Beyond Binary

Microsoft on Thursday reported weaker-than-expected quarterly revenue and again declined to offer a forecast for the current quarter.

The software maker reported that for the three months ended June 30, the company earned $3.05 billion, or 34 cents per share, on revenue of $13.1 billion. However, those results included legal and other charges, as well as the deferral of revenue related to a Windows 7 upgrade program. In total, those charges cut into per-share earnings by 4 cents.

Revenue from Windows on desktops and laptops has been dropping. However, the decline isn't quite as deep as it looks, because Microsoft deferred some Windows revenue to future quarters to account for an existing program that gives Vista buyers free Windows 7 upgrades.

(Credit: Microsoft)

Analysts had expected per-share earnings of 36 cents, according to First Call. However the revenue figure was notably weaker than the $14.37 billion that analysts expected, even accounting for the Windows revenue deferral.

"Our business continued to be negatively impacted by weakness in the global PC and server markets," said Chris Liddell, chief financial officer at Microsoft. "In light of that environment, it was an excellent achievement to deliver over $750 million of operational savings compared to the prior year quarter."

Investors were not pleased. In after-hours trading, Microsoft's stock dropped 7 percent, or $1.90, to $23.66.

In a series of PowerPoint slides released along with its report, the company said the enterprise business remained relatively healthy, but hardware sales were weak. PC sales, in particular dropped 5 percent to 7 percent.

On the cost front, it said it reduced expenses by $800 million more than the low-end of its plans. It also recorded $108 million of "impairments" related to a drop in value for some investments.

Although there were some blogs and Twitter posts to the contrary, a Microsoft representative said the company isn't announcing any new job cuts. It did discuss in its earnings report its previously announced program to cut up to 5,000 jobs.

Microsoft didn't give a sales or earnings forecast when it reported its last quarterly numbers in April. It did say it was seeing economic pressures that were both "broad and deep"--the worst in the company's 30-year history.

The results come just as the company wrapped up development of Windows 7, which was officially finalized on Wednesday and is due to go on sale October 22.

Here's a look at the how each business unit did, by the numbers.

It's been a year since Bill Gates left full-time work at Microsoft, but he's found plenty to keep him busy.

In between trying to eradicate polio, tame malaria, and fix the broken U.S. education system, Gates has managed to fulfill a dream of taking some classic physics lectures and making them available free over the Web. The lectures, done in 1964 by noted scientist (and Manhattan Project collaborator) Richard Feynman, take notions such as gravity and explains how they work and the broad implications they have in understanding the ways of the universe.

Gates first saw the series of lectures 20 years ago on vacation and dreamed of being able to make them broadly available. After spending years tracking down the rights--and spending some of his personal fortune--Gates has done just that. Tapping his colleagues in Redmond to create interactive software to accompany the videos, Gates is making the collection available free from the Microsoft Research Web site.

Gates said that he hoped his action would serve as a model for taking great educational content and making it broadly available for free.

"When a lecture is presented as well as this, it draws more people in to understanding science." Gates told CNET News. "And over time I hope there's more like this."

In a wide-ranging interview, Gates also reflected on the changes at Microsoft, spill the beans on the expansive vision for Product Natal and shared his thoughts on Google's just-introduced Chrome OS. Here's an edited transcript of that interview.

You first saw these videos on a vacation 20 years ago. Do you want to talk a little bit about how that happened, and what your reaction was to seeing those lectures?
Gates: Yes. I was in a period where, in order to learn new science, thought it would be a fun thing to see what films there were, and we went to some university catalogs, including University of California system had a catalog of films, and got a lot of health, biology, physics type films--those are those metal cans with big reels--and then we had a projector in a room that we made dark. So even (during) the day, you could thread these films. And there were a lot of interesting ones, but these Feynman lectures that he gave at Cornell...those were just unbelievably good.

After that, I got them put onto videotape, and I got rights to make a small number of videotapes. It was VHS tape at the time, and send it around to some friends who might be interested. But I always had in the back of my mind that it was kind of a crime that there wasn't broad availability of those things, particularly for young people thinking about science.

