Microsoft has its head in the clouds

As the world shifts ever more to the web, Microsoft is looking badly placed to exploit it. Or should that be was‾

Yesterday its chief software architect Ray Ozzie unveiled the long anticipated Windows Azure software, on the first day of the Microsoft Professional Developer Conference in Los Angeles.

Azure is a web-based development platform, designed to support cloud computing. Microsoft is only releasing a limited version for developers to experiment with for now, with the commercial version scheduled for release late next year.

The idea behind cloud computing is that companies run their applications on huge, centralised data centres across the internet cloud rather than on its own servers and PCs -Microsoft's heartland.

Now it is trying to run two business models in parallel - the desktop and server Windows software licence market (which isn't going to disappear any time soon, but will decline) and a web model where income is derived from developers' subscriptions and advertising. Pricing details have not been made available.

All of which constitutes a big step indeed.

Certainly it's one that Microsoft needed to take, but there are lots of challenges. Ozzie was quoted explaining that now Microsoft's applications will just be running on an additional platform - the web.

But he went on to claim the technology would underpin Microsoft's own online consumer and business services - presumably such as SharePoint Online, Exchange Online and Dynamics CRM Online. None of which have taken the world by storm.

Most of all, though, it is a very distant third in the search in arguably the most innate web application of all - search and its monetisation mechanism, advertising.

Secondly, Microsoft hasn't got the greatest reputation among developers and they will need some persuading that the software giant is a better bet than other, more developer-friendly innovators and leaders in this area.

Which brings us to the third vexed issue - competition. Microsoft is lagging behind the likes of (with its S3 for small businesses, for example and EC2) and, which offer hosted applications across the web as a service. And of course there is Microsoft's bete noire lurking - web-native Google with its hugely successful Gmail already out there and its App Engine for developers, launched in April this year.

Finally, more people access the web by mobile than online and the gap is only going to get bigger. Where is Microsoft in mobile‾ Nowhere, relatively speaking. Despite many years head start and huge investment, Windows Mobile accounts for a fraction of the phone market and the company has been made to look like a rank amateur by new-comer Apple, with Google about to hit the market with Android.

Money may not buy love, but acquiring Yahoo and RIM could help plug some of Microsoft's gaps.

Also see Ovum Analystwire on Microsoft's move.