As Bill Gates signs off from his day job after 33 years, JOHN HARRIS looks at the unprecedented challenge facing Microsoft from an online onslaught of free software..

Bill Gates spent his last day as a Microsoft employee last week.

While he stays on as chairman of the giant software corporation he founded as a dropout college student in 1975, Gates leaves Microsoft facing one of the greatest challenges of its 33-year history –the onslaught of online applications.

After BASIC beginnings, Microsoft was subcontracted by IBM to develop operating system software for the original IBM PC. IBM got its PC and Microsoft kept licensing rights for its MS DOS software.

Ultimately, the software proved a more valuable franchise than the personal computer design held by IBM, which several years ago flogged off its PC division to a Chinese crowd called Lenovo.

Today, Microsoft software is used for everything from millions of PCs and network servers to the Xbox gaming console and Windows Mobile 6 mobile phones. With 2007 revenue of more than US$50 billion and annual growth of 13 per cent, Microsoft should be sitting on top of the world.

In fact, it is looking over its shoulder.

This colossus of the software industry is facing attack from a number of fronts: While no one blow may prove lethal, collectively they threaten to cruel Microsoft’s future as the kingpin of software.

On one flank is Google, the search engine start-up that has gone from zero to hero during the past decade. Touting the ethic of “don’t be evil”, Google has played the counter-culture anti-hero to Microsoft’s straight-faced suit-and-tie culture.

Microsoft loves the desktop, the terrain inhabited by Windows: Google loves the Internet.

Microsoft sells much of its software with big ticket prices: Google gives away its software.

Despite trying not to, Microsoft reeks of the machine: Google basks in the artisan.

Google is also growing fast. It 2007 revenues were a shade under US$17 billion, 56 per cent greater than in 2006. More importantly, Google, which is largely funded by online advertising, offers a bunch of cool software tools for free.

Google Desktop http://desktop.google.com/ is a search engine for your home computer that can interrogate every bit of your hard drive in seconds. Google Docs http://google.com/docs is a suite of online applications for word processing, spreadsheets and presentations. Picasa http://picasa.google.com/ is a great photo editing and management program that is simple to learn and use.

The absence of a price tag is what makes Microsoft shake. A complaint about Microsoft’s applications is that they offer so many bells and whistles that it’s tricky to extract core value from them.

What Google Docs and other online apps lack in tinware, they make up for in simplicity.

But the online onslaught is not limited to Google. A world of open source developers is collectively creating a new generation of programs that are designed and developed collaboratively, as opposed to the proprietary model used by Microsoft. One example is OpenOffice www.openoffice.org/, a no-cost, open source application suite currently working on its third version.

While this might not undermine Microsoft’s might next week, it is whittling away at the inevitability of choosing the Big M’s software as a preferred purchase.

Even traditional application vendors are getting into the online business model:

In May, IBM unveiled version 1.0 of Lotus Symphony, a free application suite, based on the Open Document Format (ODF), which offers word processing, spreadsheet and presentation programs.

Graphics company Adobe has created an online version of its PhotoShop photo editing program. PhotoShop Express www.express.photoshop.com to let you edit and publish photos on the Internet.

While PhotoShop itself costs from $1155 to buy, the online freebie is touted as "the on-ramp to the Adobe digital-imaging franchise", a try-before-you-buy experience that’s intended to predispose consumers to buying Adobe.

The online opportunity is a new world order that Microsoft is still coming to terms with.

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