And so I sort of had this project in mind, and (have been) making some progress in understanding who had the rights, and eventually doing deals for the rights, and then getting these things scanned, and then getting Microsoft Research agreed to host the stuff and create some innovative software around it, which Curtis (Wong) has run. It's taken a long time, but with lots of PCs and the Internet, and my willingness to spend some money, now these things are just going to be out there.

What do you hope people get out of these videos? Who is your ideal audience for them?
Gates: Well, I didn't get to see these until I was about 30, and so I would love it if lots of young people saw them, and got a sense of the fun, and how science works, and what's complicated, and what's not. I hope some people who teach science are inspired by the way that Feynman managed to make it interesting without giving up the depth of how it works.

With super-high-quality material like this up there for free, I hope people see the potential, and that they'd benefit from this one in particular, and then it starts to push forward the idea if someone is great lecturer, then their work should be out there and available.

I've heard you talk about the way community college really should change, and really what we should be doing for some of these subjects that are somewhat universal is taking really the best explanations, the best lectures out there, and making those broadly available, and then focusing sort of the local learning around discussion and different sorts of things.
Gates: That's right. Education, particularly if you've got motivated students, the idea of specializing in the brilliant lecture and text being done in a very high-quality way, and shared by everyone, and then the sort of lab and discussion piece that's a different thing that you pick people who are very good at that.

Technology brings more to the lecture availability, in terms of sharing best practices and letting somebody have more resources to do amazing lectures. So, you'd hope that some schools would be open minded to this fitting in, and making them more effective.

But, you've also got this huge set of people who like to teach themselves and like to learn things, and yet find science kind of daunting. And when a lecture is presented as well as this, it draws more people in to understanding science. And over time I hope there's more like this, including some about science stuff that's changed since the time these were done.

How big an impact do you think these types of things can have in terms of the overall problem of getting people interested in math and science? Is this type of thing enough, or do we really need to fundamentally do more, younger?
Gates: Well, certainly in fifth grade through senior year, most students aren't yet motivated to want to learn a lot in general, and particularly about science and math. The big impact is anything that can help teachers do a better job, where teachers can either see other teachers doing it super-well, or they might incorporate some online things into the classroom experience. As you get older, and you've got people who are motivated more clearly, then it shifts where these online lectures can be a huge part of learning.

That's where Feynman with his clarity of explanation and simplicity of explanation, and love of the subject, and humor around it is such an exemplar.

You mentioned that you didn't get to see these until you were in your 30s. If you had seen them earlier in your career, maybe before you decided to start Microsoft, do you think you might have headed in a different direction?
Gates: I'm not sure. I've always liked physics, but I also want the equivalent lectures to be out there for biology, and computer science, and chemistry. Everybody has a level where you can bring in their interest. I mean, people care about animals, and disease, and food, but many of the sciences are so abstract, and the amount of things you have to learn before you start connecting to those practical issues can be very daunting. And yet with a teacher like Feynman they're out there in different fields, it's just that we haven't had a way to magnify their excellence, and make it broadly available.

One of the points that's made in the lectures is this idea that from the discovery of gravity there's basically been since then 400 years of just an avalanche of discoveries, and he sort of puts forth this notion of continuous progress. And I'm curious, do you see that having continued, or have we seen limits to sort of some of the full understanding that the basic sciences can give us? Are there things that are beyond sort of what basic science can teach us?
Gates: We're learning more about basic science today by a huge amount than ever before. You just take understanding materials, why they break, why they're strong, how you engineer them to have various properties, and a lot of that was black magic. And it's only now that we're able to say, okay, when we want to make batteries that charge really fast, okay, how do you make something with a lot of surface area that doesn't degrade.

Anyway, in material science, or basic medical things, or basic things about physics that are going to be important for cheap energy as just one example, this is the most interesting time. That's why it's partly an irony that you're not getting the best and the brightest particularly native born to go into science and math. And so you've got to look back and say, what is it we're doing about making it daunting, or abstract that holds that back so much.

