Microsoft spends $9 billion annually in research. Why can't it get its money's worth?

Microsoft spends an estimated $9 billion a year in research, development, and acquisitions, but when it comes to innovation, Apple and Google always seem to be far ahead of it. Why can't Microsoft get its money's worth?

A special report by Reuters takes an in-depth look at the current state of Microsoft. Particularly insightful is the section that covers Microsoft's innovation, or lack thereof. The article notes:

There is a growing feeling that the $9 billion a year Microsoft is now spending on research and development -- totaling almost $69 billion over the last decade -- has not brought the breakthroughs it should.

"Comparing Microsoft to Apple over the past 10 years in terms of innovation, new products and completely new businesses, the differences are pretty obvious," said Don Dodge, a former 'startup evangelist' at Microsoft, who now works for Google. "What did Microsoft investors get in return for their investment of over $75 billion in R&D and acquisitions?"

That view is shared by another former high-ranking Microsoft executive, still active in the technology sector, who asked not to be identified. "There probably isn't another company in the world that has the same amount of raw talent and smart people," he said. "Then you look at the results over the last 10 years and they're not so impressive. How do you explain that gap?"

The article points to one problem with turning research into innovative product --- the "innovator's dilemma" which happens when a company focuses more on protecting its existing markets, rather than trying to create new ones, fearful that new markets may eat into existing revenue streams. The article has this to say:

"Microsoft's been playing defense for the last 10 years," said the former executive. "They are trying to protect existing revenue streams rather than taking risks. New revenue streams put the old ones at risk, and those old ones support thousands of people in the company. It's a difficult situation to be in."

Another problem many cite is CEO Steve Ballmer, who some believe simply lacks the vision to create innovative products. Some people believe that unless Microsoft can launch innovative products in the next year, his time at the company may start to draw to a close. The article notes:

"If they (Microsoft) are not successful with their consumer product launches that are coming in the next year, I think all of us will stop listening to him period," says Becker at Becker Capital. "And that's coming from a supporter." It may be time for a change, Becker says, if Ballmer cannot deliver that success.

An issue that the article didn't cover is how the company's bureaucracy and turf-protection is anathema to innovation. After all, several years ago, Microsoft hired Ray Ozzie, one of the most innovative technologists of the PC era, and he's accomplished very little at the company. That's in large part because he couldn't cut through turf wars and political in-fighting to make much of a difference. He's now leaving the company.

An even starker example has to do with Andy Rubin, the brains behind both the Kin and Android. Rubin founded a company called Danger, which developed the groundbreaking Sidekick phone, which was eventually purchased by Microsoft for a reported $500 million, after Rubin had left the company. Microsoft took the Sidekick, and turned it into the widely reviled Kin, which it quickly killed after it launched it.

Rubin went on to form a company called Android, which developed the Android operating system. It was bought by Google in 2005...and you know where Android is now. Rubin is now VP of Engineering at Google, in charge of Android.

Rubin, by the way, was at one time an employee of a company owned by Microsoft --- Artemis, which eventually became WebTV. It's no accident that he ended up at Google instead.

So is Microsoft getting its money's worth for its R &D and acquisitions spending? It certainly doesn't look that way, given the way that Apple and Google have out-innovated the company. Microsoft shouldn't curtail spending on R & D, though. Instead, if it wants to get the most out of it, it needs to overhaul the corporate culture and organization to take advantage of all of its substantial research and brainpower.

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