Ad Age has a big special issue out today on digital media. I contributed an article that looks at some of the implications of the rise of cloud computing, particularly the blurring of the line between the consumer software business and the media business:

In a closet in a spare bedroom of my house is a crate of PC-software programs on CD-ROMs and DVDs. There are dozens of them neatly wedged into their plastic cases – financial programs, graphics programs, encyclopedias, games, business applications, hobby applications. And they all seem, suddenly, like strange artifacts from the past …

Read on.

I was in Germany this week, giving a talk at CeBIT, and didn’t have time to do any blogging. But I received a nice homecoming gift this morning, as The Big Switch appeared in the new Wall Street Journal business bestseller list, at Number 5 – just behind Good to Great and just ahead of Who Moved My Cheese?

I’ve received a few more hints about the big cloud-computing initiative Microsoft may be about to announce, perhaps during the company’s Mix08 conference in Las Vegas this coming week. One of the cornerstones of the strategy, I’ve heard, will be an aggressive acceleration of the company’s investment in its data center network. The construction program will be “totally over the top,” said a person briefed on the plan. The first phase of the buildout, said the source, will include the construction of about two dozen data centers around the world, each covering about 500,000 square feet or more. The timing of the construction is unclear.

If accurate, this report would be in line with comments that Microsoft CEO Steve Ballmer made in an interview with the Financial Times a week ago. Echoing predictions already made by representatives of Sun Microsystems, Yahoo, and IBM, among others, Ballmer argued “that a new super-group of tech companies would dominate the cloud computing market, each of them managing what amounts to a giant centralised computer made up of a number of big datacentres. ‘Amazon has one. Rumours are Google will have one. We’ve said we’re going to have one,’ Mr Ballmer said.”

Despite the airiness of the “cloud” buzzword, web-based computing requires a whole lot of bricks and mortar. Microsoft has the resources and, it appears, the will to invest many billions in the physical infrastructure necessary to secure a place among the “super-group” of companies set to dominate the new era of computing.

I’ve also heard that people may be “stunned” about the extent to which Microsoft will embrace open-source software and interoperability in its plan. We shall see.

Put your ears to the ground, my friends, for the Beast of Redmond may be stirring. I’ve heard that Microsoft has begun briefing its large enterprise clients on an expansive and detailed strategy for moving its software business into the cloud. If the report proves correct – and I make no guarantees – the company will unveil the strategy to the public either next week or the week after.

It’s been two and a half years since the famous Halloween memos in which Bill Gates and Ray Ozzie warned Microsoft’s top executives and engineers that a “services wave of applications and experiences available instantly over the internet” was approaching and that it would reshape the traditional software business. Since then, Microsoft has been fairly quiet about its plans for riding this new wave. It’s rolled out, in a piecemeal fashion, some modest new web applications for consumers and small businesses, but these moves have largely been on the periphery of its business.

There are, it seems to me, at least two very good reasons for Microsoft’s deliberate pace up to now. First, its business and marketing priority has been the rollout of the recent upgrades to its core Windows and Office programs. It’s had to milk the cash cows. Second, it’s been building out the backend infrastructure – the data center network – required to run web apps reliably and on a large scale. These obstacles are now coming down. The upgrades have been out for more than a year, and, despite some glitches, have generated a lot of cash for the company. As for its infrastructure, a massive new data center near Chicago is expected to come online this year, adding to the capacity of the new centers the company has built or bought in Washington, Texas, and California.

The new strategy will, I’m told, lay out a roadmap of moves across three major areas: the transformation of the company’s portfolio of enterprise applications to a web-services architecture, the launch of web versions of its major PC applications, and the continued expansion of its data center network. I expect that all these announcements will reflect Microsoft’s focus on what it calls “software plus services” – the tying of web apps to traditional installed apps – but they nevertheless promise to mark the start of a new era for the company that has dominated the PC age.

Andrew Orlowski has just posted an excellent interview with Feargal Sharkey, the singer whose inimitable warble iced the cake that was The Undertones. Sharkey has, Orlowski reports, “crossed into regulatory and policy work” in the music business. His level-headed observations about the future of that business, at once realistic and optimistic, provide a nice counter to the fuzzy-headed thinking that often arises in discussions about online piracy, free music, and the cost structure of musicianship and recording in the digital era.

Sharkey praises the fact that the Net has provided many people with new ways to express themselves – “in my book anything that’s going to encourage people to be creative in any way gets my bloody applause every single time” – but he puts a fork into the rose-tinted arguments that piracy is good for the many musicians who struggle to turn their passion into a living:

I’m aware a lot of people seem to think that when downloading something off the internet for free, there’s a large, black, soulless, faceless, moneygrabbing multinational company there that will never miss the £7.99.

But the brutal reality of life is: according to the Musicians Union, 80 per cent of musicians will make less than £10,000 this year. And according to the MCPS, 95 per cent of composers and songwriters will earn less than £15,000 in royalty income.

Invariably, it’s artists and creators who are at the sharp end of this food chain, and they’re the ones that will get to the stage that they’ll give up and go and do something else – because they have to pay the rent, pay the gas bill and feed themselves, buy shoes, and deal with all the things normal people expect to deal with in life. So people have to realise there’s an implication in this.

There’s been all this play about FairTrade coffee and FairTrade sugar – but what about FairTrade bloody music?

Good question.

For years now, we’ve seen a steady stream of would-be “Microsoft killers” – products that were going to break the hold of Windows and Office over the PC desktop. It’s been assumed that a deterioration in Microsoft’s fortunes and power would manifest itself in losses of market share. But that’s been a faulty assumption, one based on a belief that future competition in personal computing would continue to be fought out on Microsoft’s turf – the PC’s hard drive.