There's an American physicist, Fritjof Capra, (who) wrote a lot of books in the '70s on ecology, and the limits of Cartesian thinking. Basically his thing was that by focusing on sort of the Cartesian reductionist approach to things that prioritizes sort of looking at the small parts--that type of thinking has contributed to not getting as deep an understanding of things like ecology, and really complex systems. Is that what's caused us to get into some of the problems we have, or do you think it's more just these are tough choices and require conserving, and things that are kind of hard for us as humans to do?
Gates: Well, the tough situation that we're in is that we have electricity, we have medicines, we have vaccines, those were all due to scientific understanding. And as we get new materials, new batteries, solar, nuclear energy that don't cause environmental things, it will be because of these scientific understandings. So, I think the incredible improvement in living standards, and life expectancy, and literacy, and all those things really do come back to the advanced scientific understanding. And when people look at history, that's the one thing that they always undervalue is how scientific progress has allowed us to do those big things.

It's true that as you go forward, you tackle more complex problems, but the tools of modeling and simulation and getting a lot of people who are mainly in politics, but know enough about science to be in the discussion, that's important. You know, there was a book written called Physics for Future Presidents, which took some of the basic notions of energy density and costs and dangers about radiation or nuclear weapons, and put that into a fairly straightforward thing.

We do have a problem if we don't draw a large part of society into at least some understanding of science and the tools of science. And so, having great lectures online, I have several goals--improve education, get more people into the sciences in a deep way, but also get a broader set of people into sciences in even a modest way.

When we talked a year ago, I asked kind of what you anticipated your life would be like once you stopped being at Microsoft full time. Now a year later what are some of your observations on how your time is different, and maybe what are some things that you hadn't expected about where you are today?
Gates: Well, the foundation work is very rewarding, and there's a lot of interesting complexity that comes with it. I'm pretty much doing what I expected to be doing, which is very different than what I was doing before my job changed. I do have about 20 percent involvement with Microsoft, where topics like their future of Office, of search, or various things that Steve (Ballmer) asked me to look into and help out with come along. So that's developed pretty much like I would expect.

It will be interesting as I get a year or two more out, and I know the activities and the people (at Microsoft) a little bit less, you know, how Steve and I make sure I stay fresh and connected and things like that. So, maybe the first year was always going to be the easiest. And it's at the level that we planned it for, which is giving me a massive amount of additional time to meet with scientists and go to the developing world and meet with various government partners.

For the last three months, up until two weeks ago, I was entirely in Europe, and actually based out of there. Our family had moved over there. So, I was up at Cambridge and Oxford. For that period I was particularly focused on the science and partners, both governments and companies, and things that happen to be based in Europe. That's done, but the kind of things I was doing there are exactly what my schedule looks like over the next six months, where I'm in India, I'm in Africa, going to meet with companies, doing things, meeting with scientists. So, you know, I'm thrilled by the foundation work, and fortunately I have Jeff Raikes running the foundation as CEO, and so my role at the foundation is a lot like it was in the period where Steve had already taken over as CEO, where I got to be more on the research side, the breakthroughs, the new ideas.

And you've been doing some stuff with Intellectual Ventures. I know every time you show up on a patent application that, folks get interested in what you're looking at, whether it's stopping hurricanes, or beer kegs, or what-have-you.
Gates: That's right. We're going to make the cows that don't fart. You name it, we've got it under control.

That's been really exciting to take this idea of gathering top scientists from a broad set of areas and think about problems that can be solved. And in the case of the foundation, you know, Nathan (Myhrvold) has used that ability to convene great scientists to look at things like how do you deliver vaccines without having to use as many refrigerators, or how do you pasteurize milk in a better way, some very interesting things. And then I also sit down with that group when they're looking at their rich world applications, including things around energy, and one of those has actually led to creating a company called TerraPower, which is focused on a new, very radically improved nuclear power plant design, which is a hard thing to get done, but extremely valuable if it comes through.

