Microsoft executives said on Thursday that they intended to respond to the growing threat to its software posed by rivals like Google that offer Web-based versions of its applications.
The executives said Microsoft would add similar Internet services to its own well-known desktop applications like Office or Excel.
At an annual meeting with financial analysts, the executives laid out the clearest description to date of Microsoft's plan to compete with companies offering free or lower-cost "software as a service."
Analysts and industry executives have argued that Microsoft's greatest challenge will come from the shift from packaged software to a proliferating array of Web services, including word processors and spreadsheets, as well as data storage and commercial applications like customer-relationship management systems used by corporate sales forces.
"Today the transformation toward services is the most significant one in the software industry," said Ray Ozzie, Microsoft's chief software architect.
Microsoft fought a similar battle before. In the mid-1990s, Microsoft defeated Netscape Communications by embedding the Internet Explorer Web browser as a free component of its Windows operating system. While the strategy insured Microsoft's dominance over Netscape, it also embroiled Microsoft in a legal battle with the Department of Justice, which Microsoft eventually lost.
Now, however, Microsoft's executives appear to be increasingly confident that in addition to giving away some free services, they will be able to sell Web-based services to consumers and businesses.
"We're not moving toward a world of thin computing," said Microsoft CEO Steven Ballmer, referring to systems in which simple processing takes place on a PC, but more complex processing is moved to a centralized computer through a network connection. "We're moving toward a world of software plus services."
Nearly every Microsoft software application will be transformed with the addition of a Web-services component within three to 10 years, he said.
He rejected the notion that in the future all software would be based in what computer industry executives refer to as "the cloud" -- computer hardware and software reachable over the Internet.
"People tend to get weird and extreme about this," he said. "Does everything move to the cloud? I think that is wrong-minded."
The company has already begun charging a subscription fee for a set of computer security services and this fall it intends to introduce a set of consumer services like photo sharing under the Windows Live brand.
The strategy did not immediately ignite enthusiasm among the more than 100 financial analysts who follow the company. Microsoft's stock fell US$0.73 on Thursday, or 2.4 percent, to US$29.98.
Microsoft's weak reception, against the backdrop of a steep decline in the overall market, came despite the company's statement that it has sold 60 million copies of its Windows Vista operating systems. Microsoft said that this was the strongest initial sales performance of any of its operating systems.
"We eclipsed the entire installed base of Apple in the first five weeks that this product shipped," said Kevin Turner, Microsoft's chief operating officer.
The company expects a billion Windows-based computers -- including those running pirated copies -- within the next 12 months. At that point, PCs will outnumber automobiles worldwide. Microsoft also said it agreed to buy the online advertising exchange AdECN to bolster its presence in the online advertising market. Terms of the deal were not disclosed.
AdECN runs a NASDAQ-like marketplace, where ad space on Web sites is bought and sold in real time through an auction. The deal follows Yahoo's acquisition of the ad exchange Right Media, which was announced in April. Yahoo paid US$680 million for the 80 percent of Right Media it did not already own, but Microsoft's purchase of AdECN is likely to be smaller.
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