Nothing will stay the same anymore

Blogger's Note: Recent news in the hardware and software fronts reveals mammoth changes lay ahead. Intel's Pentium 4 is under scrutiny due to the potential of being hacked via its hyper-threading technology. The rest of the software makers are still figuring out how to make money with the advent of free software. Microsoft is even planning of releasing an ad-supported Microsoft Office with minimal or no license fees. We can all thank AMD and Linux for making Intel and Microsoft (and other software makers) to stand and become balanced competitors. Read on... 8-)

Does hyperthreading hurt server performance?
By Rupert Goodwins
http://news.com.com/Does+hyperthreading+hurt+server+performance/2100-1006_3-5965435.html
Story last modified Mon Nov 21 14:31:00 PST 2005

Intel's hyperthreading technology, which aims to improve the performance of its processors, is being blamed by some technologists for server performance problems.

With both SQL Server and Citrix Terminal Server installations, motherboards enabled to use Intel's Hyperthreading Technology show markedly degraded performance under a heavy load, some technology professionals have reported. Disabling the technology restores expected levels, they noted.

"Our customers were complaining about much worse performance than expected when running Citrix Terminal Server and our software on the same machine," said Peter Ibbotson, the technical director at Lakeview Computers, a British provider of accounting software.

"We've had fun and games in the past, when we've enabled hyperthreading for testing, and we'd seen that motherboards had started to arrive with it enabled. When we disabled hyperthreading, performance went back to normal," Ibbotson added.

Hyperthreading allows various elements of a processor to run different code at the same time. Intel says its HT technology will boost chip performance and allow a CPU to process nearly twice as much information as one without hyperthreading.

Slava Ocks, a developer working on SQL Server 2005 within Microsoft, reported similar problems in a blog posting earlier this month.

"Our customers observed very interesting behavior on high-end HT-enabled hardware. They noticed that in some cases, when high load is applied to SQL Server, CPU usage increases significantly but SQL Server performance degrades," Ocks wrote.

Ocks then detailed some testing that showed this behavior. In that case, a system thread cleaning out blocks of disk cache memory was running at the same time as worker threads. "With Intel HT technology, logical processors share L1 & L2 caches. As you would guess (this) behavior can potentially trash L1 & L2 caches," Ocks wrote.

The on-chip cache exists to speed operation by keeping copies of recently accessed data where it can be accessed without recourse to main system memory, which is much slower by comparison. Where multiple threads access different parts of memory, but are simultaneously processed by the chip's hyperthreading technology, the shared cache cannot keep up with their alternate demands, and performance falls dramatically, according to analysis by Ocks and Ibbotson.

"It's ironic," Ibbotson said. "Intel had sold hyperthreading as something that gave performance gains to heavily threaded software. SQL Server is very thread-intensive, but it suffers. In fact, I've never seen performance improvement on server software with hyperthreading enabled. We recommend customers disable it when running Citrix and our software on the same server."

Scott McLaughlin, an Intel spokesman, said Monday that hyperthreading has done well on most benchmarks. "Intel has been clear where it offers benefits and where it won't," he said.

Earlier this year, Intel hyperthreading was revealed to have a security flaw where threads could find information from each other through the shared cache despite having no access to each other's memory space.

Rupert Goodwins of ZDNet UK reported from London. CNET News.com's Greg Sandoval contributed to this report. Copyright ©1995-2005 CNET Networks, Inc. All rights reserved.

Software: No longer business as usual
By Martin LaMonica
http://news.com.com/Software+No+longer+business+as+usual/2100-1012_3-5958760.html
Story last modified Thu Nov 17 12:27:00 PST 2005

The software industry, already reeling from consolidation, is grappling with a new problem: finding the right sales model.

The old, traditional model of selling software, either through up-front fees or long-term licenses, is increasingly under strain as both consumers and big businesses demand change.

The latest sign of turmoil: an admission by Microsoft's top executives that ad-supported Web-based services pose a risk to the company's traditional business. Other internal memos show that Microsoft is worried by the growing reluctance of consumers to spend money on software.

The business software market has been wrestling with changes for several years now. Many companies, like PeopleSoft and Siebel Systems, have been acquired. Some have simply gone out of business. And all of the big software makers acknowledge that it has become harder to sell new software licenses. Oracle, SAP and others now rely on selling ongoing maintenance contracts.

