Knowledge@Wharton has published an excellent (once you get past the interminable introduction) interview with Ray Ozzie, Microsoft’s official software visionary. Ozzie doesn’t say anything unexpected, but he provides a through and often subtle explanation of his view of the future of software and of Microsoft.

He lays out what he sees as the five great transformations in the computer business – “mainframes to minis, minis to PCs, PCs to LANs, LANs to the web, the web to where we’re going, which is services” – and argues that “we only have one shared future as a software industry. And that is centrally deployed code that has a different lifetime associated with it on the device it’s deployed to.” The lifetime may be as brief as the length of time a browser window remains open or it may be as long as a person owns a device. “All apps – whether Win32 code, Flash code, managed WPF [Windows Presentation Foundation] code – are going to have those lifetime choices and will all be centrally deployed, whether that central deployment is from an enterprise or from a service provider on the web. The concept of CD-based installs, floppy-based installs or USB stick installs are artifacts of a time when we were not fully connected.”

In that context, Ozzie emphasizes his belief that software for the foreseeable future will be a hybrid of code running centrally, somewhere in the Internet “cloud,” and code running locally, on a PC or other device.

When we, as an industry, communicate the meaning of an architectural shift to customers, sometimes it’s great to take an extreme position because it helps people to understand the benefit of this new era. In first generation “software as a service,” people tried to push the browser as far as it could go. But the most important mission of vendors is to figure out what value they are delivering, not how they are delivering it. If you look at people like Salesforce.com, they may talk “software as a service” being [exclusively] through a browser, but they have an offline edition … What we as an industry need to deliver are seamless experiences – however those things are accomplished – to do the appropriate thing in the browser and the appropriate thing on a laptop or on a device to solve that problem. So the way I view it is, first generation “software as a service” really just meant browser. Second generation means weave together hardware, software and services to accomplish a specific solution.

Ozzie divides the challenges facing Microsoft into “little i” innovation and “big I” innovation. “Little i” innovation involves the ongoing improvement of its traditional products – Office and Windows, in particular – in their traditional form. “Big I” innovation means adapting to the shift to the provision of software as a set of online services and achieving the right hybrid solutions for customers.

So each group within Microsoft – and in our industry – is at a point where we should be saying, “If we’re aspiring to deliver productivity to a customer, how should we best weave that into services that are deployed through a browser? What aspects do you want mobile? What kind of synchronization should automatically be built in? Should I use the camera in that mobile device to snap a picture of the white board and have it automatically go up to the service and integrate it with the other documents related to this meeting that I’m working on?”

Ozzie is asked why he, and Microsoft in general, has been slow to unveil concrete details of how the company will transform its software and its business in response to the “services disruption.” He responds:

I have been trying to work internally on some fairly interesting things and we will talk about them as they become more real. We’re out there talking about what the most important things are to deliver for the company today, which are Office and Vista. Those are the primary things we are talking about right now. Are we ready right now to talk about how to change the game in search or how Microsoft might weave services into our various offerings? No, we’re not. But we will.

Here we see the very real dilemma that Microsoft finds itself in today. To maintain its growth and profits, it has to focus for the time being on promoting the new versions of Office and Windows, even though they are, by Ozzie’s own implication, relics of the past – “artifacts of a time when we were not fully connected.” If the company were to excitedly “talk about how to change the game,” through offering software more as a set of services deployed centrally, it would trample on the Office and Vista sales pitches. Who wants to buy relics of the past?

What Microsoft is counting on is that the transformation of the software business will proceed at a measured pace, that the company will be able to continue to reap large profits from its traditional products even as it slowly and steadily changes their nature. “Whenever someone has a very successful business,” says Ozzie, “there is absolutely a risk of innovator’s dilemma. I believe it’s too soon to tell whether there is a significant risk of that kind of disruption in [Microsoft’s] core businesses – simply because we’re in the early days of understanding the role of web-based productivity versus PC-based productivity. I am not one to believe that suddenly you snap fingers and everything that you do on the PC is doable on the web.”

Counting on a measured and manageable transition – and in particular on the sustainability of existing pricing and profit models – is a risk, but it would seem to be a risk that Microsoft has little choice but to take.