????A Battered brand

????While the Google battle is about growth, the feud with Apple is mostly about honor. It pains Ballmer and his troops react viscerally when they watch those Apple ads - and when they see how much they've harmed Microsoft's reputation. The consulting firm CoreBrand calculates Microsoft has declined from 11th among global brands in 2004 to 59th today, and reports that the two-year-old "Get a Mac" campaign has almost certainly played a role.

????The ads hurt even more because they strike a nerve. On the whole, Vista has been a business success. After all, about 140 million PCs have shipped worldwide thus far with this latest version of Windows built in. But even at Microsoft, where acknowledging mistakes is rare, people concede that Vista had flaws, at least at first, and that its launch was embarrassing. Microsoft execs have high hopes for the next version, Windows 7, which they say will emerge in 2009. It is designed to make the operating system on your PC only a piece of a larger Windows experience that will include your cellphone and the web. In the meantime, Ballmer does not intend to keep tolerating Apple's insults.

????The new marketing campaign, which is supposed to run for three years beginning later this year, is an urgent attempt at triage for both Windows and the larger Microsoft brand. The expensive, aggressive, long-overdue rejoinder to Apple will be unprecedented at the company in its scope. A year ago Ballmer okayed the effort, led by Bill Veghte, who is responsible for both Windows and search. He partnered with marketing boss Mich Mathews, then the two recruited an all-star team from across the company - the best experts at branding, packaging, online advertising, and other specialties.

????Two days a week this group drove to a special skunkworks away from the Microsoft campus in Redmond to work quietly on the project, code-named FTP168 (the "FTP" is said to stand for "free the people"). Ballmer approved an additional $200 million for Windows advertising this year, even though in nonlaunch years there is typically no budget increase at all. The aim of the campaign will be to talk about things you can do with your PC that you could never do before.

????Even more important, Windows itself is being reconceived. In the next 18 months Microsoft will launch three separate "Windows" products, more or less in tandem. Aside from the flagship Windows 7, which will succeed Vista for PCs, the company will launch a new version of Windows Mobile as well as a new version of the services known as Windows Live. For the first time, they're going to be promoted as aspects of the same thing. "We're making a huge bet that a closer relationship between the PC, the phone, and the web is what the consumer wants," says Veghte. Windows Mobile is itself a fast-growing success story after many years of investment. The software currently operates on about 120 million cellphones worldwide, and the company will sell 30 million copies this year.

????Microsoft people talk a lot about "soft-ware plus services," but this new Windows wave, combining software on the PC, the phone, and the web, will finally put the slogan to the test. It may not be dominant in search or e-mail, but Microsoft does have a large web population that is getting steadily bigger. Johnson says there are 430 million users of Windows Live Services each year, a figure growing 20% annually. Those services include Hotmail and Live Search, as well as instant messaging and blogging products and things like the clip art function in Office Online. At the moment 80 million people each month use that service alone.

????Microsoft is also selling web services to business. Any company that wants to purchase 5,000 seats or more for a Microsoft Exchange e-mail system can use something called Exchange Online, completely hosted by Microsoft on servers it dedicates to that company. Coca-Cola Enterprises has 70,000 employees using such a system. Microsoft is also now beta-testing a do-it-yourself version of Exchange Online, in which companies as small as five people will be able to create a corporate e-mail system just by going to a website and submitting a credit card number. Microsoft will host and maintain the service.

????Some critics assert that the entire "software plus services" mantra is only a way to maintain Microsoft's historical grip on its customers. Says Marc Benioff, CEO of Salesforce.com, the poster boy of the latest era in enterprise software: "The very term is evidence that Microsoft does not get it. They want software plus services because the software is their monopoly. They might as well rewrite it as 'monopoly plus services.' " It will be interesting to watch how much flak Microsoft gets for trying to use its Windows PC monopoly to draw people into its ad-supported online services.

????Bill Gates can never be replaced. That's what Ballmer started telling his leadership team a couple of years ago. Instead, said Ballmer, he needed to be replaced by processes to duplicate elements of what he brought to the company. That is partly the genesis of the power-sharing arrangement between Ray Ozzie and Craig Mundie. And Ozzie's staff now manages what Microsoft calls its "quests." These are 70-odd efforts to create entirely new ways of using software in various parts of Microsoft's business - just the kinds of visionary efforts that might have been led by Gates back in the day. But he could never have spearheaded 70 of them. Today there are quests on things like computer vision and speech, on ways to write software using one-tenth as much code, and on how to create a "dynamic datacenter" with computers that know what software is running on them.

????How long can a Gates-less Microsoft retain the driving, visionary ambition with which he imbued the company? (See sidebar.) Colleagues say Ballmer is even more competitive than the company co-founder, which is probably a big reason why Gates wanted his Harvard dormmate to join Microsoft way back in 1980. The fact is that the heart and soul of Microsoft has never remotely resembled John Hodgman's nebbishy helplessness. Microsoft is likely to remain, to use a phrase Gates particularly loves, hard-core, like the man who made it what it is.