News.context
What's new:
Recent internal Microsoft memos exploring advertising-supported software demonstrate how software companies are being forced to examine new business models.
Bottom line:
Several factors--including open source, advertising-supported and hosted services--are giving customers more choices and putting a strain on the traditional method of purchasing software with a one-time, up-front fee.

"There are some seismic shifts happening" in all areas of the software industry, said M.R. Rangaswami, an investor and software industry consultant. "It's not going to be a complete shift to open source, software-as-a-service or build-your-own. Will (this) have a major impact on the market? Absolutely."

The growing popularity of open-source software, particularly for server software like databases, has shifted strategies at Microsoft, Oracle and other large companies, which now offer free or low-cost products.

Similarly, hosted applications like Salesforce.com that allow companies to switch to a recurring monthly charge instead of a large capital outlay have forced Microsoft, SAP and others to offer similar products.

The confluence of these factors and others is causing dramatic changes in how software is bought, said analysts and company executives. Rather than just charging customers for a CD stuffed with code, providers are increasingly turning to the Web, and to new licensing models, they said.

"Finding new revenue streams is really important so (vendors) are looking at all kinds of contract models," said Joanne Correia, an analyst at Gartner. "When markets become really mature, what happens is people fight for customer control, and that is done via contracts."

In particular, big companies are demanding the ability to buy on an annuity basis, where they pay in smaller increments rather than shell out large sums up front, analysts said.

"It's not going to be a complete shift to open source, software-as-a-service or build-your-own. Will (this) have a major impact on the market? Absolutely." --M.R. Rangaswami, investor and software industry consultant

With tight IT budgets and slim increases projected for the coming years, corporate customers are eyeing shorter-term contracts--or no contracts at all--rather than pay a perpetual license fee and maintenance costs.

For instance, Joe Drouin, the global chief information officer of TRW Automotive, is taking a look at Salesforce.com, which delivers its product as a Web-based service, in part because of the economics. Drouin said TRW is already an SAP customer. But for new applications, he's looking to cut costs.

"You know, you go in and you spend millions of dollars in software and hardware and you put a big beast in place...The idea (with software-as-a-service is) that you wouldn't have to do that right up front. You can pay as you go," Drouin said. "It's a very compelling model."

Microsoft faces big changes
Customers like Drouin are pushing software makers to keep pace with a rapidly changing industry. One of the most visible transformations is taking place at Microsoft, the world's largest software maker.

Bill Gates, the company's chairman, sees the shift to online services as a "sea change" on par with the company's embrace of the Web more than a decade ago.

The recent launch of Microsoft's Live.com Web-based service, along with a major reorganization in September underscored the company's stepped-up commitment to deriving revenue from services, rather than strictly software licenses.

In addition, the company has mulled the introduction of free, ad-supported products, such as Works and Money. According to an internal strategy paper, consumers' unwillingness to pay for desktop programs is forcing Microsoft's hand.

"The outlook for the packaged consumer retail software market is poor," the authors of the paper, seen by CNET News.com, wrote. "The size of the market is shrinking, and consumers appear less willing than ever to buy software applications off the shelf."
Meanwhile, Google is expanding its array of Web-based products funded by advertising. Although Google's applications are limited to e-mail, photo-sharing and consumer-oriented services, George Colony, CEO of Forrester Research, expects to see much more.

"Google is also leading a pricing revolution," Colony wrote in a recent column. "Google's programs are free, funded through advertising and syndication. This is a prescient move. I foresee a world in which even enterprise applications like financials, ERP (enterprise resource planning), and supply chain software will be advertising-funded."

The growing viability of open-source products is already accelerating a shift in pricing models for businesses, analysts noted.

IBM, Oracle, BEA Systems and other infrastructure software providers have each shifted from a completely closed-source business and increasingly embraced open-source infrastructure software products. IBM even bought Gluecode, an open-source alternative to its WebSphere Java application server, and adopted its business model of monthly maintenance fees.

Open-source advocates argue that open-source software, such as databases or business intelligence tools, is cheaper than existing products. Also, by giving away software--at least, initially--open-source companies do not need to invest as much in sales and marketing, according to analysts and industry executives. Commercial software makers spend on average 82 percent of new license revenue on sales and marketing--that is, finding new customers--according to a Goldman Sachs report. That's up from 66 percent in 2000.

