Ars Technica has an interview with Ray Ozzie, Microsoft's new chief software architect. He signals a slight change in Microsoft's worldview, and unlike Bill Gates, he identifies his new competition. Google.
Of course, any discussion of Microsoft moving to Internet-connected services has to acknowledge the presence of Google. Unlike Bill Gates, Ozzie considers Google to be a viable competitor, placing them in the same category as previous strong competitors to Microsoft. He gives Google credit for proving that an advertising-driven model for "free" software delivered over the web can be a bit hit with consumers. However, he feels that Microsoft has a chance to redefine the web services industry. He gave the examples of how strong competition from Sony's PlayStation 2 resulted in Microsoft changing the nature of the industry by creating XBox Live, and how the challenge of competing with Linux actually helped the Server and Tools division create new types of applications that expanded the market.
You never become the largest anything by getting top dollar from a small group of customers. Wal*Mart is bigger than Nieman Marcus. Apple is Nieman Marcus. Will Microsoft, or Google, be the Wal*Mart of the ones and zeros? Where Microsoft is going.