Microsoft R&D uncovered

1. Olivier EZRATTY Innovation Strategies Consulting oezratty@hotmail.com, http://www.oezratty.net July 2006 Microsoft R&D uncovered

2. Agenda • Microsoft’s business overview • Microsoft R&D processes • Microsoft innovation challenges

3. Portfolio breadth, role of platforms and ecosystems, company organization, innovation categories Microsoft business overview

4. Technical Consulting Technical Support Books and Courseware Internal IT Software Applications & Tools Internet Services Hardware Hardware Reference Designs Internet Hosting Operating Systems Media Centers Ultra Mobile PCs Tablet PCs

5. Windows Windows XP Windows XP Tablet PC Windows Media Center Windows Embedded Windows Automotive Windows CE Internet Explorer Windows media Player Windows Desktop Search Windows Defender Servers Windows Server Windows Small Business Server SQL Server BizTalk Server SMS Server Virtual Server Storage Server Antigen Application Center Commerce Server Data Protection Manager Host Integration Server Identity Integration Server ISA Server Operations Manager Speech Server System Center Systems Management Server Windows Server Update Services Exchange Server Live Communication Server Project Server Sharepoint Portal Server Content Management Server Developer Tools Visual Studio Visual Studio Team System MSDN Office Access Communicator Excel FrontPage InfoPath Live Meeting Office Live OneNote Outlook Powerpoint Project Publisher Small Business Accounting Visio Word Office Mac Business Solutions Dynamix AX Dynamics CRM Dynamics GP Dynamics NAV Dynamics SL Forecaster Point of Sale Retail Management ystem Small Business Financials Microsoft Products Portfolio Home Encarta Money Streets and Trips Digital Image Suite MapPoint Pocket Streets Works Microsoft TV Hardware XBox XBox Wireless Controler XBox Memory Unit XBox Headset Xbox Wireless Networking Adapter XBox Live Keyboards Mouses MSN Live Messenger Hotmail Search Spaces AdWords Premium Music Windows Games Flight Simulator Combat Flight Simulator Age of Empires Age of Mythology Zoo Tycoon Fable Dungeon Siege Rise of Nations Kings and Myths Halo RalliSport Challenge Freelancer Impossible Creatures MechWarrior MechCommander Board Games Train Simulator Return of Arcade XBOX games Halo Shadowrun Mass Effect Crackdown Forza Motosport Gears of War Too Human Viva Pinata Kameo Perfect Dark Zero Project Gotham Racing Fable Conker MechAssault Blix Sudeki RalliSport Challenge CounterStrike Project Gotham Racing Crimson Skies Grabbled by the Ghoulies Midtown Madness Shenmue Tao Feng Brute Force MechAssault Blood Wake Quantum Redshift Azurik Fuzion Frenzy Source: http://www.microsoft.com

6. Market share or penetration Xune Product Category Market Adoption

7. Revenue mix FY06 revenue mix in % and $B. Source: Microsoft Reports Fourth Quarter Results and Announces Share Repurchase Program

8. Revenue and profit growth FY06 vs FY05 revenue and profit growth in $m. Source: Microsoft Reports Fourth Quarter Results and Announces Share Repurchase Program Available on http://www.microsoft.com/msft/download/fy06/letterhead_Q4.doc

9. Microsoft top level organization CTOs <120 p Product Divisions 30000 p Field 28000 p • Sales / marketing • Services Microsoft Research 850 p • Platform & services • Windows • Server & tools • Live & MSN • Business • Office • Business Solutions • Entertainment & devices • Xbox, games • Media Center • Mobility, hardware Functional 8000 p • Mathematics • Development optimization • Scalable computing • User interfaces • Nanotechs • HR • Finance • Legal • IT • Operations Estimated headcount as of June 2006, various internal and external sources used

10. R&D geographical split Denmark Ireland UK Redmond France Fargo Spain China San Francisco Israël India

11. R&D budgets Budgets in $m. Not all Fortune 500 shows up here. Only high tech and pharmaceutical market leaders. Sources: budgets in $m, 2004 financial results published on company investors relations web sites. Microsoft data relates to FY2005 ending june 2005.

12. Disruptive innovations Relational databases Spreadsheets GUI and Xerox Star Electronic publishing Web browser XML Incremental innovations GUI improvements Word spellchecker Commonplace in software Based on customer feedback and competition watch Incremental or disruptive innovations

13. Innovation and integration • Parallel hardware and software integration • Integration must create real user value • Many integration combinations • Integration and complexity trade-offs • Interoperability and legal limits to integration

14. Exploding Platform Ecosystem ADSL modem Wifi, Bluetooth Smartphones and PDAs DVD drives Digital cameras Digital camcorders MP3 players TV screens HDTV Hifi & 5.1 USB discs External disk drives Smartcards Multi-core processors 64 bits processors Tablet PC Color printers Multi-function printers Scanners Joysticks Microphone Loudspeakers CD-ROM drives 32 bits CPUs USB connectivity PC peripherals B&W printers Network cards Mouse 1980’s 1990’s 2000’s Printer sharing File sharing Modems Mainframes connectivity Local networks Web Newsgroups Electronic payment Online music Messaging Instant messaging Calendaring Wifi connectivity Blogs RSS Mobile messaging Mobile calendering Visio-conferencing IPTV VOIP Home automation Communication tools

15. Windows innovations categories • GUI evolutions • Information organization • Search • Digital convergence • Mobility • Communications Usages Quality Ecosystem • Reliability • Security • Deployments • Internationalization • Upgrade easiness • Certification • Developer tools • New hardware support • DRM • Interoperability standards (XML, IP V6) Pleasure Productivity Consumer Entreprise

