Getting Microsoft executives to admit that the company is plotting a transition from traditional software to Web-based services is like getting President Bush to talk up his timetable for withdrawal from Iraq. But this week, the first cracks in the stone wall of silence appeared. No, not with Mr. Bush. With Microsoft.

Microsoft, which was once one of the fastest-moving and customer-centric companies on earth, has fallen on hard times lately. Sure, the company is still raking in revenues and profits, but its traditional money makers--Windows, Office, and Windows Server--are still its only money makers, while its Internet services, video games, mobile devices, media players, and other offerings are still wallowing in massive losses and lost market share. Microsoft was widely criticized for not seeing the shift to the Internet a decade ago, but today, the company faces a similar issue: Increasingly, customers are turning to Web services-based solutions. And all Microsoft really offers is services that link up to, yep, Windows, Office, and Windows Server.

That situation may finally be changing. At this week's annual Worldwide Partner Conference, Microsoft finally admitted that it was working on Internet services software solutions that may actually compete with its traditional offerings for the first time. "Look, this is going to happen," Microsoft CTO Kevin Turner said this week during a keynote event. "We need to build the door and go through that door and reach that opportunity. Software plus services is imminent, it's going to happen. It doesn't mean the traditional client-based software or locally based software is going to go away, but the customer is going to want the choice."

Under the new Microsoft plan, the company will begin offering its business customers a range of software solutions. Some will be solely client-based, such as the Office suite its customers know and love. Some will be hybrid "software + services" offerings that combine the best of local applications with Web services. And some, finally, will exist solely in the Internet cloud. This new tact has far more in common with, say, Google's strategy for applications that it does with anything Microsoft has done in the past.

To host its Internet-based offering, Microsoft is working on a "cloud platform" called Windows Live Core that will sit alongside Windows, Windows Server, and Windows Mobile as yet another Windows-based (or, Windows-like) platform. The first infrastructure services based on this platform will ship later this year, Microsoft CEO Steve Ballmer says. And the company will increase its 2007 $7 billion R&D budget in order to expand its offerings into this new market.

"I guarantee you Microsoft will lead in driving this next generation of computing and user-interface models just as we have the last couple of generations," Ballmer said during his own keynote address at the event. "You'll all have choices, but suffice it to say priority number one in terms of our long term outlook is this transformation, and we're going to make sure it's a very successful one for our customers, for our partners, and, of course, for Microsoft."