Open-source sales application SugarCRM, for example, does not employ direct salespeople, who are typically highly paid. Instead, the users of its open-source product are the primary source of sales leads, according to SugarCRM CEO John Roberts. A smaller sales and marketing budget allows it to divert its resources toward engineering, he added.

Larry Augustin, the founder of VA Software who sits on the board of a number of open-source companies, said that the rising cost of sales and marketing business software is driving up prices for customers.

"The traditional enterprise software business model is broken," Augustin wrote in a recent column. "A rabid search for new customers and revenue growth has caused sales and marketing costs to spiral out of control...We're charging the customer more to sell to them."

Still, some corners of the software world have been able to maintain the status quo.

Adobe Systems, which sells popular desktop software like Photoshop and Illustrator, has stuck with the model for consumers and has even been able to raise prices in recent years, noted Gene Munster, a financial analyst at Piper Jaffrey. But Adobe will likely explore different models, he said.

"The traditional enterprise software business model is broken."
--Larry Augustin, founder, VA Software

"I think you'll see companies move to different (pricing) models over time," Munster said. "I could see Adobe, like Microsoft, look at ways of charging less up front, have a subscription fee, and (have) products supported by ads."

Gartner's Correia said that the products that are most likely to be funded by advertising are those that are sold in high volume, such as consumer products. A subscription model, where customers pay a regular fee in place of one up-front purchase, are best suited for applications such as e-mail or customer relationship management, rather than custom-built applications, she said.

Rangaswami said that alternative pricing models and other larger industry changes, notably less-expensive offshore development and modern service-oriented architectures, ultimately benefit an increasingly demanding customer.

"The power has shifted to the buyer," Rangaswami said. "Five years ago, (vendors) could sell a million-dollar piece of software and run off to the next deal."

CNET News.com's Mike Ricciuti contributed to this report. Copyright ©1995-2005 CNET Networks, Inc. All rights reserved.

Gates memo warns of 'disruptive' changes
By Ina Fried
http://news.com.com/Gates+memo+warns+of++disruptive+changes/2100-1014_3-5940792.html
Story last modified Tue Nov 08 19:20:00 PST 2005

Aiming to stir up the same kind of momentum as his Internet Tidal Wave memo of a decade earlier, Microsoft Chairman Bill Gates has penned a memo outlining the challenges Microsoft faces from a host of online competitors.

"This coming 'services wave' will be very disruptive," Gates said in an Oct. 30 e-mail to top Microsoft employees, which was seen by CNET News.com. "We have competitors who will seize on these approaches and challenge us."

In the memo, Gates cites an earlier missive from Ray Ozzie, outlining the importance of tapping online advertising and services as new revenue sources.

News.context
What's new:
Microsoft Chairman Bill Gates sends a memo to top executives at the software giant, citing the challenges the company faces.
Bottom line:
Memo references another memo sent by the new services chief, who cited a laundry list of missed opportunities for the software maker, citing competitive threats from rivals such as Google, Skype, Research In Motion and Adobe.

"It's clear that if we fail to do so, our business as we know it is at risk," Ozzie wrote. "We must respond quickly and decisively."

Ozzie's memo, which was also seen by CNET News.com, includes a laundry list of missed opportunities for the software maker, citing competitive threats from rivals such as Google, Skype, Research In Motion and Adobe.

In September, Microsoft announced that it was reorganizing itself into three units and tapping Ozzie to lead a companywide services push. Last week, Microsoft announced the first fruits of that effort--products called Windows Live and Office Live. Windows Live combines many of Microsoft's existing MSN services into an advertising-supported product for consumers, while Office Live is a set of services, some free and some paid, aimed at small businesses.

Although Microsoft had already announced those moves, the two memos shed light on the urgency and importance the company is attaching to these plans.

Ozzie notes areas that Microsoft could have led, such as Web-based applications, but where other companies are instead more heavily focused.

"We should've been leaders with all our web properties in harnessing the potential of Ajax, following our pioneering work in OWA (Outlook Web Access)," Ozzie wrote. "We knew search would be important, but through Google's focus they've gained a tremendously strong position."