16. Growth and innovation drivers, leadership and management culture, research and development organization, partnering with the ecosystem, external growth Microsoft Innovation Process

17. Microsoft key growth drivers • Share and value gains • Server, desktop • Beyond the PC • Mobility, living room, games • Up in the applications foodchain • ERP and CRM for small businesses • Advertising revenue • Search, Live! • Geographic / penetration • Particularly China and India

18. Microsoft Innovation Drivers • Leadership and management style • Product teams environment • Big long term quests • Fundamental research investments • New products incubation • Partnering with the ecosystem • External growth

19. Top to bottom Billg memos Competition watch Product reviews Opportunity analysis Bottom up Customer feedback Technical support logs Geek ethnocentrism Skunk projects Decision making process

20. Successes and Failures

21. MSR brain trust Research partnerships Joint MSR/INRIA lab Publications Patents TechFest Microsoft Research

22. Themes • Algorithms and theory • Hardware development (including nanotechs) • Human-computer interactions • Machine learning, adaptation and intelligence • Multimedia and graphics • Search, retrieval and knowledge management • Security and cryptographics • Social computing • Software development • Systems, architectures, mobility and networking See list on http://research.microsoft.com/research/default.aspx

23. outcome examples • Windows Media Codecs • Cryptography libraries • ClearType • Tablet PC concept and ink management • Speech recognition in Windows Mobile • Chinese and Japanese Input Method Editors • Spot watches • Word automatic language recognition • Grammar checker in Word • Email mining in Outlook • Junk mail filters • Answer wizards • Smart Tags • Antipiracy technologies Tools and support • TCP-IP V6 implementation • Datamining in SQL Server • TerraServer and SQL Server scalability showcase • SkyServer and .NET Web Services showcase • Microsoft knowledge base automated translation • Security code audit tools • Automated bug detection tools

24. Product Groups Organization • Team jobs • Developers only 1/3rd of product teams • Team size • 5 to 60 developers per component • Up to 30 components per product • Special roles • Lead Architects • Business Managers • Hardware reference designers • Ethnologists • User Interface designers • Marketing in a separate division • Usability labs Approximate product team HC split with enterprise software

25. Development process & tools • Processes • Specifications • Yearly Engineering Conference • Developer Security Training • Software build process • Alpha & Beta Testing • Internal IT « dog-fooding » • Tools • Automated Testing Tools • Automated Security Audit Tools • Automated User Interface Localization • Windows Error Reporting database

26. Hiring and staffing Risk culture R&D budgeting Industry collaboration Incubation Acquisitions Standards creation Bureaucracy Installed base Hierarchy Interdependencies Unbalanced aged pyramid Badly managed acquisitions Organizational Innovation Drivers

27. Product lifecycle 3-10 years 2-6 years <2 years Major releases Service Packs Research Patches Hardware OEMs Large accounts Other customers Involved parties Chercheurs ISVs Integrators Communauties Consumers

28. Technology Evangelism • Feeding the ecosystem • Driving “killer apps” creation

29. Internal growth R&D Hiring and staffing >90% of historical growth India / China new R&D labs External growth Merger and acquisitions Investments Joint ventures Technology IP acquisitions Joint innovation with customers and partners Startup programs Growth strategies http://www.microsoft.com/msft/invest.htm

30. External growth track record

31. Success and failures, business challenges, Vista and Google case studies, competing with open source, innovations marketing challenges Microsoft Challenges

32. Microsoft challenges • Engineering challenges • Products complexity (Vista) • Product delays (Vista, Office 2007) • Software revenue models • Open source competition • Google competition • Organization challenges • Talent drain • Organization complexity • Legal challenges • Limits to software integration • IP protection and litigations mitigation • Marketing challenges

33. Windows history Longuest delay between versions

34. Vista delays • Way too complex product • Track record of exec in charge • Desynchronization with licensing • Learned lessons • Complex technology management requires businessmen • Align product roadmap with business roadmap • Prefer modular software design

35. Software Licencing Models Subscription Licences ASP OEM Embedded Freeware Commission Shareware Advertizing Open Source Services

36. Competing with Open Source • Non traditional competition • Challenges software business models • Challenging intellectual property grounds • Software with many so-called benefits • Microsoft response • Evangelize fundamentals of software publishing • Continue to heavily invest in R&D to make a difference • Communicate on value and TCO • Debunk some open source myths • Improve software interoperability and standards endorsement • Embrace but not extend • Shared Source licences and tools

37. Worldwide software revenue > $230B Software vs Advertising Internet Advertising > $25B With >45% on search Worldwide advertising revenue > $550B Online ads TV > $160B Source: based on IAB Internet Advertising Revenue Report, April 2006, 2005 data.

38. Competing with Google • Situation • Google and search ‘new darlings’ in town • Microsoft Internet assets not well valued • MSN lagging behind with search but leading with communication tools (IM, Hotmail) • Software as a service trend • Internet advertising market growing faster than software market • Challenged traditional software revenue models • What should they do ?

39. Marketing Challenges • Product portfolio complexity • Customer and partners segmentation • Ecosystem drive vs spin communication • Consumer vs enterprise schizophrenia • Global strategy vs local execution

40. Conclusion • Software development is becoming a real industrial process • Size matters but it’s a growing management challenge • Innovation still comes from small teams or companies • Business model innovations as important as technology innovations

41. Bibliography and speaker bio Appendix

42. On innovation strategies

43. On Microsoft