I'm curious of your thoughts of how Microsoft is doing as a company since you left. I'd also be remiss if I didn't ask you what you thought of Google's efforts to get in the OS arena.
Gates: Well, just to do the second part very succinctly, there's many, many forms of Linux operating systems out there, and packaged in different ways, and booted in different ways. So I don't know anything in particular about what Google is doing. But, in some ways I'm surprised people are acting like there's something new. I mean, you've got Android running on Netbooks; it's got a browser in it. In any case, you should make them be concrete about what they're doing. It is kind of a typical thing. When Google is doing anything it gets this--the more vague they are, the more interesting it is.

I guess there is the notion, though, and I know Microsoft Research had been looking at it, too, of whether the browser, because it's become so central to so much of our work, needs to take on more operating system-like characteristics.
Gates: It just shows the word browser has become a truly meaningless word. Anyway, what's a browser, what's not a browser? If you're playing a movie, is that a browser or not a browser? If you're doing annotations is that a browser or not a browser? If you're editing text, is that a browser or not a browser? In large part it's more an abuse of terminology than a real change.

What about on the question of how Microsoft is doing?
Gates: I'm always the one who thinks, gosh, why isn't Microsoft doing even more, because that's been my mindset, let's move fast, do new things very quickly. But, you have to say, whether it's Windows 7 that is a really excellent piece of work. I'd go so far as to say both compared to other operating systems, and compared to other generations of Windows, it's an extremely nice piece of work.

What they're doing in new versions of Office--I guess they showed a little bit of how the Web piece fits into it recently, but there's a lot about the new version that will get talked about in the next nine months or so. The work on search, where people see Bing as a nice piece of work, really see us in the game, hiring really top people, and willing to try to do things some different ways.

The part of Microsoft I stay up to date the most on is probably the research group. I was over at the Cambridge lab a few weeks ago, over at the India lab as part of a trip I take this month, and that's really the sort of crown jewel in terms of always feeding neat new things into Microsoft. I'd say a cool example of that, that you'll see is kind of stunning, in a little over a year, is this (depth-sensing) camera thing... Not just for games, but for media consumption as a whole... If they connect it up to Windows PCs for interacting in terms of meetings, and collaboration, and communication, you put the camera in now it's a cool thing, and it's just an example where Microsoft research did the original stuff to show, with the depth information, something great could be done. Then both the Xbox guys and the Windows guys latched onto that and now even since they latched onto it the idea of how it can be used in the office is getting much more concrete, and is pretty exciting.

So Microsoft is a very innovative company, but obviously in a hyper-competitive field, which is what makes it such a great field.

I'm not sure I understood that last point. You're talking about cameras, you were talking about like the depth sensing cameras that are in Natal?
Gates: Yes, exactly, Natal. The software libraries and applications we're doing around Natal.

And we'll basically see that in more than gaming? We'll see it in other scenarios, too?
Gates: Well, I think the value is as great for if you're in the home, as you want to manage your movies, music, home system type stuff, it's very cool there. And I think there's incredible value as we use that in the office connected to a Windows PC. So Microsoft research and the product groups have a lot going on there, because you can use the cost reduction that will take place over the years to say, "Why shouldn't that be in most office environments?"

Although Microsoft is on track to deliver Windows 7 for the holidays, the new operating system will miss the back-to-school buying season.

For that reason--and to prevent the stall in sales that can precede any new operating-system release--Microsoft has been working for months on the free-upgrade program it announced earlier Thursday.

(Credit: Microsoft)

Under the program, those who buy a PC with Windows Vista Home Premium, Business, or Ultimate will get a free upgrade to the comparable version of Windows 7, once it is released in October. Microsoft is hoping that will help juice PC sales a bit.

"With PC prices out there, there is probably no better time to buy a PC, especially for students," Brad Brooks, a Microsoft corporate vice president, said in an interview. Technically, the upgrade program runs through the end of January, since Microsoft knows that it will take that long for the Vista machines to work their way through the channel.

