Microsoft Corporation reported third-quarter results today. Earnings slip below target, as indicated in this CNET article. But what is more interesting is the guidance that was given to investors, indicating that future earnings would be significantly impacted by a dramatic increase in investments dedicated to the development of the Windows Live platform.

Microsoft is one of those rare companies that managed to successfully re-invent itself several times over the course of their existence. Nevertheless, the challenge that lies ahead might be systemically more difficult to overcome than any other the firm has been faced with in the past. To a large extent, Microsoft’s anti-competitive practices of the ’90s against companies such as Netscape and Sun Microsystems were fueled by one fear: the impending irrelevance of desktop operating systems in a world where web browsers would become the conduit for most computing activities. Unfortunately — or shall I say fortunately for Microsoft — such a fear did not materialize back then, for web technologies were not mature enough to support the development of alternative office solutions that could be served by a web browser. If you remember Corel’s doomed attempt at implementing an office productivity suite using one of the first versions of Java back in 1995, you know what I am talking about.

Well, fast forwarding ten or eleven years into the future, such fears are finally materializing, and so faster than anyone could have anticipated. AJAX, in the very many flavors that are available today, has become solid enough to support the development of truly enterprise-class applications, and even though the feature sets offered by the first Office 2.0 suites pale in comparison to the ones of Microsoft Office or StarOffice, they appear to be good enough for a growing user base. Give it a year or two, and a critical mass will be reached, which will mark a point of no return for the market at large.

The folks at Microsoft are smart, and they have acknowledged this risk better than anybody else, which is one of the reasons why they decided to increase their investments on Windows Live. Problem is, I am not sure that it will make much of a difference. Granted, Microsoft can put more resources on the job than any other company could, including Amazon, Google and Yahoo! combined. Nevertheless, the problem is not a technical one, it’s a systemic one. Roughly half of Microsoft’s profits come from perpetual license sales for shrink-wrapped software — Microsoft Office, and switching to a subscription model for online services is a very difficult transition. If you add to this the fact that such online services will be made available for free to end-users and corporations alike by companies such as Google in exchange for advertising revenue, it will create a competitive environment where Microsoft will have to cannibalize its existing business faster than its shareholders might want it to.

I have a lot of respect for what Microsoft built over the past thirty years. No other company understood the needs of end-users as well as developers better than they did. For this reason, I would love to be proven wrong. Nevertheless, looking at what’s possible today — a lot — and what it took to build it — not much — my bets will be placed somewhere else.