Microsoft's Windows Live effort is in a state of "general paralysis" as a result of Wall Street pressure over the company's spending plans, according to a key member of the Live team.

The remarks came from Niall Kennedy, hired by Microsoft in April to work on an Internet feed platform, as he disclosed this week that he was leaving the company. They're the latest criticism of Live from people close to the operation.

Windows Live is a catch-all brand for Microsoft's efforts to transition from a traditional software business model to "software as a service," which includes everything from ad-supported search to Web services to full-fledged business applications hosted or delivered over the web.

But Microsoft's difficulties in convincing investors of the merits of Live have thrown the project into disarray, according to Kennedy. In a blog entry, he said the company initially seemed serious about web-based delivery technologies such as RSS, RDF and Atom.

"The Windows Live initiative got off to a huge start, with lots of new services created and an 'invest to win' strategy in the new division," he wrote.

But shortly after Kennedy's arrival, Microsoft told investors it would be spending an extra $2 billion because of costs related to Live, including 10,000 new hires, and the company's stock price went into a nosedive. This had a dramatic effect within Microsoft, Kennedy said.

"What do you do when the market responds to your 6 month-old online services strategy by reducing your valuation by 1.5 Yahoos?" Kennedy wrote.

"Windows Live is under some heavy change, reorganisation, pullback and general paralysis, and unfortunately my ability to perform, hire, and execute was completely frozen as well."

Since April, Microsoft has focused spending on its three upcoming flagship products - Windows Vista, Exchange 2007 and Office 2007 - and other initiatives have been put on the back burner, Kennedy said.

"Vista, Exchange, and Office are huge priorities for the company as those three products account for the lion's share of company revenues," Kennedy told Techworld.

He said he didn't want to wait until the products had shipped - probably early next year - before getting the investment needed to push ahead with his syndication work.

Microsoft denied it has skimped on Windows Live. "We are not pulling back on the Live effort at all," a Microsoft spokeswoman told Techworld.

"We are totally committed and are seeing great momentum across the company." She said Microsoft has launched more than 20 Live services in beta so far, with more than half of those to be finalised by the end of the summer, and has more than 320 million Live accounts.

Whether Microsoft is succeeding with Windows Live or not depends on which part of the nebulous brand you look at, according to David Bradshaw, a principal analyst with Ovum.

While Microsoft might not be devoting as much cash as expected to the "Web 2.0" side of Live, that's just part of the wider effort to shift to software-as-a-service.

"Microsoft's problem, which is a nice problem to have, is that they already have these enormously profitable money-spinners that are all based on the conventional model," Bradshaw told Techworld. "They have to migrate to the new business model, while not destroying those too quickly."

Aside from the Google-style web services Microsoft has launched, the company is also shifting some of its business-oriented products to a Web-based model. Last month Microsoft said it would make its Dynamics CRM a hosted service, along the lines of Salesforce.com, in the second quarter of 2007.

Such moves clearly point to the direction Microsoft is going, Bradshaw said. How big a part "Web 2.0" technologies will play in that transition remains to be seen.

"Windows Live is really a toe in the water of the Internet-based business model. It's a very small step toward getting people to look at Microsoft as an Internet-oriented company," Bradshaw said.

Some have questioned how much progress Microsoft has made toward changing the public's perception.

At the TechEd developer conference in June, a Windows Live programme manager found that attendees had no idea what Live was, even though it a major theme of the conference.

Kennedy said he had encountered similar confusion around Live in the outside world.

"Many Microsoft employees shake their head at the company's naming choices, especially with the Live effort," he told Techworld.

"My mother thinks Windows Live Local is showing 'live' satellite photos of her house, and she went outside to wave at the camera. People I know who use Mac or Linux on their computers are unsure this new 'Windows' product will work for them."