In the memo, Ozzie talks about Google as the most prominent of Microsoft's emerging competitors, but also makes reference to Yahoo and Apple Computer.

"Google is obviously the most visible here, although given the hype level it is difficult to ascertain which of their myriad initiatives are simply adjuncts intended to drive scale for their advertising business, or which might ultimately grow to substantively challenge our offerings," Ozzie wrote.
"Although Yahoo also has significant communications assets that combine software and services, they are more of a media company and--with the notable exception of their advertising platform--they seem to be utilizing their platform capabilities largely as an internal asset.

"The same is true of Apple, which has done an enviable job integrating hardware, software and services into a seamless experience with dotMac, iPod and iTunes, but seems less focused on enabling developers to build substantial products and businesses," wrote Ozzie, who joined Microsoft as chief technical officer earlier this year when his company, Groove Networks, was acquired by the software maker.

He also cites smaller, emerging companies that are developing software and services that use the Internet, rather than Windows, as their base platform.

"Developers needing tools and libraries to do their work just search the Internet, download, develop and integrate, deploy, refine," Ozzie wrote. "Speed, simplicity and loose coupling are paramount."

At the same time, Ozzie sees an opportunity if Microsoft can create a Web-based development platform.

"The work of these startups could be improved with a 'services platform'," Ozzie said. "Ironically, the same things that enable and catalyze rapid innovation can also be constraints to their success. "

Microsoft has talked of a developer platform in conjunction with Windows Live, but the company has offered few details of how third parties will be able to build on top of Microsoft's work.

He also points to the fact that although Microsoft's Office is ubiquitous, it is Adobe's PDF file that has emerged as the key means of sending formatted documents on the Web. Microsoft is proposing its own rival to PDF, known as Metro, with Windows Vista, its new operating system that is due out next year. The company will also support PDF in the next version of Office, due next year.

Gates says that despite the threats, "the opportunity for us to lead is very clear."

"More than any other company, we have the vision, assets, experience, and aspirations to deliver experiences and solutions across the entire range of digital workstyle & digital lifestyle scenarios, and to do so at scale, reaching users, developers and businesses across all markets."

Details of the memos were reported late Tuesday by the Wall Street Journal.
Copyright ©1995-2005 CNET Networks, Inc. All rights reserved.

Microsoft eyes ads as consumers close wallets
By Ina Fried
http://news.com.com/Microsoft+eyes+ads+as+consumers+close+wallets/2100-1012_3-5954406.html
Story last modified Wed Nov 16 04:00:00 PST 2005

Although Office and Windows continue to produce vast revenue and profits for Microsoft, some of the company's other well-known consumer titles are generating only a trickle of business.

According to internal documents seen by CNET News.com, Microsoft gets only about $2 for each copy of Works that is bundled on new computers. The standard version of Money isn't even a break-even proposition, and the company has had to heavily discount its OneNote application in order to get computer makers to include it.

Microsoft predicts that things won't improve from here, either.

News.context
What's new:
Some of Microsoft's consumer software products are generating only a trickle of business, internal documents indicate.
Bottom line:
Predicted decline in consumer revenue could be impetus for Microsoft to move the titles into free, ad-supported releases or other nontraditional sales models.

"The outlook for the packaged consumer retail software market is poor," MSN workers said in an internal strategy paper seen by CNET News.com. "The size of the market is shrinking, and consumers appear less willing than ever to buy software applications off the shelf."

In the paper, Microsoft said that worldwide sales of full packaged software--which includes Works, the Encarta encyclopedia, digital imaging software and Money--dropped by 7 percent in fiscal year 2004. In addition, the company said it was seeing similar trends for fiscal 2005.

The tepid forecast, combined with concerns that others might offer free versions anyway, is prompting Microsoft to take a hard look at selling free, ad-supported versions of many of its consumer titles, like Works. And, in some cases, the numbers may well add up.

Calculating that the average person keeps their copy of its entry-level productivity suite Works--a kind of "Office lite" for consumers--for about three years, Microsoft reasoned that it wouldn't take a lot of ad revenue to justify moving the product to an ad-driven model.

"That means that if ad revenues exceed 67 cents per year, we could actually give Works away and still make more money," two Microsoft researchers and one person from MSN stated in a paper presented to Chairman Bill Gates at a Thinkweek brainstorming session earlier this year.

