Once those tools are built and deployed, Microsoft says, it won’t matter if the applications an IT department supports are Web-based services hosted by an outside party, client/server software hosted internally, or a combination of the two. "[CIOs] have to have a way of provisioning an account, providing the initial connection and user interface," regardless of an application’s source, says Ballmer. "At least that’s our vision."

But even Ballmer admits that right now, a vision is all it is. Microsoft has accepted and internalized the idea that the software market has shifted ineluctably to services, and the company has seen there a critical opportunity to move forward. But to succeed, analysts say, to change its corporate strategy, identity and DNA, Microsoft must overcome equally critical barriers of technology, strategy and culture.

Where Microsoft Sees Its Opportunity

The widely preached gospel of software as a service says that companies willing to give up the control that comes from running an application internally will save money by not having to maintain and host those applications and, by freeing up those resources, will become more agile and productive. CIOs running services, the gospel goes, don’t have to buy and operate farms of servers or trudge from desktop to desktop upgrading software. Instead of a model that encourages long, costly upgrade cycles (the very model upon which Microsoft built its enterprise empire), software as a service allows for small, steady, incremental improvements. That’s just one reason it could kill CIOs’ appetites for traditional client/server software like Microsoft’s.

Furthermore, all a user needs to access a Web-based application is a browser—not a robust operating system tightly integrated with the application. Therefore, unlike in its past battles with Netscape and others, Microsoft cannot rely on its Windows strength to pull its bacon out of the fire. And while Microsoft argues compellingly that it would be foolish not to take advantage of all the processing power a PC offers, the company simultaneously is planning for a future that will rely upon less powerful mobile computing devices and ubiquitous high-speed Internet connections.

The hard truth is that Microsoft has no choice but to confront software as a service. But rather than fighting it, Microsoft looked for an opportunity. And, it says, found one.

"Some people say that [software as a service] is a panacea and that everybody should immediately switch off everything they have and go to this world," says Andy Lees, VP of Microsoft’s server and tools marketing, his sarcasm foreshadowing what comes next. "But here’s a problem with it: The first service that you have is beautiful, the second service that you have is kind of nice; from then on you have all of the same problems that you had before."