Ray Ozzie, Microsoft's chief software architect, answered a variety of questions this morning at a Goldman Sachs conference. There were no obvious bombshells, or surprise announcements, but people interested in where the company is headed will no doubt be analyzing his comments for indications and clues.

Among other things, he was asked about Google's impact. "Google's success very clearly caused an inflection point within our industry and within Microsoft in terms of understanding the real power of advertising as an economic engine that can be used to fund software," he said, describing it as "a wake-up call."

But Ozzie stopped short of promising a Web-based version of Microsoft Word or Excel. He acknowledged programs such as Google Docs & Spreadsheets, but added, "In the pure Web model, the trade-offs are fairly substantial."

Those are snippets from a session that lasted about 50 minutes, led by Goldman Sachs analyst Rick Sherlund. If you're interested in reading the tea leaves, continue on for some extended excerpts, transcribed from the audio broadcast.

On what Ozzie has been focusing on in his job:

Connected entertainment, connected productivity, connected business -- the opportunity really is only fulfilled if we have a services platform upon which to build these services at dramatic scale. One of the first things that I tackled when coming into Microsoft was to work with different groups to understand that each one of them was going to somehow reshape their services over time, or their product over time, based on services, and that internally, we needed a very robust, very high-scale services platform so that every group didn't have to build a service from scratch top to bottom. So we've been building the services platform that will be used within the company. Ultimately the economies of scale that we gain internally are going to be available to third-party developers and enterprises who don't deploy things at anywhere near that scale. So kind of at a high level, what I've been working on is driving a services mission throughout the company in the different areas, the three different primary business groups.

On the notion of Web-based productivity software:

... As far back as pre-bubble there was a company called desktop.com, but ever since that era, technologists have been trying to test themselves and see how much of the Office experience we could take up into a browser and make it usable in some form. And in that realm, yes, there's Google Docs & Spreadsheets, there's ThinkFree, Zoho, there are a variety of different instances of people taking the tools and kind of replicating them up into a Web environment. ... In the pure Web model, the trade-offs are fairly substantial. You have to be online in order to use them. Depending on whose version it is, there are different feature/function trade-offs. But the way I approach it and the way I view the services opportunity related to productivity is really about more than just taking what's on the PC and putting it up on the Web. I think there are high-level scenarios that if you consider you've got software on PCs, services in the cloud and devices, mobile devices, as the power that you can work with, and you try to envision the value of productivity, and what you're trying to offer, you end up with a different result.

An example of what he's talking about above:

In the realm of presentations or note-taking, if you think of it holistically, there are different things you would do with those different devices depending on the setting that you're in. For example, just take presentations. Formerly, we might have thought of PowerPoint and the in-room presentation of a slide deck as being the model of what a presentation might be. But now, with networks and services, perhaps we should be envisioning an integrated service and software scenario that would enable, for example, a lot of these laptops to be getting that presentation streamed to them while it's being done, connected to a service. A service that might be retaining a copy of that for people to use as a reference later on. In note-taking scenarios, mobile devices are now pervasive, and when you go into a meeting room, some people are sitting there typing away on laptops, but some people are writing things on white boards, and phones all have cameras on them now, and they have microphones and flash memory. We should be using phones to augment meetings in terms of recording those meetings, people taking pictures of what's on the white board and having those seamlessly woven into the notes that you're taking with a meeting on the PC or publishing into places like Sharepoint either on an internal Web site or externally. When I say the word connected productivity, what I really mean is the opportunity writ large for the industry and for Microsoft is not just to try to copy or duplicate the PC experience but to envision new sharing scenarios and other scenarios that weave together those different aspects.

On advertising as a source of revenue:

Historically, Microsoft has operated on a hybrid of two models, predominantly, either licensing or subscriptions, depending on how you characterize the nature of -- sometimes we delivered licenses in the form of a subscription with support and other things built into them. That's been Microsoft's historical model. Google's success very clearly caused an inflection point within our industry and within Microsoft in terms of understanding the real power of advertising as an economic engine that can be used to fund software. This really was a wake-up call within Microsoft in terms of, wow, this is not just something that might impact the business model within some of our existing markets, but it might actually open some significant new markets to us where we didn't really understand how to monetize that software before within that market. A lot of the software that we generate is used at home by consumers, and consumers tend to be more comfortable with software that they can get free some people get it illegally, some people do pay for it, some people pay for it on one machine and duplicate it on multiple machines, but it's very clear that consumers have embraced the advertising model.

