Steve Ballmer set the tech blogosphere alight this past week when he said that Microsoft’s riskiest bet would be the next version of Windows. Where many tech pundits would have suggested that Windows Phone 7 would have been the more appropriate answer I would have to agree with Ballmer’s assessment.

To understand why Ballmer feels this way we need to understand just how much the computer landscape has changed since Windows was first introduced to the world some 25 years ago.

Fading Powerhouse

It has become an interconnected world of information where change no longer takes years to happen but can see services, products, and even ideas change on a daily basis. The days of iron fisted control, ala Bill Gates, where Microsoft was the powerhouse that everyone looked to for direction; whether they wanted to or not, has faded into the sunset.

That doesn’t mean that Microsoft is a company to be ignored or considered as some sort of anachronism of the past. Far from it. In fact, people and companies that do that do so at their own peril.

Where they had been written off after the failure of Vista, they have come back and shown their ability to dominate operating systems with the successful launch of Windows 7.

When it comes to the mobile world Microsoft has been their own worst enemy, with Ballmer admitting that the company had badly dropped the ball.  However, just as they had been written off in the operating system world and came back, they are doing the same thing in the mobile world with the launch of Windows Phone 7.

Yes, it is still early in the game for them in the mobile world.  But, by all accounts, and even by some of their most stringent critics, Microsoft could very well find itself back in the game in a big way.

The problem is that the world isn’t standing still. It is iterating around Microsoft at an incredible pace,  and no more so than in the areas where the backbone products of the company are losing relevance. It doesn’t matter if the next version of Windows is 8, 9, 10 or 100. This upcoming version is the one where Microsoft needs to make drastic changes while laying the groundwork for even more revolutionary changes.

The Past Repeating Itself

When we talk about the risky future of Windows we need to understand that the biggest challenge that any future version of Windows faces is Windows 7.

The biggest fear that must be going through Redmond right now; even as they celebrate the enormous success of Windows 7, is that they may just have another Windows XP on their hands.

The fact is that Windows 7 is a great operating system, which is exactly what it needed to be, but then so was XP, once the service packs were installed. It was a good enough operating system that people were willing to ignore Vista and even fight to make Microsoft to extend its life cycle.

Add this to the fact that, in all honesty, the whole Windows paradigm as we know it is getting very old in the tooth. This reality is being driven in part by the fact that the world of software cycles measured in years is no longer valid. With the ability to update software on literally a daily basis, the consumer is no longer interested in major release cycles of software.

This fast changing world that is being driven by the Web will be driving the next version of Windows, and Microsoft. So what can we expect?

Looking Forward

The following thoughts are just my own opinions as to what the future may hold for Windows but there is no doubt, Steve Ballmer is right, the next version of Windows will be the company’s riskiest bet on where they think their future is headed.

The first change I believe will happen is that Windows 7 is the last version that will have a 32 bit version. I believe that Windows 8 will be released strictly as a 64 bit operating system and doing so will bring along a lot of benefits for Windows.

The biggest problem that Windows has always suffered from is one of bloat, due to the mindset that each new version of Windows needed to be able everything previous versions brought to the table. This cutting back started with Windows 7 and the implementation of XP Mode that allowed people to seamlessly run their older programs.

The Core

By concentrating on just a 64bit version Microsoft will be able to literally slash almost 20 years of bloat from Windows and continuing the slimming down process of the operating system that started with Windows 7.

However that won’t be enough to encourage users to upgrade to Windows 8 when it does get released. As Robert Scoble wrote the other day on this subject:

Windows 7 is a fantastic OS, so we might just stay with that. If Windows 8 doesn’t have a “killer feature and killer apps” then there won’t be the leverage on us to upgrade. We all upgraded to Windows 7 to get rid of the buggy Vista, or get the new stuff that made XP seem old-in-the-tooth. But will Windows 8 come up with something to make Win 7 seem long in the tooth? That’s a far tougher challenge.

And make no mistake about it people, Windows 8; more so that any version of Windows previously, is going to have to bring some major changes to the table, and not just with eye-candy. As I stated above, Window 7 is the new Windows XP. It is such an improvement over the past and so rock solid that there is no reason for people to upgrade to any future version of Windows.

So other that the slimming down of Windows what can Microsoft do to encourage people to upgrade to any future version of the operating system?

