Microsoft to cannibalise its core business

Amazing news. Early next year Microsoft plans to launch a new Web site called “Office Live” in an attempt to create a new platform that will liberate some of its applications from user’s hard drives. (Translation: to head off Google’s plans to make the PC platform irrelevant.) Office Live, Microsoft said, will be targeted at the 28 million small businesses worldwide. It will have “elements that enhance regular Office applications” while others will work independently of the software suite.

(Reality check: where did that number of 28 million come from? There must be 28 million small businesses in the US alone.)

Some of the tools promised for the site will allegedly help small businesses build an online presence as well as offer applications to automate tasks such as project management, expense reports and billing, among others.

“With Office Live services, we make complex technology affordable and easy to use for small businesses, empowering them to reach their business goals,” said Rajesh Jha, general manager of Information Worker Services at Microsoft. (Don’t you just love that cant about “empowering”!) Meanwhile, Chairman Bill was rolled out to put the best spin he could muster on the development. “It’s a revolution in how we think about software,” he told reporters and industry analysts. “This is a big change for…every part of the ecosystem.”

You bet. Especially the Microsoft ecosystem.

Here’s Good Morning, Silicon Valley‘s take on the development…

Microsoft’s Bill Gates and Ray Ozzie today outlined the first steps in a critical change in the company’s business — a move into providing software and services over the Net, prodded by the specter of being disintermediated on the desktop by Google and Yahoo and in the business market by companies like and NetSuite. But this venture, which Ross Mayfield describes as nothing less than the “third coming of Microsoft,” comes with a whole new set of challenges for the company. For one, eventually it would put Microsoft in competition with itself as services vie with packaged software (though Steve Gillmor thinks Gates is ready to bite that bullet). The other problem is that it seems to take Microsoft about three tries to get something new close to right. In the past, that meant users were pretty much forced to suffer through a couple hinky iterations, there often being no viable alternatives. Hardly the case this time. Microsoft will be trying to move into a territory with some significant and experienced occupants — a territory in which, as Microsoft blogger Robert Scoble notes, the company is already regarded with distrust and dislike.

David Heinemeier Hansson, creator of the increasingly popular Web-application development framework Rails, sees it this way: “Microsoft is now entirely optional. No part of the stack needs Microsoft. Not on the client, not on the server. And I think that’s a pretty tough challenge for a company that used to be a necessity. … To be frank, I don’t ever see the good times coming back for them. Microsoft will have to move to higher grounds. Get out of the infrastructure race. Like Apple did. There is no dominant future for the Microsoft tool chain for Web development in sight. But I doubt the company will acknowledge that before it’s game over.”