Although there had been speculation that Microsoft would charge PC makers for the upgrade rights, Vice President Brad Brooks said Microsoft decided to offer it free of charge. PC makers can still charge a shipping-and-handling fee, or another small fee, if they want.

"We are not going to charge them for it," Brooks said. "How they implement it is up to them."

Hewlett-Packard, for example, on Thursday said it will offer the upgrade free. After Windows 7 ships, it plans to give buyers of Vista PCs a disc with Windows 7, as well as a second disc that has utilities, drivers, and other software. Asus said it will offer the upgrade free in the United States, while customers elsewhere will have to pay a shipping and handling fee.

Acer (including its eMachines and Gateway brands), Fujitsu, Lenovo, and Toshiba are also taking part in the program, though it is not immediately clear if those companies are planning to charge a fee for the upgrade.

There are some changes in the logistics from the last time Microsoft did such a program. With the Vista technology guarantee, Microsoft had a hand in how the upgrades were managed. This time around, Microsoft says it is leaving things up to the PC makers.

"They felt they could handle it better and we agree," Brooks said. "They handle the images; they handle the process."

Things get tricky in Europe, though. Although Microsoft will offer the upgrade program, users will have to do a clean installation of the operating system to move to the comparable Windows 7 version, as Microsoft is offering only a browserless "E" version in Europe, in an effort to pre-empt regulatory action there.

Microsoft has said Windows 7 will arrive on new PCs and on retail shelves on October 22.

With Redmond discontinuing Microsoft Money, Intuit is offering a series of discounts aimed to lure more folks to use its Quicken personal finance product.

In a blog posting, Intuit said it is offering the discounts on Quicken products through the end of July to all users, not just the Money users left in the lurch.

Aiming to lure Microsoft Money users, Intuit is offering a series of discounts on Quicken through the end of July.

(Credit: Intuit)

Specifically, Intuit said that it is offering $20 off on Quicken Deluxe (now $39.99) and $30 off Quicken Premier (now $59.99). It is also chopping $30 off its Home & Business product and $50 off its Rental Property Manager product. The company is also touting its free Quicken Online product.

Although Quicken is already the market leader in the personal finance space, Intuit clearly sees a chance to move in for the kill now that Microsoft is exiting the space.

Intuit also reiterated that it is working with Microsoft to try to improve Quicken's ability to import large amounts of data stored in MS Money.

"We've been working closely with Microsoft to develop an easy-to-use way for MS Money users to transfer years of financial information into Quicken products," Quicken said in the blog. "We'll keep working on it."

As first reported by CNET News last week, Microsoft plans to halt sales of Microsoft Money at the end of this month.

In Vegas terms, the likelihood of a Microsoft-Yahoo search deal is now a "pick 'em."

That was the takeaway from a report Tuesday by Collins Stewart analyst Sandeep Aggarwal.

"In our view, the likelihood of a Microsoft-Yahoo search deal has gone down materially in recent weeks," Aggarwal wrote in a research note. The biggest hurdle remains the price of a deal, he said.

"We believe that a Microsoft-Yahoo search deal can happen but we are reducing the probability from 80 percent-plus to 50 percent, and with the lowered probability, we restrain ourselves in terms of assigning any timeline," Aggarwal wrote.

Of course, a historian might also offer the same caution. Microsoft first went public with a bid to buy Yahoo early last year. The two sides never came to a deal, despite a few months of negotiations.

For the past year, Microsoft has indicated it is open to some sort of a search partnership short of an outright deal, but the two sides have remained far apart on price, Aggarwal said.

When Carol Bartz was hired as Yahoo's CEO, hopes for a deal increased. The two sides have resumed talks, and while Bartz has said she is open to some sort of deal on the right terms, she has sounded less than optimistic at times. (See video below of Bartz on Fox Business News.)

