Microsoft Walks Past Graveyard, Whistles

(MoneyWatch)  As expected, Microsoft's brief multi-touch demonstration of Windows 7 garnered most of the headlines, but when the crowd goes one way sometimes it makes sense to go the other way. And if you go away from the crowd you'll notice more than a few subtle hints were dropped about how Microsoft is changing the way it does business.

First, the big headlines (Techmeme). Microsoft said Windows 7 will get multi-touch capability. Mary Jo Foley confirmed that tidbit on Tuesday. The other big takeaway is that Vista will be the kernel for Windows 7. That's another interesting nugget since it may indicate that Windows 7 will work better with all of Microsoft's hardware partners out of the box. Ed Bott had noted the Vista kernel point on our little roundtable on Friday. News.com and Dan Farber had all the live coverage of D6 (roundup) with the hits and runs and errors.

But what stood out for me was the following:

• Microsoft CEO Steve Ballmer acknowledged the fact that a lot of computing is happening in the browser and not in applications. He also said that the future of software will have "a much more balanced computational model" and that Microsoft will have to compromise. Make no mistake that Ballmer is talking the hybrid apps line, but Microsoft will have to play ball in the new world order while preserving its cash cows. How will that happen exactly?
• Microsoft is decoupling how it sells Windows Mobile. Ballmer hinted that Microsoft will sell Windows Mobile differently. In some cases, customers will only get the operating system. In others, there will be software and services combined. This decoupling could be a precursor to how Windows on the desktop is sold in the future.
• The software giant will be an advertising company come hell or high water. Ballmer obviously talked a bit about its Yahoo bid, but also indicated that Microsoft is patient about its advertising business. Ballmer does seem to know where the ad line stands. He shot down an idea about layering advertising on the desktop. Amen to that, Steve. If you listen to the high Web 2.0 priests you'd think advertising was the savior that will infiltrate or desktop?€"and possibly your pores too.
• Microsoft will need to make Windows a UI juggernaut. Microsoft can talk about touch technology all it wants, but it is going to have to wow consumers somehow. By the time Windows 7 launches in late 2009 I'd bet Apple will already have something. Ballmer said Windows PCs are going to "look fantastic," but it's competing against a supermodel (Apple). Can Microsoft wrangle all of its partners and ecosystem into building a supermodel OS? It's telling that Microsoft has to cook up software that pinpoints problems in its ecosystem when you run Vista.

Add it up and it's safe to say the Microsoft you see today won't resemble the one you see five years from now. Microsoft's soul?€"Gates?€"retires in a month or so and you have to wonder how his departure will impact the company. Ballmer and Gates have great chemistry and it's unclear whether that can be maintained with Gates playing chairman and focusing on his charity work.

Of those aforementioned model questions, the most challenging one to tackle will be the final one?€"leapfrogging on the Windows UI front. Looks matter. So does functionality. Apple has raised the bar and even if you disagree with that you'll have to admit there's something to controlling the hardware and software. How can Microsoft manage that entire ecosystem and be competitive? It's shocking that Microsoft's herding cats routine works as well as it does, but there's a management case study waiting to be written if the software giant can up the ante.

The other things on Microsoft's to-do list?€"changing leadership, decoupling the OS, figuring out the mobile model and growing advertising?€"are all doable. And they will get done. The big question is whether Microsoft can take its ecosystem to a new level.

Video: Multi-Touch in Windows 7Larry Dignan is Editor in Chief of ZDNet and Editorial Director of ZDNet sister site TechRepublic. See his full profile and disclosure of his industry affiliations.
Credit: ZDNet