Microsoft this week unveiled two new online software services meant to capitalize on the flourishing Internet ad market now dominated by the likes of Google and Yahoo. The new offerings, dubbed Windows Live and Office Live, are meant to supplement -- not supplant -- the company's key PC software franchises. In fact, the new services don't bear much resemblance to their offline counterparts. But the ad-driven "Live" versions signal a major shift away from Microsoft's old licensing strategy, a shift that Bill Gates described as a "sea change." And that new approach may have particular significance for the small-business market, for several reasons.

First, the new products contain a number of features meant to appeal to large numbers of small businesses. Windows Live will essentially repackage and build on a number of MSN services that already exist. It will offer a personalized individual Web page with features such as Internet search, e-mail, instant messaging, file sharing, PC-based phone calling, and other options. But with Office Live, Microsoft is more squarely targeting small businesses, specifically those with fewer than 10 employees. Meant for "growing and managing a business online," the advertising-supported version of the service will include tools for building a Web site with 30 MB of free storage and five Web e-mail accounts. Office Live will also offer subscription-based business tools, including applications for project-management, time and billing management, and collaboration.

Will these tools be any good? It's too soon to say for certain. While Windows Live is available for previewing now, Office Live won't be out until early 2006. One thing is clear, though: The services can hardly be as clumsy as this week's introduction by Gates & Co., when network problems caused repeated delays in the presentation to analysts and reporters at the Palace Hotel in San Francisco. The negative buzz has already started building, but Microsoft is nothing if not tenacious.

There's another reason for small businesses to take note of the Redmond giant's announcement. Besides setting its sights on Google and Yahoo, Microsoft's new approach puts it more directly in competition with smaller companies including Salesforce.com, Webex Communications, and a host of startups providing software on demand -- the kinds of companies whose Web-based services have proved popular with smaller businesses loathe to pay for licensing deals.

As tech blogger Russell Beattie noted on the day of the announcement: "Just today we saw a variety of established Web companies already being targeted: Salesforce, Plaxo, Google Search and Maps, AIM, My Yahoo! and more -- and that's just on day one. Imagine what the near future is going to bring?" For many startup software services, the competition just got tougher.