The real threat to Microsoft has always been that the battle would shift away from its turf, that its traditional hegemony over the PC would begin to matter less. The threat, in other words, wasn’t so much that Microsoft would lose its control over the operating system and the personal productivity application, control reflected in market share numbers, but that its control would simply fade in importance. And that phenomenon – the loss of importance – would be revealed through a loss of pricing power, not a loss of share.

That’s what we’re beginning to see today. At the edges of its vast and incredibly lucrative market, Microsoft is losing pricing power. As the center of personal computing moves from the PC hard drive to the web, people’s reliance on Windows and Office begins, slowly, to fade, and as a result their motivation to buy or upgrade the programs weakens. To maintain its market share, Microsoft has no alternative but to cut prices.

Over the last couple of years, Microsoft has slashed the price to home users of retail copies of its Office suite. Last fall, it launched a special promotion aimed at college kids in which it cut the price of its high-end Office Ultimate 2007 edition by 90%, to just $60. In the end, as free alternatives continue to improve, it will probably have no choice but to give away a version of Office to students.

Now, Microsoft has also announced sharp discounts, effective later this month, for retail versions of Windows Vista. In the US, the price of Windows Vista Ultimate will be cut from $400 to $320, while the price for an upgrade version of Vista Home Premium will fall from $160 to $130. Such cuts, one analyst told Cnet, are “very unheard of.” In explaining the reason for the discounts, Microsoft executive Brad Brooks was quite clear: there’s been little demand among PC users for upgrading old versions of Windows to Vista. The PC operating system just doesn’t matter the way it used to.

“Today,” Brooks said, in a press release, “the vast majority of Windows licenses are sold with PCs; retail stand-alone sales, in contrast, have been primarily from customers who value being early adopters and those building their own machines.” Microsoft has been testing price discounts for Vista in various markets, and, says Brooks, “one constant emerged – an increase in demand.” Yep, it’s true: if you cut prices, you increase sales.

It’s true that retail sales of Windows and Office to consumers represent a relatively small portion of overall sales. But that’s the way a loss of pricing power tends to work. It begins with the most price-sensitive customers and then works its way in toward the center of the market. To get a read on the long-term financial prospects of Microsoft’s core businesses, don’t focus on the market share report; look at the price tag.

UPDATE: Another point worth mentioning: Because the marginal cost of producing and selling a copy of a software program is so low, price discounts at the edge of the market are likely to provide an immediate boost to Microsoft’s profits by bringing in high-margin revenues from a set of customers who otherwise would not have bought the programs. The financial danger to Microsoft lies further out, as the loss of pricing power expands to core customers. Given the relative price-insensitivity of a lot of those customers, the process could take a fairly long time.

On Thursday, Google formally unveiled its personal health records service, Google Health, with a speech by CEO Eric Schmidt and a blog post by product VP Marissa Mayer. The service will initially be tested with a group of volunteers who are patients at the Cleveland Clinic before being rolled out to the general public later this year. Future partners will include a slew of hospitals and care providers, medical testing companies, pharmacy chains, and health insurers. Microsoft rolled out a similar service, called HealthVault, last October.

There’s much to be said for such services. Today, a person’s health records are often scattered in many locations and in many forms, both paper and digital. They can be hard to find and even harder to combine into a unified whole. At best, that’s a nuisance. At worst, it puts people’s lives at risk. So far, the medical establishment has made little progress in rationalizing patient records. A company like Google, which knows how to apply enormous computer power to the organization of information, has the resources and the expertise to help solve this problem.

There are reasons for concern, however. The issue of security – in particular, questions about how sensitive medical information will be safeguarded once it enters a database that lies outside the realm of doctor-patient privilege – has already spurred much discussion. Less discussed so far, but perhaps even more troubling, is the issue of the possible commercial exploitation of personal medical information. Providing drug makers, law firms, and other companies with the ability to target ads to people based on their health histories and current illnesses would be a goldmine for the operator of a popular health records site. As one Wall Street analyst, Piper Jaffray’s Gene Munster, told USA Today, “Advertisers would pay absurd amounts of money to be seen when someone wants to, say, refill a subscription online. This is more lucrative than commerce-related search.”

Microsoft currently displays ads targeted to searches carried out through the HealthVault site, but it doesn’t tie ads to the health records themselves. Similarly, Google has stated that, at the moment, it has no plans to use personal health information to target ads. But neither company has ruled out the practice explicitly and entirely. Both have left themselves plenty of wiggle room for the future. As USA Today noted in its report, “Google said it wouldn’t start out selling ads but wouldn’t rule it out.” Munster, noting the huge amount of money that’s at stake, “firmly believes ads will happen.”

I hope Google, Microsoft, and the other for-profit companies aiming to get into the health records business will prove Munster wrong. Exploiting information about people’s illnesses to feed them ads is ethically distasteful, and it could distort the course of medical treatments as well. It’s true that we’ve already slid a good ways down this slippery slope, having allowed drug companies to advertise pharmaceuticals like soap, but tying ads to individual health records would vastly expand the potential for manipulation and abuse.

Now, while these services are in their infancy, is the right time for a public debate about the guidelines under which for-profit companies should operate health-care databases. I would hope that companies like Google and Microsoft would step forward and provide ironclad guarantees, without any wishy-washy “opt-in” and “opt-out” qualifications, that they will not allow any of the health information they store to be used to target ads or underpin other kinds of commercial promotions – ever. But if they’re not willing to do that, policymakers should consider imposing such guarantees on them. Information technology can do much good here, but it can do harm as well.