Despite some good early traction for Microsoft's Bing search engine, Aggarwal said the software giant can ill afford to wait, particularly since it has no other means of significantly boosting its search share.

"As far as Microsoft is concerned, it cannot afford to wait for long because Bing can help Microsoft (bridge) the gap in core relevancy, etc. but cannot deliver 20 percent search share (required to remain sustainable/meaningful in search)," Aggarwal wrote. "In addition, Google is getting more aggressive both in search and online applications and Microsoft cannot delay much the adoption of Cloud Computing (in absence of viable/scalable online ad business model)."

Microsoft has found a powerful incentive to get people to use Windows Mobile--at least those within its own ranks.

The software maker has stopped paying for cellular data plans for those using BlackBerries, iPhones and all manner of non-Microsoft devices.

Plenty of Microsoft workers still have an iPhone, but as of earlier this year, they can no longer be reimbursed for their data plan unless they switch to a Windows Mobile-based phone.

(Credit: Apple)

Although the move took place earlier this year, it is only making headlines now, thanks to an article on Silicon Alley Insider.

It's hardly a shocking move. Lots of companies standardize on a particular mobile operating system or two and limit reimbursements to those devices.

A Microsoft representative confirmed on Monday that "the data plan reimbursement for Microsoft employees is limited to Windows Mobile devices."

"This policy took effect as part of the broader cost saving measures announced earlier this year," the representative said in an e-mail. The software maker has trimmed its product line, cut staff, and also pulled back on spending on travel, vendors and contractors.

Microsoft plans to stop selling Microsoft Money, its venerable, but not market-leading personal finance program, CNET News has learned.

The software maker has been notifying financial institutions and plans to announce the move to customers over the next 24 hours via a posting on its Web site and a notification in the software. Although Microsoft will stop selling the product at the end of June, it plans to support it through January 2011.

Microsoft plans to stop selling Microsoft Money at the end of the month, although for the moment it continues to pitch the product on its Web site.

(Credit: CNET)

After that point, people can continue to use the product, but they will no longer be able to get automated data feeds from their banks, credit card companies and other financial service providers.

Last year, Microsoft stopped selling Money at retail stores, offering it only by Internet download. The company also said it would stop doing annual updates, but said at the time it planned to continue offering the product.

Microsoft's Adam Sohn said the company now plans to halt sales of the product at the end of the month. A variety of factors led the company to change course.

"It's a mix of what's going on in the market, what makes sense for long-term for us and a little bit on consumer behavior," said Sohn, a director in Microsoft's Online Business Services unit.

The discontinuation of Money is one of the more high-profile product cuts made in the wake of the company's cost-cutting efforts, which began in January. Microsoft said in March it was largely discontinuing its Encarta encyclopedia and has also scrapped its Windows OneCare antivirus product.

As of Wednesday, Microsoft had made no mention of its plans on the Web site. Rather it was offering to sell Money for $59 and featured a link for financial institutions to get more involved in the product.

Sohn said that the company plans to continue selling Money through the end of the month and hasn't made a plan to offer refunds to recent buyers of the product. Those who have recently bought the product, he said, still have a good while to get the value from it. (Microsoft will support Money slightly longer for those who have recently bought the product, per its licensing terms).

Plus, he said, some people will continue to use it even after the automatic services stop. At that point, consumers will have to manually download information from their banks and other service providers. "After Jan 31, 2011, the product will work," he said. "It just wont have the rich-services back end."

Although Microsoft will support current partners pushing data to Money users, it won't be adding any new institutions. It will, however, let current partners re-brand themselves.

The software maker also plans to continue its MSN Money Web site, although Sohn said the company opted not to try to recreate the full Money program on the Web.

Competing with Intuit and Mint
Microsoft has long been chasing Intuit's Quicken. Microsoft even tried to buy Intuit in the mid-1990s, but the Justice Department blocked the move.

In subsequent years, Microsoft has continued the product but also has continued to trail Quicken's sales. More recently, Money has also faced a new wave of Internet-based competitors, such as Mint.com and Intuit's free Web-based Quicken Online program.

