Microsoft CEO, Steve Ballmer, signalled another step towards a dramatic change in the software giant’s business model.

In London on a whistle-stop tour, Ballmer said, “We are a software company, and yet in a sense, the very form of our core capability is changing. We need to change our capabilities so that we are not just good at writing bits that you put out on CD and deliver, but rather writing this thing that is a living, breathing, dynamic, organic thing.

Ballmer says that CTO Ray Ozzie’s vision of software as a service, or software plus services as Microsoft prefers, will eventually overtake shrink-wrapped software sales.

“It’s not in the next two, three, four years, but in the long run it’ll happen. Some of that money will come through subscription revenues, some will come through transaction revenues and some will come through advertising revenues. The average consumer really doesn’t like to pay for things. And anything that can be ad-funded sensibly for the customer and sensibly for the provider will be. Will online publications be largely ad-funded as things move from the physical world to the online world? I think the answer to that is yes.

“I think there will be some subscription businesses, and yet I think the rest of the group will be either ad-funded or essentially not for profit.”

Ballmer also drew attention to the dangers of Google’s dominance in online advertising, “It could be quite an economic problem for anybody who wants to offer an ad-funded experience on the internet, or anybody who wants to buy advertising,” he says. Predictably he put Microsoft forward as “the most sensible, credible alternative to Google”.

On Windows Vista and its critics he said, “The uptake on new computers has been very good amongst consumers. We’ve a little bit more work to do to resolve some issues that are slowing acceptance in smaller businesses and, as always, it takes longer to get things through the approval process of larger businesses.”

Is Microsoft interested in buying a stake in social network site, Facebook? “Sure they are an interesting internet property. They have a lot of growth, a lot of page views, a lot of users and we want to make sure that their stuff runs on our advertising platform, and we are excited to be there. We will make acquisitions where they make sense. Our strategy is to be strong in the areas of communications and social interaction; to be strong in the area of search, portal and information management; to be strong in advertising platforms. And if acquisitions will accelerate that as Aquantive did, we will make more acquisitions.”

Former Microsoft evangelist and blogger, Robert Scoble, says Microsoft’s CTO, Ray Ozzie is planning a similar service to Amazon S3 :

“Amazon S3 charges right now about $.15 per gigabyte of stuff delivered. Watch what happens after Ray Ozzie jumps into the market. I bet that by late 2008 the cost per gigabyte delivered will be about 1/10th that.”

Dave Winer agrees — from a “future-safe” perspective : “The more the merrier. I’ll use them both. What are the chances that both Microsoft and Amazon go out of business? We’re starting to approach future-safeness.”

There’s nothing quite like an overkill of riches, it seems. Except, perhaps, a little peace once in while.

Microsoft was put on the back foot today by the announcement of Google’s Office challenger, Apps Premier, its subscription package of premium, business applications hosted online.

For $50 (£26) a year per user, Google Apps Premier Edition will offer business customers a number of web-based applications including email, word processor and spreadsheet. It will compete with Microsoft Office’s desktop-based Word and Excel.

A Microsoft spokesman downplayed the launch, claiming online services such as Google’s are “not alone in altering today’s technology industry. Productivity applications represent a very competitive space in which more than 450 million users around the world have consistently chosen Microsoft.”

The Times (London) says : “Microsoft’s Business Division, which includes Office, accounted for $3.5 billion of the group’s revenues of $12.5 billion in the latest reported quarter, making it the largest source of sales. However, industry insiders say that Google has been quietly preparing for months to tap Microsoft’s cash-cow. Keen to supplement its lucrative search business, Google has built massive data-storage plants, thought to be years ahead of those so far developed by Microsoft and IBM.”

This “cloud” is now being used to host both software and data, while the internet becomes ever more the operating system.

Tom Austin, of Gartner, the technology analysts, said: “This constitutes a real threat to Microsoft’s business model. Eventually, it will have to switch from limited-use licences to software as a service. That will require a fundamental reengineering.”

Despite investing heavily in Office 2007, which was released earlier this month and which, like its predecessors, is anchored firmly to the PC, Microsoft has earmarked $2 billion to develop its own data centres.

The company added that it is now partnering other businesses “to capitalise on emerging services, such as advertising-based software, subscription or on-demand software”.

Most of the Premier Edition components are already available free. “From today, for the first time, it will charge for “white label” tools that carry its customers’ brands, so that e-mail addresses can be in the name of the client company.”