Microsoft has announced a "strategic shift" in its entire software business, moving to a software-as-service approach and away from its traditional CD sales.

Calling the plan "Live Software", Bill Gates announced new services for both Windows and Office called, oddly enough, Windows Live and Office Live, whcih will provide Web-based services separate from the software products.

Microsoft chief technical officer Ray Ozzie said Live Software would see Microsoft offer an entire range of Web-based services that customers can use in conjunction with Microsoft software or on a standalone basis. "Microsoft's intent is to offer a general services platform," he said. "It will have a tremendous number of services within it, such as storage services, communication services, peer-to-peer connectivity and an identity mechanism."

Live Software also will include software for various devices that will enable customers to take advantage of the portability of Web-based services, Ozzie said.

Windows Live and Office Live will start with a Web portal that will provide both existing Web-based services for Windows and Office. A beta can be found at http://www.live.com/.

Windows Live includes an e-mail service and Windows Messenger, which is similar to MSN Messenger but with more ways to sort and maintain e-mail, phone and instant-messaging contact information. It also has improved search functions as well as collaboration technology for file sharing through a peer-to-peer network that Microsoft acquired from Groove Networks in March.

More services will be rolled out for the Windows Live beta in the next few weeks. Microsoft plans to eventually transition all its MSN and Hotmail e-mail users to its Windows Live e-mail service, but will continue to evolve the services provided on the MSN portal, said David Cole, a senior vice president in Microsoft's Windows group. Office Live will be in beta in the first quarter of 2006.

Office Live potentially will compete with hosted CRM service provided by Salesforce.com. Its CEO, Marc Benioff, claimed not to be worried, calling Live Software "a terrific thing for on-demand".

“It's looking like software is an endangered species at Microsoft," Benioff said. "The implication of 'Windows Live' is that their existing offering is 'Windows Dead.'"

Advertising sales are a major component of Microsoft's LiveSoftware strategy, a plan that takes a page out of Google's book. Gates said that both Windows Live and Office Live will have basic, free services driven by advertising revenue, along with subscription-based services.

Ozzie acknowledged that Google has demonstrated how online advertising can be an opportunity for significant revenue. "Google has done an amazing job at making that ad engine click on all eight cylinders," he said. But he said he believes Google has only shown the tip of the iceberg in how much revenue there is to gain from online ad sales, and Microsoft plans to capitalise on online ad sales in a big way.

Gates acknowledged that Microsoft has been trying to figure out a viable way to provide software as a service since 1999. The company has been moving in this direction gradually with services such as LiveMeeting, which provides online Web conferencing; Xbox Live, which allows gamers to play Xbox games in real time with users through the Internet; and Microsoft update services that allow users to download software patches and updates online, he said.

The reason the industry is ready for hosted software again is due to technology advancements, such as the ubiquity of broadband Internet service and more powerful, 64-bit commodity hardware that can provide the kind of networking needed for hosted services for lower prices.