to 11 percent increase in fiscal year 2007.

Online advertising "is where the information is lagging," said Yun Kim, senior analyst at A.G. Edwards. "I was hoping to see more detail about their plans for online advertising." But Microsoft is smart to move aggressively beyond software and gaming, Kim said. "This is something they have to do."

Another analyst, Rick Sherlund of Goldman Sachs, said he thinks Microsoft will be able to catch up with Google -- over time. "I'm encouraged by what I've heard," he said, noting that Microsoft is tasking developers to come up with a more sophisticated advertising system than Google has, one in which advertisers could more closely monitor where their ad placements are paying off and the demographics of viewers.

Microsoft said it also plans to incorporate more advertising into its games for its popular Xbox gaming system by placing products or company brands into game scenes. It is also experimenting with ways to incorporate ads into video. In one demonstration at the conference, the company showed a video of the TV show "Sex and the City" that displayed information about the designer clothes worn by the show's star, Sarah Jessica Parker, and how much they cost.

Another demonstration of voice recognition technology failed onstage as an executive attempted to write a Microsoft Word document with voice commands.

"Dear Mom," he said. The program typed, "Dear Aunt." As he tried to delete the mistake, the voice technology wrote a bizarre, nonsensical string of words: "so double the killer delete select all."

The crowd roared.


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