Microsoft is not alone in seeing its consumer business trail overall software spending. IDC estimates that consumers worldwide spent $4 billion on software last year, and that total is pegged to reach $4.7 billion by 2009--a compound growth rate of just more than 3 percent.

By contrast, global packaged software revenue is much larger--$91 billion in 2004--and projected to grow to a healthy $120 billion by 2009.

Consumers just aren't seeing enough value in what's inside most software boxes, IDC analyst Albert Pang said. With programs like Excel and Word, Pang said, most people just use a fraction of the features and aren't willing to shell out big bucks.

"Only professionals are willing to pay the full retail price for the software," Pang said. "Somehow, somewhere, a better strategy needs to be developed to expand the market," Pang said.

Members not wanted
The MSN strategy paper argues that subscriptions are not the way to go, pointing to the success of Google's ad-supported Gmail. If Google's Web mail service is successful, Microsoft estimates the annual revenue per subscriber could top $20 per user, leaving "no room left at all for mass market consumer subscription services."

Instead, the paper points to nontargeted advertising as the way to go to pay for basic, low-cost services.

"High-cost services (many of which are currently paid) will be funded by an exchange of user information that will allow better targeted advertisements," the Microsoft paper contends.

The software giant has confirmed that both papers are genuine, but has declined to comment further. A Microsoft source noted that both papers represent internal brainstorming around new business models and that no decisions have been made.

In the MSN-drafted paper, Microsoft points to controversial adware maker Claria, noting that Claria claims ad rates six to 20 times those of traditional Web advertising because of its ability to target to a user's activity. Microsoft was said to be in talks to buy Claria earlier this year, though no deal was announced.

Microsoft has been building its own engine for targeted ads, known as AdCenter. The product, originally code-named Moonshot, combines context of what a user is searching for with demographic information about who is doing the searching. Initially, Microsoft is using AdCenter to serve up keyword-based search ads. However, the company has said its ambitions go much further.

"Today, it's keyword," Joanne Bradford, Microsoft's chief media revenue officer, said in an interview last week. "We believe in the future it will be about display (ads), video and all that is advertising."

Top Microsoft executives, such as Gates and Chief Technical Officer Ray Ozzie have also been calling for the company broadly to get more revenue from online advertising. Microsoft has already outlined two new ad-driven services: the consumer-oriented Windows Live and Office Live, which is aimed at small businesses.

Goldman Sachs analyst Rick Sherlund said Microsoft needs to consider a wide array of new models, including both advertising and subscriptions.

Candidates for freedom
Works, he agrees, is a good candidate to be offered for free and supported by ads. "They could deliver this as a service and get minimal ads and be money ahead," Sherlund said in an e-mail interview. "This would be market expanding."

Microsoft would likely see similar benefits if it offered Money, its personal finance software, as free and ad-funded, he said.

"I think (Microsoft) should not be afraid of offering most of their products in all three modes."
--Rick Sherlund, analyst, Goldman Sachs

But other software is better suited to being hosted on a server and offered up by subscription, Sherlund said. Still, other users, particularly business users, are likely to want software that they can run on their local PC, ad-free and without having to be connected to the Internet.

"I think (Microsoft) should not be afraid of offering most of their products in all three modes," said Sherlund, whose analyst firm has done banking work for Microsoft. "Better to cannibalize yourself and block competitors than have others step into the market unopposed."

The OneNote note-taking program represents an interesting example of, at the extreme, the types of products that could be funded by advertising. In one of the papers, Microsoft notes that it is trying to create a whole new category of software, something that is "not easy to do."

As a purely desktop application, it is maybe not in the first category of software likely to be thought of as suited for ad-based conversion. But, the Microsoft workers noted, it is also one of the Office application that users keep open longest (second only to Outlook e-amil).

"Since advertising revenue depends roughly on time used, this means OneNote has substantial potential," the paper posits. Plus, the authors noted: "OneNote's low sales to date…mean that so far, there's little risk of cannibalization."

But Pang isn't sure advertising is the answer. There are already so many Internet ads, that he thinks computer users will just get overloaded if their desktop software starts spitting out solicitations as well.

"I don't see how marketers will want to take that risk when there are so many more effective ways to reach end-users," Pang said.

