Microsoft RD uncovered u Olivier EZRATTY u u

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

Agenda u u u Microsoft’s business overview Microsoft R&D processes Microsoft innovation challenges

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

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

Microsoft Products Portfolio Windows Developer Tools Home Windows Games XBOX games Windows XP Tablet PC Windows Media Center Windows Embedded Windows Automotive Windows CE Internet Explorer Windows media Player Windows Desktop Search Windows Defender Visual Studio Team System MSDN Encarta Money Streets and Trips Digital Image Suite Map. Point Pocket Streets Works Microsoft TV Flight Simulator Combat Flight Simulator Age of Empires Age of Mythology Zoo Tycoon Fable Dungeon Siege Rise of Nations Kings and Myths Halo Ralli. Sport Challenge Freelancer Impossible Creatures Mech. Warrior Mech. Commander Board Games Train Simulator Return of Arcade Halo Shadowrun Mass Effect Crackdown Forza Motosport Gears of War Too Human Viva Pinata Kameo Perfect Dark Zero Project Gotham Racing Fable Conker Mech. Assault Blix Sudeki Ralli. Sport Challenge Counter. Strike Project Gotham Racing Crimson Skies Grabbled by the Ghoulies Midtown Madness Shenmue Tao Feng Brute Force Mech. Assault Blood Wake Quantum Redshift Azurik Fuzion Frenzy Servers Windows Server Windows Small Business Server SQL Server Biz. Talk 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 Office Access Communicator Excel Front. Page Info. Path Live Meeting Office Live One. Note 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 Hardware XBox Wireless Controler XBox Memory Unit XBox Headset Xbox Wireless Networking Adapter XBox Live Keyboards Mouses MSN Live Messenger Hotmail Search Spaces Ad. Words Premium Music Source: http: //www. microsoft. com

Market share or penetration Xune Product Category Market Adoption

Revenue mix FY 06 revenue mix in % and $B. Source: Microsoft Reports Fourth Quarter Results and Announces Share Repurchase Program

Revenue and profit growth FY 06 vs FY 05 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/fy 06/letterhead_Q 4. doc

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

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

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 FY 2005 ending june 2005.

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

Innovation and integration u u u 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

Exploding Platform Ecosystem s PC l a r e h p i r pe B&W printers Network cards Mouse 1980’s Printer sharing File sharing Modems Comm unica tools tion Color printers Multi-function printers Scanners Joysticks Microphone Loudspeakers CD-ROM drives 32 bits CPUs USB connectivity 1990’s Mainframes connectivity Local networks Web Newsgroups Electronic payment Online music Messaging Instant messaging Calendaring ADSL modem Wifi, Bluetooth Smartphones and PDAs DVD drives Digital cameras Digital camcorders MP 3 players TV screens HDTV Hifi & 5. 1 USB discs External disk drives Smartcards Multi-core processors 64 bits processors Tablet PC 2000’s Wifi connectivity Blogs RSS Mobile messaging Mobile calendering Visio-conferencing IPTV VOIP Home automation

Windows innovations categories Usages u u u Quality GUI evolutions Information organization Search Digital convergence Mobility Communications u u u Reliability Security Deployments Internationalization Upgrade easiness Certification Ecosystem u u Developer tools New hardware support DRM Interoperability standards (XML, IP V 6) Pleasure Productivity Consumer Entreprise

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

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

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

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

Successes and Failures Sales successes Open game Failure or withdrawal MS-DOS Windows 3. 0 et suivants Multiplan, Word Office, Access, Project Visio Map. Point Tablet PC Windows XP Embedded MS-Mail Windows 1. 0 et 2. 0 OS/2 Servers Windows Server Exchange SQL Server Share. Point Server Biz. Talk Server Commerce Server Architecture. NET OS/2 LAN Manager Architecture DNA Tools Basic Visual Studio Quick. Pascal Visual Basic for MS-DOS Business Applications Business Solutions MS Finance MS Tax Mobility and new medias Pocket PC Windows CE Smart. Phone MSTV Web. TV Consumer Encarta Flight Simulator Money XBOX Windows Media Center MSN Bob Magic Schoolbus Smart Displays Hardware Mouse Keyboard Desktop Joysticks Windows Sound System

Microsoft Research u u u MSR brain trust Research partnerships Joint MSR/INRIA lab u u u Publications Patents Tech. Fest

Themes u u u u u 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

outcome examples u u u u Windows Media Codecs Cryptography libraries Clear. Type Tablet PC concept and ink management Speech recognition in Windows Mobile Chinese and Japanese Input Method Editors Spot watches u u u u Word automatic language recognition Grammar checker in Word Email mining in Outlook Junk mail filters Answer wizards Smart Tags Antipiracy technologies Tools and support u u TCP-IP V 6 implementation Datamining in SQL Server Terra. Server and SQL Server scalability showcase Sky. Server and. NET Web Services showcase u u u Microsoft knowledge base automated translation Security code audit tools Automated bug detection tools

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

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

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

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

Technology Evangelism u u Feeding the ecosystem Driving “killer apps” creation

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

External growth track record Investment type Server and tools Windows Desktop Business Solutions Mobility Consumer MSN Acquisitions Placeware, Connectix, Flash Communications, Network Courrier, Softway, Zoomit, Valence, VXTreme, Link. Age, Cooper & Peters, Intersé, Net. Carta, Res. Nova, e. Shop, Active Views, Giant, Front. Bridge, Pro. Clarity, Asset. Metrix, Whale Communications, Softricity Entropic, Dimension X, Colusa, Giant, Front. Bridge, Alacris, Folder. Share, Winternals Visio, Powerpoint, Project, Vermeer, Groove, Mediastreams. com AG, i. Views Great Plains, Navision, SMS SNTC, Sendit Rare, Ensemble Studios, Digital Anvil, Net. Games, Bungie, Access Software, Fasa Interactive, Bruce Artwick, Sof. Image, Web. TV, Lion. Head Hotmail, Vinciniti, Mongo Music, Driveoff. com, Jump Networks, Comparenet, Link. Exchange, Firefly (Passport), Teleo (VOIP), Motion. Bridge, Onfolio, Massive, Vexcel Acquired IP Net. IQ, Nat. Systèmes, Panorama, Prologue, Citrix, Unveil Technologies Fin. Jan JV or investments Avanade, Commerce One Corel TMM/TAK, Dreamworks SKG, Inprise MSNBC, Real. Names General Magic Lernout & Hauspie, Apple Lots cablos, telcos and mobile operators, Digex

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

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

Windows history Longuest delay between versions

Vista delays u u u 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

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

Competing with Open Source u Non traditional competition Ø Ø Ø u Microsoft response Ø Ø Ø u Challenges software business models Challenging intellectual property grounds Software with many so-called benefits 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 Ø Shared Source licences and tools

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

Competing with Google u Situation Ø Ø Ø u 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 ?

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

Conclusion u u 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

Appendix u Bibliography and speaker bio

On innovation strategies

On Microsoft