Friday, January 28, 2005

FastCompany on Microsoft

Merely for interest, from fastcompany:

Meantime, an upstart named Google, founded eight years after Gates announced his quest, has pretty much stolen the day. Google's string of Internet search innovations has not only won the hearts and minds of customers but also made a ton of money. It has spent a total of $233 million on research and development since 1998 -- just 3.4% of Microsoft's annual R&D budget -- yet its market value now tops $3.7 billion.

Which raises the question: Why not Microsoft? Here is a giant company that for two decades has dominated computer software. It generates $9 billion in cash flow and $8 billion in profits from $37 billion in sales, making it twice as operationally efficient as General Electric and more than twice as profitable as IBM. But when it comes to online search, arguably the hottest technology of the past five years, Microsoft has missed the boat. Heck, it hasn't even been near the dock.

Say the same for the Web browser (created by Netscape), the streaming media player (by RealNetworks), the game box (Sony), interactive television (TiVo), so-called smart phones (Nokia, Ericsson, and Motorola), and digital-music distribution (Napster and now Apple). Once the bellwether of the computing industry, Microsoft has watched from the sidelines as comparatively smaller, poorer companies brought to market virtually every important technical innovation of the past decade.

It's not the sort of track record that inspires confidence about Microsoft's prospects. "It's not good enough. And it's not just the incremental product innovations that matter. Microsoft's inability to create leadership in entirely new product areas . . . is a real problem," says Adrian Slywotzky, strategy guru at Mercer Consulting. "If they didn't have $61 billion in cash, if they had only $40 billion but they had dramatically stronger strategic positions in games, or [digital] music, or technology in the home -- which is where they really want to be -- then people would think very differently about this company."

Instead, Microsoft shares have gone nowhere in the past five years, more or less tracking the market in that time. In July, chief executive Steve Ballmer basically conceded that his company couldn't find enough opportunities in which to invest its enormous cash hoard, announcing plans to pay shareholders a $32 billion special dividend. And Wall Street analysts have quietly begun comparing Microsoft to a power utility circa 1990: well suited to generate steady cash flows and dividends, but not growth.

Microsoft may be the most striking example ever of the phenomenon that Harvard academic Clayton Christensen famously identified in his 1997 book, The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail (Harvard Business School Press). Good managers, Christensen wrote, tend to direct resources toward protecting established lines of business, usually by investing in incremental improvements that help pad profit margins.

Of course, it's impossible to say exactly what the right balance is between offense and defense, or between the short and long term. Ultimately, observes Gary Hamel, innovation guru and chairman of Strategos, "really good ideas are just few and far between. Forgive the metaphor, but it is a little like the process of sperm trying to fertilize an egg. Increasing the number of really strong swimmers doesn't increase your success rate. That's not how biology works. Only one [sperm] gets to fertilize the egg."

In other words, innovation is often just a happy, creative accident, where the laws of numbers can actually get in the way. In this sense, Microsoft's size and wealth become obstacles rather than assets. Venture capitalists typically pore over 50 to 100 deals to find a good $20 million software investment. By that logic, Microsoft, with its $6.8 billion annual R&D budget, must consider as many as 35,000 new ideas just to find a few hundred worth investing in every year. Is it any wonder the company invests in so many dogs -- or, for that matter, toilets?


The Feb. 1 Wall Street Journal mentions that Microsoft plans to intensify its attack on Google with a four-month advertising and marketing campaign to promote its new Internet Search Engine.

One approach to product differentiation is to provide instant answers to questions, rather than just links.

So, when you are not first in innovation, go to marketing...


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