In an email apparently leaked to almost every media outlet and their dogs, Bill Gates and Ray Ozzie warn that the current move to a services-based world poses a serious threat to Microsoft's business.
Gates's email to senior staff, dated October 30, described the move to Web-based services as "the next sea change" and as important as his late conversion to the internet ten years ago.
The memo warns senior staff they must "act quickly and decisively" because "This coming 'services-wave' will be very disruptive".
A spokesman for Microsoft confirmed to the New York Times that the emails were genuine but refused further comment.
The memo notes the threat from advertising-supported businesses like Google and Yahoo but also warns that "grass-roots adoption and popularization model" makes it easier for start-up companies to reach a mass audience.
A document written by Ray Ozzie is called "The Internet Services Disruption" notes that Microsoft has failed to exploit technologies it was responsible for creating. He mentions search, the widespread use of pdf documents and VoIP as areas where Microsoft missed a trick. He said: "We knew search would be important but through Google's focus they've gained a tremendously strong position."