Pang has a different idea. He suggests Microsoft and others should partner with service providers, who could underwrite some of the cost of software and integrate it into what they do. For example, your bank might bundle Microsoft Money with its own online account tools. Or perhaps Comcast Cable might pick up some of the cost of software for managing digital photos and bundle that product with its TV and Internet services.

There have been some examples of such pairings, as many Internet service providers have in antivirus software. That has a double benefit of adding to the perceived value of the subscription and helping to keep bugs out of their networks.

There have been other online examples. SBC Communications, for example, has its partnership with Yahoo, in which high-speed and dial-up subscribers get additional Yahoo features and services as part of their monthly fee.

"I see that type of bundling much more effective and palatable to the users," Pang said.
Copyright ©1995-2005 CNET Networks, Inc. All rights reserved.

Microsoft eyes making desktop apps free
By Ina Fried
http://news.com.com/Microsoft+eyes+making+desktop+apps+free/2100-1014_3-5951569.html
Story last modified Mon Nov 14 12:52:00 PST 2005

Even as Microsoft readies a host of new ad-supported online services to battle rivals, the software maker has been mulling a plan to offer free, ad-supported versions of some of its desktop products, CNET News.com has learned.

Although no specific plans have been made, executives within Microsoft are examining whether it makes sense to release ad-supported versions of products such as Works, Money, or even the Windows operating system itself, according to internal documents seen by CNET News.com.

"As Web advertising grows and consumer revenues shrink, we need to consider creating ad-supported versions of our software," two Microsoft researchers and an MSN employee wrote in a paper presented to company executives earlier this year. The document was prepared for one of Microsoft's twice-yearly Thinkweek exercises, in which Chairman Bill Gates and other top executives gather to consider potential new avenues for the company to follow.

News.context
What's new:
As part of its attempt to fend off Google and others, Microsoft is looking at whether it makes sense to release ad-supported versions of Works, Money, or even Windows, CNET News.com has learned.
Bottom line:
A move to bring ads into Microsoft's desktop software, though risky, would offer the company an ability to move the battle with rivals onto its home turf.

Microsoft officials confirmed the authenticity of the paper, dated Winter 2005, but declined to comment on its contents. However, a Microsoft source characterized the paper as an internal brainstorming exercise.

"It is simply an exploration of different models of delivering software to customers," the source said. "It is not policy, it is not a plan, and no decisions have been made--it's just some thoughts from our research and business units."

In recent weeks, Microsoft has identified a number of ways to increase its online advertising business as it seeks to fend off rivals such as Google. A move to bring ads into its desktop software, though risky, would offer the company an ability to move the battle on to its home turf.

The document also sheds light on Microsoft's concerns over the erosion of revenue from shrink-wrapped software, particularly in the consumer market.

Chief Technical Officer Ray Ozzie and Chairman Bill Gates outlined some of the opportunities and the challenges Microsoft faces in a series of October memos. In the more blunt of the two missives, Ozzie said Microsoft had an obligation to act on the shift to ad-supported software.

"It's clear that if we fail to do so, our business as we know it is at risk," Ozzie wrote. "We must respond quickly and decisively."

Already, the company has announced plans for Office Live and Windows Live, two products that are ad-supported complements to its existing desktop software. But in the internal documents, Microsoft workers maintain that the software maker may be forced to go further if rivals launch ad-supported versions of popular programs such as PowerPoint.

"If our competitors release free, advertising-supported versions of these programs, we may need to do the same," the two researchers and John Skovron, who works in MSN's Money unit, wrote in the winter 2005 paper.

Microsoft has been mulling a shift to ad-supported software for some time. A paper prepared for a summer 2004 Thinkweek gathering noted the decline in consumer software and suggested Microsoft's MSN online business might benefit from moving from a subscription model to one paid for through advertising.

The more recent paper outlines a number of factors for identifying which desktop software could be ripe for moving to an ad-based model. Such factors include whether the software is frequently used online, whether it contains good data for targeting ads and whether it is likely to face ad-supported competition. Among the products it identifies as meeting some of those criteria are Works, Money and OneNote.

