09 November 2005 Microsoft’s chairman Bill Gates has admitted to his senior staff that the company is that it is at risk of being outstripped by technologies being developed by rivals.

In an email sent prior to last week’s announcement that Microsoft will offer free web-based services to accompany its Windows and Office software, Gates warned: “The next sea change is upon us. We must recognise this change as an opportunity and take our offerings to the next level.”

Gates’ warning accompanied a memo written by the software giant’s newly recruited CTO Ray Ozzie.

Ozzie, whose role as CTO was recently expanded by Gates to encompass services strategy, said that Microsoft must respond quickly and decisively in the race to pioneer search and communications technology and services. “It’s clear that if we fail to do so, our business as we know it is at risk,” he wrote.

Comparing the dramatic shift towards Internet-based software services to previous upheavals in the industry – the emergence of the Internet itself and web-based software development – Gates also emphasised the possibility of making more software revenue through advertising rather than the traditional licensing model.

Ozzie’s memo, titled “The Internet Services Disruption” acknowledges that Microsoft has failed to exploit many of the technologies it was instrumental in creating.

In order to compete with rivals such as Skype and Google, Microsoft is urging its staff to redouble efforts to identify and exploit new technologies.

Whether anything comes from Gates’ exhortations remains to be seen – but it will serve additional warning to its competitors that it is taking threats to its business seriously.