Microsoft's master plan: be Google. Be Apple

Microsoft executives used the company's annual financial analysts' day to lay out their plans to grow the company in the face of the industry shift to software-as-services and mobile computing.
The plan? Having come to dominate its core software markets, it now wants to grow by becoming more Google than Google, more Apple than Apple.
As is usual for these types of events, Microsoft's evolving strategy was presented in terms of the last thirty years of computing - how the software giant morphed to tackle the GUI, client-server enterprise computing, and now the internet.
Despite naysayers on each occasion, the company has become a powerhouse in each of these areas, either leading the market or giving the specialists a run for their money.
So where does it go next? Judging by Ballmer's remarks yesterday, the company is simply following the money, creating a battle plan to take on Apple and Google on their own proven cash-making turfs.
"We're investing today in two new capabilities. We are going to be an advertising company, and we are going to be a devices company," Steve Ballmer said during the meeting.
Advertising is the revenue stream that supports software-as-a-service, he indicated, making it vital that Microsoft becomes better at selling and delivering ads, and not just on Microsoft's properties.
"We're the number three seller of internet advertising today," he said. "We sell primarily on our own sites, but we also sell Facebook, we now signed a deal to sell Digg, and a variety of other people. But we're number three. Number three is better than number four, but not as good as number two or number one."
On the road to number two, the company also yesterday announced the creation of a dedicated Internet Services Research Center, essentially a war room focused on brainstorming ways to better Google in search and advertising technologies.
The ISRC will be peopled by "crack research teams with brilliant minds and fires in their bellies", according to corporate vice president Harry Shum, who will lead the team.
Later yesterday, Kevin Johnson, president of Microsoft's Platforms and Services Division, took the stage to elaborate on how the company plans to grow as an advertising platform.
The strategy centers on Live ID, the user accounts that you need to create before you can use many of Microsoft's Live-branded web services. Microsoft has about 380 million such accounts under management at the moment, and wants more.
Google has focused largely on targeting advertising based either on the context of web pages or, primarily, the words and phrases users search for. While it has a system of user accounts, they're not strictly necessary to use its most interesting services.
Microsoft is instead putting its knowledge of the individual, via their Live ID at the forefront.
"This creates significant amount of opportunity for us to know more about the users when they are signed in versus just a cookie or an IP address," Johnson said. "As users are signed in, we can do a better job of behavioral targeting or ad targeting to these particular users, which is good for the user - more relevant advertising - and it's good for the advertiser."
In a few months Microsoft plans to release another version of Windows Live, which Johnson described as "A single suite of user services. A single download and install to the PC that will enable users to use these services whether they're on the PC, on the phone, or just directly from the browser."
This appears to be what Microsoft means by "software-AND-services", the term it has been grooming to replace "software-AS-A-service" in the minds of users over the last few months. Windows Live, in its current incarnation, is just a collection of web sites, rather than a download.
"We're going to drive very hard on continuing to expand the number of users we have using these Windows Live services," Johnson said.
Another area of focus is redesigning the existing web services to keep users on Microsoft properties for longer, creating more page impressions or minutes than can be monetized with advertising.
On the sell-side, Microsoft is also determined to build a platform for advertisers that it hopes to rival Google's AdWords. Microsoft's adCenter will this quarter start deploying ads targeted contextually against content within Microsoft's own sites, and this will be expanded to third-party publishers within the next 12 months, Johnson said.
Having plotted the demise of Yahoo and Google's, Microsoft executives then turned their attention to Apple, where slick hardware design and novel interface work on the iPod and iPhone have given the company a domineering mindshare position in mobile devices. A position that, naturally, Microsoft would like to erode to its own advantage.
"On the devices side, we need to embrace retail, hardware, hardware design where we need to," Ballmer said.
While executives yesterday stopped short of spelling out the company's hardware plans, Ballmer did say that Microsoft needs to look into consumer devices to stay relevant.
"I will get asked, do you really need to do consumer device?" he said. "And the answer is, we really do, because our ability to leverage our technology, our ability to innovate, our ability to drive growth, we need to have this business outlet for our software creativity to continue to grow, to continue to innovate, and continue to be relevant."
It's not an ideal situation for Microsoft's partners. Imitating Apple's strategy with the iPod and iPhone perhaps, Microsoft's mobile devices strategy will be more closed-system that its longstanding PC strategy, which by some standards could be considered "open".
"We're a believer in what we think of as a managed ecosystem," Robbie Bach, head of Microsoft's devices business said. "If you want to compare two worlds, you can compare the open world and you can compare a closed world closer to an Apple model. We want to be in a place where the consumer's experience is managed but where there's openness for a broad variety of partners to participate."