It would have been hard to imagine ten years ago that an as-yet unformed company would arise to redefine and dominate the internet economy. Yahoo! and Amazon and eBay, after all, were already well on their way. Microsoft had beaten back the challenge of Netscape and seemed poised to monopolise another generation of desktop software. The big tech companies – IBM and Hewlett-Packard and Cisco – were all on a fast growth track. AOL was gearing up to take over Time Warner.

But Google's ascendance has fundamentally altered the power structure – not least by redefining the role of Microsoft. Until a few years ago, Microsoft was the weather, as they used to say, the company that set the context for everything that happened in the high-tech world. No matter what you were doing, it was the one company you had to take into account.

Microsoft has now completely lost that position to Google, and it's worth asking why. With tens of billions of cash for acquisitions and R&D, with many of the best and brightest in the industry on the payroll, with decades of experience in beating back various challenges, Microsoft nonetheless has found itself more or less helpless in the face of Google.

Microsoft was never quick to understand the significance of various internet developments, and it clearly missed a beat in not getting to work on search technology much sooner. Never comfortable as a media company, it backed away even from successful online media ventures, such as the travel site Expedia, and instead focused on software. For home entertainment, it put its chips on the Xbox – not necessarily a bad business in itself, but not one that has helped it gain internet mindshare.

For a company known for being aggressive, even predatory, Microsoft has been oddly timid in certain key areas of the internet business. It managed to let Doubleclick, an online ad firm it wanted to buy, go to Google instead. While Google and Yahoo! are acquiring scores of nifty new Web 2.0 technologies, Microsoft has been much less active. Google now has free online versions of core software applications such as word processors and spreadsheets in beta testing, and if Microsoft has a plan to combat this it isn't obvious from here.

Microsoft's efforts in the online music business have made no headway against Apple, which is surprising; I would have expected a shrewd negotiator with Microsoft's resources to be able to find a way to play the labels against Apple and to its own advantage. Microsoft never even managed to put pesky music rival RealNetworks out of business.

Some of Microsoft's troubles – and this last example is a case in point – surely stemmed from its long anti-trust battles. The company fought the government hard in part because it didn't want to be forced into a cautious way of doing business, but government sanctions and scrutiny inevitably have their impact after a while. If Real Networks or other rivals had gone under, that would have created more legal headaches for Redmond.

Microsoft has also clearly seen its size catch up to it; being nimble and aggressive can be almost impossible when you are a huge company.

In the end though, the biggest single factor in the company's evident drift is the fact that Bill Gates isn't running it anymore. Gates is still chairman, but he spends his time doing things like addressing Senator Max Baucus' Montana Economic Development Summit, which he did yesterday via videoconference. With the Bill and Melinda Gates Foundation to run and his status as an international celebrity, he clearly isn't spending much time on Microsoft anymore.

Steve Ballmer, Microsoft's chief executive, is a very competent executive and certainly doesn't lack for aggression or fire in the belly. But the transition from the founder is always tough, and especially when it involves a founder who was so monumentally successful. Microsoft can make a nice living for a long time selling software to businesses and consumers, but that isn't where the action is these days. And strange as this would have sounded ten years ago, the industry needs Microsoft to be a viable player in the Web 2.0 world, lest we all be bit players in the universe according to Google.

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Jonathan Weber is the founder and editor in chief of NewWest.Net, a regional news service focused on the Rocky Mountain West in the United States. He was previously the co-founder and editor in chief of the Industry Standard