A couple of days ago, I reread Ray Ozzie’s famous memo to top Microsoft’s top executives and engineers on “the internet services disruption,” as well as Bill Gates’s cover note. The sense of urgency in both men’s words remains striking. Gates spoke of the software-as-a-service model as being a “wave” that could swamp the traditional software business. Ozzie said that “the most important step is for each of us to internalize the transformative and disruptive potential of services. We must then focus on the need for agility in execution.”

It’s been a year, exactly, since those memos went out. A lot’s gone on in that time. It basically covers, for instance, YouTube’s entire lifespan, from early startup mode to explosive viral growth to being bought out for more than a billion and a half dollars by Microsoft’s nemesis in Internet services, Google. A lot of startups have jumped pell-mell into the so-called “Office 2.0” business, hoping to create online alternatives or complements to Microsoft Office. While their services, for the most part, remain rudimentary, they’ve progressed significantly over these last 12 months.

So where’s Microsoft? I think it’s fair to say that the company’s been distracted. It’s been struggling to get what seem likely to be the last major upgrades (in the traditional sense of upgrades) of its two major products, Windows and Office, out the door. It’s been working through organizational changes, not least Gates’s cutting back of his role in the company. It’s been continuing its seemingly permanent negotiations with European regulators. (“Another croissant, Mr. Ballmer?”) It’s been constructing big-ass utility data centers. And, needless to say, it’s been sucking in a ton of money. Oh, and there’s that Zune thing, too. Big companies tend to have a lot on their plates, and Microsoft’s is heaping full.

It’s not surprising, therefore, that the company hasn’t yet demonstrated the “agility in execution” that, as Ozzie argued, it needs if it’s going to make a successful transition to the services model. Yes, it’s been expanding the services, or “Live,” side of its business. But the steps have felt tentative, and the products, so far, have been underwhelming and ill-branded. (Like Google, Microsoft might really want to hire someone with a little talent in naming products.) The Live stuff hasn’t exactly been turning any heads.

Early today, Dan Farber reported on a conversation he had with Ozzie yesterday evening. He asked Microsoft’s new chief software architect about what he thought of the Office 2.0 crowd and the potential threat it posed. Ozzie’s response was as thoughtful as you’d expect, but it also was surprisingly tepid. It lacked the urgency you heard in his memo:

From Ozzie’s response, Microsoft is not in a hurry to deliver a pure Web Office, nor does it have its head in the sand. “People have been trying to create applications with Web technology since the Web began,” Ozzie said. “Just because you can do it, doesn’t mean you should. We are looking at Google Docs & Spreadsheets, and paying attention to Office 2.0 and Zoho. We are also putting those in front of customers and seeing what makes sense.[“] Ozzie said that Microsoft [is] taking a holistic view of how to proceed from a customer point of view, and modeling various user scenarios. ”

“Modeling various user scenarios” does not seem like a recipe for “agility in execution” in the new world of software – a world in which “user scenarios” are defined not in laboratory settings but in the rough-and-tumble of the web.

Farber continues:

I probed a bit more on the topic of whether a tipping point had been reached for browser-based suites. Ozzie said that no announcement is forthcoming. However, I would guess that Microsoft [is] busy coding browser-based Office components and could pull the trigger rapidly if it were deemed necessary to compete. Nonetheless, Microsoft could miss the window of opportunity, as it did in Web search, and have to play catch up in a category that is a major cash cow for the company. Developing the ultimate hybrid Office platform, beyond the forthcoming Office 2007, that accommodates all kinds [of] online and offline user scenarios could also take a long time versus the faster moving upstarts adding new features every few months and taking advantage of improvements in bandwidth and network reliability.

I’ve argued here in the past that Microsoft is in the catbird’s seat when it comes to leading the shift of personal productivity applications from the desktop to the web. We’re not at a “tipping point,” so far as the mainstream business market is concerned. We’re at the start of a transitional period in which the capabilities of desktop applications will be extended by, and slowly replaced by, the capabilities of services. As the dominant player – the only major player, for that matter – in desktop productivity apps, Microsoft has a strong natural advantage (some would call it an unnatural advantage) in coming up with the interim hybrid productivity apps that will be broadly adopted by businesses.

But while there’s no particular reason for Microsoft to act rashly, there is a big danger in relying on “the holistic view.” The new world is not going to be created holistically. It’s going to be created piecemeal. Farber’s right that Microsoft could easily come to find itself playing catch up. That’s not the ideal position to be in when it comes to software services that can take over the market with YouTube-like speed. You have to be in the fray, if only to keep your competitors off balance.

I’ve been fiddling around with SlideShare recently. It’s a service that makes it simple to publish PowerPoint presentations on web sites and blogs. As Ross Mayfield has said, it applies the YouTube model to PowerPoint. It’s one of those products that you look at and say, “This is really useful. I need this.” There’s no doubt in my mind that there’s a big market for a service that makes it as easy to syndicate presentations as YouTube makes it to syndicate videos. There’s a problem, though. SlideShare, which is in beta, doesn’t work very well yet. It can’t handle a lot of the graphics and charts and other elements routinely found in PowerPoint presentations. Which means it’s still a long way from being “easy.”

And yet this is such an obvious extension of the usefulness of PowerPoint that you have to wonder why Microsoft isn’t out there with its own innovation. It can’t be a matter of resources and coding expertise. If a dinky firm like SlideShare can do it, Microsoft can certainly do it. And this service doesn’t threaten to cannibalize PowerPoint sales at all. In fact, it would make PowerPoint more valuable – and it would also open up to Microsoft an opportunity to gain additional revenues by hosting the syndicated presentations on its own servers. You give away a little storage space with every version of PowerPoint, and then you charge companies for additional space. It’s kind of a no-brainer, so far as I can see.

Why this kind of piecemeal service is dangerous to Microsoft is that it does have a YouTube-like quality. It solves a common problem. Once it gets good, it could take off rapidly. And if it’s somebody else’s service that takes off, it would put a dent in Microsoft’s control over the market. It would begin the process of erosion that’s the biggest threat Microsoft faces with Office.

Sure you should think holistically. But you shouldn’t let the whole blind you to the importance of the pieces.