Perhaps Google woke the sleeping giant. At an annual meeting with financial analysts, Microsoft executives explained how they plan to compete with companies like Google, which are eating into the software-maker's profits by giving away free, web-based applications.

Microsoft executives said they would compete by adding similar internet-based components to programs like Excel and Office and transitioning into a software services company.

"We're moving toward a world of software plus services," Microsoft CEO Steven Ballmer told The New York Times.

While Google is betting that the world is moving toward a thin computing future, where most applications are housed online, Ballmer said people will never be entirely comfortable with a software migration to "the cloud," shorthand for hardware and software accessed via the internet.

"People tend to get weird and extreme about this," Ballmer said. "Does everything move to the cloud? I think that is wrong-minded."