But others both inside and outside Microsoft have called on the company to go beyond the types of services offered by MSN. An online version of Office is one of the products most often talked about. The company has in the past mulled such a move. But a commercial product never materialized, due to internal political battles and fears of cannibalizing revenue from Office, which is among the company's most profitable products.

Plan extends to Windows
The company's exploration of ad-supported software extends even to Windows, its most important product. An ad-supported version of the operating system could make some sense, the Microsoft researchers argue in their Thinkweek piece, noting that the product reportedly earns $9 per year per user.

"It seems possible that we could match that revenue via ads, but there are difficult UI (user interface) issues to solve, since the OS does not have a natural way to display ads that does not annoy users," the Microsoft workers said in the paper. One suggestion is a low-end version of the operating system that comes bundled with other ad-supported programs, such as Works, Outlook Express and Windows Media Player. However, the writers point out that "it's not clear how to prevent these elements from being replaced." The key is creating a robust enough advertising business to pay for more expensive content than what has been traditionally offered for free on the Internet. At the center of Microsoft's efforts here is a product called AdCenter. Its initial role is to offer the same kinds of text-based keyword ads as Google serves up though its AdWords, but Microsoft's ambitions for AdCenter go much further.

Executives see AdCenter, which has been known internally by the code name Moonshot, as a way to offer all manner of ads, text, display and video for use both online and offline on a PC, and on other devices, such as the Xbox gaming console or mobile phones.

"Are people willing to pay $100 every three or four years not to get bombarded with ads? I think a lot of people will." --Matt Rosoff, analyst, Directions on Microsoft

"It's not just about (ads that run) in your PC with your browser open," Joanne Bradford, Microsoft chief media revenue officer, said in an interview last week. "Today, it's keyword...We believe in the future it will be about display (ads), video and all that is advertising."

Microsoft is clearly looking to forge new ground with AdCenter, said Matt Rosoff, an analyst at Directions on Microsoft. "It's pretty clear that AdCenter is going to be more than a traditional paid search platform," he said. "They are taking the idea of contextual advertising and applying it fairly broadly."

Rosoff said it makes sense for Microsoft to explore which types of products might be supported by ads.

"It doesn't surprise me at all that they are looking at all possibilities, especially given that a lot of people feel Google is going to go this direction," Rosoff said. He notes that Money, for example, is already a hybrid product that has both a desktop software and an online component.

However, he is not convinced that consumers will accept a vast quantity of ads rather than pay for software.

"Are people willing to pay $100 every three or four years not to get bombarded with ads?" Rosoff said. "I think a lot of people will."

Finite market
He also notes that however promising the ad market, it is a finite one that can only support so many products. Today, online advertising is growing as businesses shift from things like yellow pages, print and TV ads, but, Rosoff said: "Eventually that tops out."

Microsoft faces other challenges as well. One problem with inserting ads served over an Internet connection into desktop software is that while broadband access has grown, many computers spend a significant amount of time offline. Also, to pay off, such advertising must be targeted and relevant enough to both generate higher revenue and avoid annoying users.

"It's definitely an idea to pursue, but it's fraught with perils," said Forrester Research analyst Charlene Li.

Li said the move could open up new markets for Microsoft, but notes that it is also a move into largely uncharted waters. "The challenge becomes users aren't necessarily used to having ads on desktop applications."

These concerns could explain why Microsoft held discussions to buy controversial adware maker Claria this summer, though ultimately no deal was announced.

Privacy is another major issue Microsoft expects to face. The paper suggests some options such as offering paid, ad-free upgrades; allowing users to turn off some of the personalization options in favor of more generic ads; and choosing applications to be ad-based in which users are already sharing private data. Even those moves may not be enough, the paper suggests. "Unfortunately, even where consumers are willing to make this trade, privacy advocate and perhaps European regulators are not," the authors wrote.

Li notes that some users might feel comfortable, say, writing a letter about their trip to Costa Rica in a free, ad-sponsored word-processing program and seeing ads for Costa Rica travel, while others may find that crosses a line.

"Everyone has different thresholds for how much their privacy is worth," Li said.

Despite the concerns, though, the researchers argue that Microsoft needs to act.

"As online advertising increases our competitors will enter many markets with free, ad-supported products," they wrote. "We must have free, ad-supported entries in these same areas."
Copyright ©1995-2005 CNET Networks, Inc. All rights reserved.