The company has been trying for years to grapple with massive changes in the consumer packaged software market as much of that business moves online.

Although its core Office and Windows products remain strong sellers at retail, the company has opted to scale back in other areas, particularly in the purely consumer arena.

In addition to canning Encarta, Microsoft also stopped selling its Digital Image Suite product after the release of Windows Vista.

Update, 2:40 p.m.: Microsoft has now posted a notice on its Web site.

"With banks, brokerage firms and Web sites now providing a range of options for managing personal finances, the consumer need for Microsoft Money Plus has changed," Microsoft said. "We would like to thank the many dedicated users who have been enthusiastic supporters of Microsoft Money over the years, as well as our partner financial institutions who helped pioneer a digital vision of financial management."

Meanwhile, I also spoke with a spokesman for Intuit, who said that the company is looking at ways to make it easier for Microsoft Money users to bring their data over to that product.

"We look it as an opportunity to show Microsoft Money customers what they have been missing... over the years," Intuit spokesman Scott Gulbransen said.

Although Intuit has recently been bulking up its free online product, Gulbransen said that the company is committed to also offering PC-based software. "We are committed to those who would like to stay with a desktop software solution," he said.

Microsoft, which already had a business selling its software licensing technology to other companies, now plans to spin that out into a separate company, known as InishTech.

(Credit: Microsoft)

Microsoft said on Tuesday that it is spinning out as a separate business a two year-old effort that licenses its software protection technologies to other companies.

In the past two years, Microsoft has signed up 120 companies to use the software activation and licensing technologies, including its own eHome unit. But it decided creating an independent company was the way to go.

The new venture, dubbed InishTech, will be based in Ireland. Microsoft will retain a stake in the company as well as an observer seat on its board of directors. Microsoft also plans to be a customer of the company.

The effort is the latest example of Microsoft spinning out its technology to a start-up. A number of past efforts, such as Inrix and Zumobi (formerly ZenZui), have come from technologies developed within Microsoft's research labs, while others have come from various product teams.

It's part of a broader effort at the company to , a push that dates back to late 2003.

Not all of the start-ups have continued with their original business plans, however. Microsoft spun out a social-networking technology, known as Wallop, in 2006. A start-up by that name hoped to launch its own social network based on the technology, but ultimately decided to join, rather than try to beat the likes of Facebook and Bebo. The company now develops applications for social networks.

Ray Ozzie, speaking Thursday at the Churchill Club in Palo Alto, in a discussion moderated by Wired's Steven Levy.

(Credit: Ina Fried/CNET)

PALO ALTO, Calif.--Ray Ozzie tends to see things much like a Seattle meteorologist--always cloudy.

Making a trip to sunny Silicon Valley, Ozzie addressed Silicon Valley's Churchill Club, outlining the transformational role that cloud computing will play.

As he discussed that vision, moderator Steven Levy asked if Microsoft itself was sufficiently cloudy when he had arrived.

"The Hailstorm had passed," Ozzie quipped, making a reference to Microsoft's widely panned first attempt to offer cloud services.

In seriousness, though, Ozzie said that Microsoft wasn't really cloud-focused when he joined the company, following Microsoft's purchase of his Groove Networks.

"Respectfully, they were very busy working on things that would become Vista and Office 2007," he said. "There was a lot of 'PC' thinking. I worked with Steve and Bill on change management and that's what I have been doing."

Ozzie declined to agree with Levy's assertion, however, that perhaps packaged software was the buggy whip of our times.

"No," Ozzie said. "Different market segments want to consume value in different.

The goal of the cloud era, he said, is to create a world in which applications are sandboxed like the browser, cached like Javascript and all the data fully synchronized.

Levy suggested that perhaps that kind of world might be bad for Microsoft's Windows business, but Ozzie disagreed.

"We'll always need an OS," he said. "Every device needs an OS. The programming model on top's of that OS is what's changing."

