Microsoft jumped into the software-as-a-service game last week, but conspicuously absent was a strategy to develop corporate-focused services.

Microsoft's unveiling of Windows Live and Office Live, which ironically have nothing to do with offering Windows or Office as services, was little more than a rebranding of MSN consumer services already available or under development, according to observers. The company also unveiled its plans for early 2006 to release business services linked to internal deployments of Office and targeted at companies with 10 or fewer employees.

What Microsoft needs to explain, observers say, is how it plans to turn its software into corporate services or offer hosted services for its current crop of Windows Server System and Office System products.

This effort would likely require re-engineering of software, building a new brand of customer loyalty, rallying its partner community, altering its corporate culture and pulling off another high-profile come-from-behind victory with word processors, spreadsheets and Internet browsers.

"This effort will make turning the Titanic look like a minuscule activity," says Carmi Levy, senior research analyst with the Info-Tech Research Group. "The largest software company in the world needs to turn itself on its ear to meet the challenges."

Levy says Microsoft will do this on a piecemeal basis as evidenced by last week's announcements. "Microsoft is going to take its licks and learn its lessons in the [small business]and consumer space, but ultimately it is going to extend this so every product from Microsoft has some degree of services component," Levy says.

The company is no stranger to services, but its inability to execute effectively in the past has created an Achilles' heel.

To wit, Microsoft's Chief Software Architect Bill Gates in 1998 sent a 14-page internal memo outlining a future that included what he called a MegaServer, a gigantic server connected to the Internet that would allow on-demand delivery of any type of information to a user from any computer, television set-top box, palm-size PC or other device.

"Google delivered on that idea," says Keith McCall, co-founder and CTO of Azaleos, which develops an appliance running Exchange along with subscription services for monitoring and managing the messaging environment. McCall says Microsoft must battle that beast, starting in consumer markets that will bleed into the enterprise, as evidenced by Google's confirmation last week that it plans to contribute to the OpenOffice.org project, which competes with Microsoft Office.