R&D: Where the Rubber Hits the Sky...

Microsoft appears to be struggling for perhaps the first time in its long and illustrious history. The company has been replaced by Google as the darling of Wall Street. In the media, rarely a day goes by that you don't read about some prominent employee leaving the firm to go work elsewhere. There doesn't appear to be any buzz or excitement about Microsoft's current crop of products, especially by comparison with all the hoopla Apple has generated with its iPods and iTunes.

Stock Price

• Microsoft's current stock price, near the end of October 2005, is $25.11


• A year ago, in late October 2004, the stock cost $27.90


• Two years ago, in late October 2003, it was $26.14

Okay, I get it. The stock price has been essentially flat. Perhaps the problem is now that Microsoft has been paying out big dividend checks to its stockholders, the company has not been investing enough in research and development. Is that possible? Let's look at the numbers.

R & D Expenses

• In 2005, Microsoft spent a whopping $6.2 Billion for research and development


• In 2004, Microsoft spent even more -- almost $7.8 Billion


• Back in 2003, the R & D budget was $6.6 Billion

That's more than $20 Billion over the past three years!!!

That's "B" as in "Billion"

What in the world is going wrong here?

Frankly, for the $20+ billion spent on R&D over the past three years, you'd think Microsoft should be introducing a slew of innovative new products.

I suspect a lot of that R&D money was spent on the development of Vista (previously known as Longhorn), Microsoft's next generation Windows Operating System, and Office 12, the next version of Microsoft's omnipresent Office Automation suite. The problem is I wonder how many Windows XP and Office XP customers are chomping at the bit, waiting with bated breath, counting the days until Microsoft releases its next generation of products. Moreover, I imagine most folks will wait awhile even after these products get released before purchasing, just to make sure the bugs have all been ironed out. Additionally, if you were to ask me, I'd say most people are sufficiently satisfied with the current crop of Microsoft products that they already own. If there's some big pent up demand for Vista and Office 12, I'm just not seeing it yet. Besides, who knows when these products will actually go on sale. Microsoft's reputation for shipping products on time has become pretty tarnished over the past few years.

I suppose imitation has long been Microsoft's strong suit -- not innovation. After all, MS-DOS originally imitated a predecessor operating system known as CP/M that ran on Z80 processors. Similarly, Windows was always considered a me-too product compared to Apple's Macintosh. Even the hugely successful Office Suite was basically viewed as little more than a GUI-based set of word processing and spreadsheet tools bundled together in the tradition of Lotus 1-2-3. Likewise, Access, the Office database tool, was chiefly seen originally as mostly just an imitation of Borland's Paradox product.

The tradition at Microsoft has long been one of initially introducing mediocre products only after some more innovative player had previously blazed the trail ahead of them, and then doggedly working at improving those belated Microsoft products in subsequent releases. This pattern seems to hold true for Internet Explorer, IIS, Xbox, and even C#. In other cases, Microsoft entered markets via acquisition. That certainly was what happened with Hotmail, FrontPage, SQL Server, Visio, and multiple lines of commercial-off-the-shelf software from Great Plains, Navision, Solomon, and Axapta.

There have been a few areas where Microsoft has created new markets as a result of their own homegrown innovative capabilities. For example, ASP (Active Server Pages) and the original MTS (Microsoft Transaction Server) were clearly leadership offerings in the early days of server-based application development software. And, Visual Basic has long been an industry leader with its pioneering efforts at improving programmer productivity.

Looking at Microsoft today, much of what's reported in the press suggests that they're sticking with the imitation strategy that has worked so well in the past. They appear to be pursuing every major Google initiative, especially desktop search, web search, mapping, published books, etc.

To help the firm learn how to innovate, they acquired Groove Networks. I doubt they cared too much about the Groove networking software. My guess is what Microsoft primarily wanted was Ray Ozzie, with his proven track record as an innovator. Today Ray is Microsoft's chief technology officer.

My advice to Microsoft, not that anyone there is asking me for my opinion, is that they really ought to step back and reevaluate themselves now, rather than later. I watched DEC die. I almost witnessed the death of IBM. IBM survived only because of unimaginable metamorphic changes during times of great pain and stress. Microsoft ought to seriously think about how they can learn the same lessons IBM learned, but to do so now while the company is still healthy. I believe if they look critically at what they've gotten in return for $20+ billion in R&D costs over the past three years, maybe they'll see that as a signal, because $20+ billion is one sh%tload of money.