Three years into the job as Microsoft's chief software architect Raymond Ozzie is on a path to overhaul how the company designs and sells the software that makes its monster profits.
His plan centers on "cloud computing," which draws on millions of computers in a vast network of data centers (a "cloud" of information, in tech-speak). This mass of connected computers will sell people software applications like e-mail and financial statements, even raw computing power and data storage. The idea is that businesses and consumers get cheaper and more flexible choices in how they use software, while Microsoft (nasdaq: MSFT - news - people ) gets more money out of every customer and reaches new ones.
Microsoft needs a winner. The twice-delayed Windows Vista operating system shows no signs of pent-up demand. In fact, many customers are demanding the older version, Windows XP. Microsoft has twice prolonged the life of XP (which it will now sell through January). Meanwhile, Microsoft's aura of leadership has dimmed with years of a do-nothing stock price and the ascent of Google (nasdaq: GOOG - news - people ) as the online giant. In areas like search, Microsoft almost brags that it is now the underdog.
Yet there is nothing underdog-like in the resources Microsoft can throw at an opportunity. Bernstein Research analyst Charles Di Bona figures that Microsoft has spent $3 billion on the cloud. "Unless you're operating at that scale, you aren't competitive," says Ozzie.
The details of his new strategy are still, well, cloudy, but Microsoft insists its vision dwarfs that of the offerings it follows. Amazon.com (nasdaq: AMZN - news - people ) already sells storage and computing power on demand over the Internet. Google offers word processing and other applications via the browser and plans to open up more services, including computer power, to outsiders.
Next year Microsoft will open a 100-megawatt data center (these facilities are measured in power usage now, not in numbers of servers) in Chicago, bigger than anything Google has running.
Microsoft, meanwhile, is dabbling in software via the Web. Coca-Cola Enterprises (nyse: CCE - news - people ) has 70,000 employees retrieving and sending e-mails via Microsoft-owned servers. Nokia (nyse: NOK - news - people ) and Ingersoll-Rand (nyse: IR - news - people ) are moving over, too. In January Microsoft is launching a Web version of Office, its most popular application. It will be limited, but less so than the current Word and Excel Web tools, which allow only rudimentary text editing and no real spreadsheet work.
Ozzie's new system, called the Azure Services Platform, will require a complete reworking of just about everything Microsoft puts out. In scope it makes the writing of the Windows operating system look like three-letter hangman. It will take five to 10 years for Microsoft to make the shift to Web computing, even though Ozzie is already calling on customers and developers to get busy with it. Pitney Bowes (nyse: PBI - news - people ), Fujitsu and Infosys are testing it now.
"We're going to create a new operating system for the next 20 to 50 years," Ozzie says. "We don't get an opportunity to rewrite it very often, so we're really making key architectural decisions now for a long time."
Azure will work with Vista, XP (87% of the world's machines) and, eventually, the millions of devices running the latest version of Windows Mobile and machines running Apple's (nasdaq: AAPL - news - people ) operating system. So far there's software that aggregates digital photos and arranges them by date and person (using facial recognition tools). Its online e-mail service can display Gmail messages without the ads, a sneaky jab at Google's revenue source.
Microsoft's cloud strategy began in earnest one afternoon in June 2006 when the newly landed Ozzie met with Amitabh Srivastava, a senior researcher for Microsoft. Srivastava had spent several years overhauling how the company built Vista. The one-hour talk stretched into the night as the duo mapped why and how Microsoft should invest in Web computing.
Srivastava started selecting a small group of engineers who could write a new Web operating system and spent four months surveying Microsoft. Even though the company makes most of its money selling desktop software, Microsoft has 165 divisions working on Web software (including MSN, Hotmail and Virtual Earth). In an e-mail exchange that December, Chief Executive Steve Ballmer gave Srivastava the go-ahead and 20 staffers.
Since May Srivastava has been experimenting with 1,200 servers running three of Microsoft's lesser-known offerings (HealthVault, anyone?). He is trying to run the system without human watchdogs. A single machine balances data streams and ensures the software is always running. Every 20 minutes a new machine assumes this role. The goal is efficiency: fewer computers, less power and almost no people.
Srivastava says Microsoft should be able to run a data center for at least 30% less than the norm. Otherwise, he says, "it wouldn't be worth it." Srivastava is working closely with Debra Chrapaty, who heads Microsoft's burgeoning database centers, including the giant one being built in Chicago. Microsoft's own software developers are using Chrapaty's machines and paying in a manner similar to Amazon's rental service.
Chrapaty, who used to run the servers at E-Trade and cuts Google's name to a spit-out "G," says 15% of all future computing resources in the corporate data centers will be just for developers working in Azure. "When you look at G, what they're doing is really just search and mail. That's two of a myriad of things going on here," she says. "We put more servers in, every month, than Facebook has."
Microsoft's greatest challenge may be in winning over the legions of developers who write software to run on Windows. A new generation of developers has now grown up on the Web writing in anything but Microsoft, using languages such as Java, Perl, Python and Ruby. Ozzie rather breezily says Azure will accommodate them all and still offer access to more customers than anyone else. "We will fail if we don't speak very, very effectively to that group," Ozzie says.
Just try it, says Google. "We have the best Web platform out there," says Google Vice President David Girouard. "We'll attract developers the same way we attract great engineers to Google. We have the best playground." And Swiss-like neutrality. "We have Android [Google's Web-oriented mobile phone], but we also love Apple's iPhone." Google last year hired the guy who was in charge of keeping outside developers happy at Microsoft.
How the developers will make money in Microsoft's cloud is still a hazy thing. So is Microsoft's future profit margin
