Bill Gates has announced a fundamental shift in Microsoft’s core business offering by announcing that the company will be launching a free online office application next year.

“These new offerings demonstrate how software is evolving through the power of services in ways that enable more dynamic and relevant experiences for people”, Gates said.

The company plans to launch two main applications - Windows Live and Office Live.

Windows Live will offer access to messenger, email and news services that will run alongside The software will primarily be delivered free to users and supported by advertising in a similar model to Google’s online services, but subscription and transaction-based services also will be available.

In addition to Windows Live, Microsoft is also launching Office Live, an online office application that will go up against Sun Microsystem’s application.

Designed to help companies establish an online presence, automate key internal and external business tasks, and collaborate with employees, partners and customers, the initial Office Live offerings are targeted at the approximately 28 million small businesses worldwide that have fewer than 10 employees.

These services can be used independently but also integrate with Microsoft Office programs, including Microsoft Outlook, Microsoft Excel, Microsoft Office Live Meeting and Microsoft Office Small Business Edition. Over time, the scope of Office Live services will expand.

“A key objective of Office Live is to provide small businesses with the power to easily and inexpensively manage their business in a way that large enterprises already enjoy today”, said Rajesh Jha, General Manager of Information Worker Services at Microsoft.

“With Office Live services, we make complex technology affordable and easy to use for small businesses, empowering them to reach their business goals”.

There are multiple Office Live offerings. Office Live Basic helps a small business establish an online internet presence including a domain name, a website with 30 MB of storage and five web email accounts at no charge through an advertising-supported model.

Office Live also provides a set of subscription-based services with more than 20 business applications to help automate daily business tasks such as project management, sales and collateral management, customer management, expense reports, time and billing management, and secure internal and external collaboration. Built on Windows SharePoint® Services, these applications can be customised and extended to specific customer needs by an extensive Microsoft partner ecosystem.

Office Live services initially will be released via an invitation-only beta in the US in early 2006.

You can find out more via the dedicated website