Ozzie said the key is making sure that operating system is "contemporary and relevant."

The Netbook factor
Netbooks really are an opportunity, he insisted. "We have to write an OS other than XP runs on it, and we've done that with Windows 7."

He expanded later on, noting that what most users really want in a Netbook is actually a full-fledged PC that can do more than just browse the Web.

"The Netbook as consumers have spoken for it is a laptop," he said. "People expect Office for it. They expect to be able to go to Download.com...and download for it." (Editors' note: Download.com is a property of CBS Interactive, which also publishes CNET News.)

As for ARM-based devices, or other non-Windows products, Ozzie noted that historically consumers haven't bought keyboard-based devices that weren't full computers.

"I'm not writing it off," he said. "If it happens and if it happens in volume it will be a different type of device."

But he said. "I believe the X86 instuction set and Intel and AMD Netbooks...they are going to be the majority of what's out there."

Levy also pressed Ozzie on what it's like now that Bill Gates has been gone from full-time work for just about a year.

"He writes, he calls, but infrequently," Ozzie said. He said Gates remains involved on a few key projects. He's also just an e-mail away, when he or others have concerns.

Some things have changed, he said, such as the company's review process as well as its famed ThinkWeek in which employees from all over Microsoft would submit hundreds of papers for Gates' review.

"Bill has an amazing ability to consume very quickly," Ozzie said. "A thousand some papers would come in for each Think Week. He would go off to a cabin and sequester himself. He would probably read a couple hundred of them. People loved it."

However, Ozzie said that ThinkWeek, as it was set up was "a very Bill-unique thing"

"I don't think that's something we want to reproduce," Ozzie said. The replacement for that, he said, is a process in which a broader set of technical people offer their thoughts on new ideas.

"People like feedback--senior technical feedback," Ozzie said.

Steering the ship
Ozzie noted that Microsoft is a bigger company than the one he competed against during his time at Lotus and Groove.

"We always were amazed at how quickly the ship could turn," Ozzie said. "But that was a different era. It was a smaller company."

In trying to change Microsoft, Ozzie said he has tried both things very much in the company's tradition--his Internet services disruption memo was modeled on Gates' missives--as well as in ways that are less familiar, such as trying to break down the company's well known organizational structure, with software developers working in offices and corresponding over email.

Levy asked Ozzie how many companies have the ability to build the kinds of data centers that Microsoft and Google are building.

"Not too many," he said. When asked about who will be there for the long term, Ozzie wasn't ready to include Amazon in that list.

"I don't know about Amazon," he said. "They are the leader. They have done amazing work, but the level to which you need (to invest) to build it out...it's very substantial."

Ozzie credited an unusual source for Microsoft's position to be able to deliver cloud-based services--its much maligned MSN consumer services. He noted that it was Hotmail and Messenger that gave Microsoft the skills it needed to ultimately build Windows Azure.

"Had we not kept MSN alive...we wouldn't have had those competencies in-house," he said.

It was a rare public speech for Ozzie, who also spoke at an investor conference last month.

Ozzie also spoke about the business side of cloud computing. I captured his answer on video. (Apologies in advance for any quality issues--I'm multitasking).

In the question-and-answer period, Ozzie was asked for his thoughts on Google Wave, the company's recently introduced tool for combined collaboration and messaging.

He praised Google for taking on a big task, but also took issue with their approach saying it is "anti-Web."

"As a system, I think the complexity is an issue," Ozzie said. "The problem, the way the defined it is a complex one."

That said, it will offer insight into whether people want messaging that is distinct, such as e-mail or instant messaging, or whether there is demand for a more integrated product.

"I hope we learn, as an industry, an awful lot from Wave," Ozzie said.

Other questions from the audience ranged from what computer science professors should be teaching to whether Internet Explorer would support HTML 5. Ozzie said he had nothing to announce on the latter front, but added, "It is our commitment to be a world class Web browser, what our competitors like to call a modern web browser. I think you can expect us to do the right thing."