I've been at Microsoft for two years. Most of while I've been there, there has been an increasing shift, particularly as Office Live was coming to market, in terms of really exploring the opportunity space in things that we can bring out to a much, much broader audience under the advertising economic model. It's not going to work for all software. We have no reason to believe that advertising is the most significant thing for enterprises. Enterprises have a lot of complex requirements, and although some of that advertising might be able to be tactically used in certain products within that market, I think that's probably going to stay predominately in the model that it's within. Consumers, it's clearly advertising. Small business, it's really a hybrid, and I think that you'll see not just us but everyone in our industry, they'll probably be in the small business realm, initial offerings that are advertising-based, supported by subscriptions where those small businesses want a higher quality of service, more storage, a higher level of functionality and so on.

On the importance of search:

In my parlance, I'd regard it as more or less the command line of the Internet, people kind of start there, and that's one place that people start, but different segments of customers have different centers of their starting experience. People who are into productivity really do treat Outlook as the center of their world. People who are into gaming or entertainment might treat the portal as the center of their world. And there is ... an increasing segmentation of audiences out on the Internet. I think this really gives us an industry an opportunity to really say, what's the best way to weave search into the destinations and places that they are interested in and that they go to a lot. If you look at statistics on search, every week, roughly half of people who search use more than one search engine in order to satisfy their needs, the things that they're looking for, and that really says that although people are amazed by search, it didn't exist before, they're still not completely satisfied with the result and they're looking for other opportunities to satisfy those requests. I think there's a lot of opportunity in concentration in domain-specific areas, whether it's an entertainment-related search, or yesterday we announced an acquisition, Medstory. ...

Within this marketplace, there's plenty of opportunity, now that we're past the first generation of search, to explore these other alternatives. I think advertisers, they just want to reach their audiences, and to the extent that Yahoo, that Microsoft, that Ask, that other people that have alternative search mechanisms make it easy for advertisers to transfer their campaigns from one search environment to another, they'd like to get good leads, do lead generation no matter where those audiences are, and I think we have every reason to believe we'll have a very viable and healthy ad ecosystem.

On how he views Google as a competitor:

Rather than focusing on what Google might do or what Google is doing, I actually step back and I look at how Microsoft competes with Google, or how Microsoft actually competes with anyone. Having competed with Microsoft from the outside, we always imagined how Microsoft itself operated, how did Microsoft do competitive intelligence, what did Microsoft do, because we were on the outside looking at this incredible machine. Being in Microsoft now, looking at the culture, at what goes on, it's a very interesting environment, because for the history of the company, the company has had many very strong competitors, and at any given moment in time, the company might have several very strong competitors. And I think rather than examining the specific mechanism by which Microsoft competed with one competitor, what's fascinating is to see the opportunities that were the broader opportunities that were created within the company as a side effect of competing with a given competitor.

If you look at Microsoft some years ago, before I was there, and how Microsoft decided to compete with PS2, what emerged from that very focused competition was the entire connected entertainment division and opportunity. This is going to be a huge opportunity that kind of has gaming as one core root element of it but expands into media scenarios and many many other scenarios both with centrally created content and with content at the edge. If you look at the Linux compete that has happened over the years, that very focused competition broadened into essentially the strength that you see in the Server & Tools business today -- a broader opportunity than just simply and operating system compete effort that has netted out to very substantial opportunities for our business. In the Google case, what's fascinating to me is that, although you can characterize Google as search and search compete, what really has happened at Microsoft is that there are two very significant things that have happened within the company as a side effect of that specific compete. One we just talked about, which is the ad ecosystem, a recognition that the economic engine behind advertising might have significant opportunities in many, many ways throughout offerings within the company. And the other one is essentially services-based infrastructure. Once the realization was made by the different groups that every product will have a services component, it made sense for the company to kind of go back to its roots, its platform roots, and say what kind of a platform within the company should we be building that essentially treats the service layer as a system that presents opportunity to internal first-party properties and third-party properties. And I actually believe that's going to present tremendous business opportunities moving forward that might have been catalyzed by Google but are not necessarily directly related to it.

On why it takes Microsoft so long to respond to rival products:

I think from internal DNA perspective, I don't believe that the company fundamentally believes, culturally, that the right way to compete is just to jump out and do something that's exactly the same. ... I can't respond to each of those instances. I don't know what it was like to be in Microsoft in an era competing with (Lotus) Notes. I can imagine, but I think we go back to what are our core strengths, what are the things that the existing market is doing with the product, the installed base that we've got, and how can we learn from what that competitor is doing and bring some of those features to market in a way that benefits our existing customer base. I think there is a very big focus on the customers, on that existing customer base. The Office example. I don't know that it serves our customers to jump out there and be reactionary and just try to slap some stuff out there on the Web. We have spent a lot of time with our customers, we continue to spend a lot of time with our customers trying to understand -- you know, they've made huge investments in Office -- how can services best help those Office users in ways that we might not have envisioned or that they might be recognizing or that they might not have shared with us or recognized themselves until they saw what was possible.