Dave Winer seems to think that one of the biggest improvements that Microsoft could do to encourage an upgrade path – simplify.

Okay, now what is Windows 8?

It’s less than Windows 7. The UI is simpler. The media players are out. Its job is just to let your data have a place to live that you own, that you pay for, that you fully control. I would actually cut a direct deal with Amazon and create the ultimate cloud server that a user can manage themselves, that you pay for by the month. Need more services? Pay a little more. Need even more? Pay even more.

In fact we have already seen some of this simplicity with the new MetroUI being used in not just Windows Phone 7 but also in software showing up on our desktops e.g. Zune Desktop. Most importantly though we are seeing this simplicity with the launch of Internet Explorer 9.

Merging with the Cloud

One of the biggest things that will affect future version of Windows will have to be increasing reliance on The Cloud. Considering that the basic premise of Windows has always been the creating and storing of data on your local machine the move to the Cloud is a radical shift and one that isn’t reliant on any one operating system, let alone Windows.

However, with the launch of Windows Phone 7 and the growing popularity of both the Zune Marketplace and Xbox Live the Cloud is being incorporated within the Microsoft ecosphere. It is these three things however that will be brought together in Windows as it will become the centerpiece around which these other efforts revolve as satellites.

Say Goodbye to Redundancy and Bundling

With Windows 7 we saw the beginning of the debundling of default programs that have always shipped with the Windows operating system. No more where things like Outlook Express or even Internet Explorer default programs. Instead what we are getting is packages like Windows Live Essentials and Microsoft Security Essentials which are up to the consumer to download.

As one tech pundit observed with the launch of the Internet Explorer 9 Beta, it seems as if Microsoft has learned the lesson – or is in the process of learning – of getting out of the way of data presentation. The point being made was that with IE9 Beta there was next to no branding and instead the consumer was able to get in and get out without the ever present “Windows Branding”; which is exactly the same theme Microsoft is using with Windows Phone 7.

With Microsoft’s move to creating a whole new platform that includes mobile, entertainment, business and consumer products which is unified by the Cloud the one common program that will link all these together will be Zune. From the desktop to the marketplace Zune will start taking on a whole new prominence but this creates a problem on the desktop.

Windows already has a media player, and even though it went through several years of being pretty much a bloated piece of crap the latest version has actually been a pretty good program. The problem is that in the new Zune world it is redundant as the Zune desktop program is a really good media player as well as being the gateway to the Zune Marketplace and the Cloud.

So it wouldn’t surprise me at all to see Windows Media Player disappear with more emphasis being placed on Zune as your entertainment console for the desktop.

A Modular Future

As with Windows Live Essentials, I think we will see more of this off-loading or even outright deprecating of many of the things that we have come to expect as the standard part of any Windows install. We could see more of what we would have once considered to be integral parts of Windows transform into other packages that we can download and install if we really want them.

While I don’t expect this to happen in a Windows 8 time frame I wouldn’t be surprised at all to see Windows itself become nothing more than a core package of just the files needed to get the most bare bones version of the operating system up and running – ala MinWin or Singularity – with everything else being nothing more than DLCs (Downloadable Content for you non-gamers out there).

The Risk

However none of this will matter one iota if Microsoft’s never version of Windows turns out to be nothing more than a caretaker version. The problem is that Microsoft also has to be able to keep its biggest customer – The Corporate world – happy.   That being said, if there is one thing we know all to well about the corporate world, is that they hate change – especially when it comes to information technology.

While Windows as a brand won’t be going anywhere, both consumer demand and technological advancement are showing us that Windows as a product is going to have to change in order to keep up. It is a change that goes well beyond just the eye-candy and right down to the core of the operating system.

There is no doubt that Microsoft knows this, but they also have to make sure that the company remains financially viable, and this means they need to keep their corporate customers happy and feeling secure.

This is the biggest risk that Microsoft faces with the next version of Windows. How do they transition their core platform that will be the grounding anchor for their three Screens and a Cloud initiative to a modern platform that consumers will want to use, and at the same time alleviate the anal-retentive fear of change by their corporate customers?

In all of Microsoft’s history, I believe the next two years are going to be the most turbulent and important. Not to mention the fact that they will be the most interesting to watch.

[Cross-posted at Winextra]