By Helen Jung
The Associated Press

NEW YORK - Microsoft Corp. launched the newest version of its Office software Tuesday, kicking off a $150 million ad campaign in hopes of convincing customers that the upgrade is worth the cost despite a skittish economy.

Investing in the new Office software will help workers better collaborate on projects and increase business productivity without requiring serious hardware upgrades, Microsoft chairman and chief software architect Bill Gates said.

"Other than the mobile phone, really the only thing that's making (workers) more effective is the software," Gates said, shortly before unveiling the new products on a Manhattan theater stage.

The launch reflects a big shift in strategy for the world's largest software maker as competitors chip away at Microsoft's dominance by offering customers cheaper business programs based on free Linux open-source technology.

Microsoft is not pushing so much its traditional core Office suite, a package of programs including the Word document-processing, Excel spreadsheet and PowerPoint presentation products, as much as trying to distinguish itself from competitors by touting the overall system behind the new Office - expensive server software that runs in the background to power features on workers' desktop computers or wireless phones.

But Gates dismissed the challenge coming from open-source programs, including those written for operating systems such as Linux.

"The distance between what we have and what the free software has is greater today than it's ever been," he said. The new Office product's biggest competitors, he said, were its predecessors, most recently Office XP, released two years ago.

Microsoft has reason to be protective of its turf.

The company's Office launch is a strategy change for its second most-profitable business division. Business software accounted for $9.2 billion in sales in its 2003 fiscal year, with operating profits of $7 billion - a 76 percent profit margin. It is second only to Microsoft's core Windows operating system business in revenue and profits.

The Office suite ranges from $149 to $499, depending on edition - student/teacher, standard or professional. Server software, however, costs thousands of dollars, such as SharePoint Portal Server, which retails for $5,619.

Companies aren't convinced that the Office system is better than how they currently operate, said Ted Schadler, an analyst with Forrester Research. "They're not quite able to visualize why a consolidated communications and collaboration platform is a whole lot better than what they're doing today," he said.

Changes in the core programs are fairly modest except for a major revamp of the Outlook e-mail, calendar and address book, which reviewers have called the most notable improvement.