Microsoft R&D Microsoft R&D uncovereduncovered

Olivier EZRATTYOlivier EZRATTYInnovation Strategies ConsultingInnovation Strategies Consulting

oezratty@hotmail.comoezratty@hotmail.com, , http://http://www.oezratty.netwww.oezratty.net

July 2006July 2006

AgendaAgenda Microsoft’s business overviewMicrosoft’s business overview Microsoft R&D processesMicrosoft R&D processes Microsoft innovation challengesMicrosoft innovation challenges

Microsoft business overviewMicrosoft business overview

Portfolio breadth, role of Portfolio breadth, role of platforms and ecosystems, platforms and ecosystems,

company organization, company organization, innovation categoriesinnovation categories

Operating Systems

Software Applications

& Tools

Internet Hosting

Hardware

Hardware Reference Designs

Internet Services

Internal IT

Technical Consulting

Technical Support

Media CentersUltra Mobile PCs

Tablet PCs

Books and Courseware

Microsoft Products PortfolioMicrosoft Products PortfolioWindowsWindows XPWindows XP Tablet PCWindows Media CenterWindows EmbeddedWindows AutomotiveWindows CEInternet ExplorerWindows media PlayerWindows Desktop SearchWindows Defender

ServersWindows ServerWindows Small Business ServerSQL ServerBizTalk ServerSMS ServerVirtual ServerStorage ServerAntigenApplication CenterCommerce ServerData Protection ManagerHost Integration ServerIdentity Integration ServerISA ServerOperations ManagerSpeech ServerSystem CenterSystems Management ServerWindows Server Update ServicesExchange ServerLive Communication ServerProject ServerSharepoint Portal ServerContent Management Server

Developer ToolsVisual StudioVisual Studio Team SystemMSDN

OfficeAccessCommunicatorExcelFrontPageInfoPathLive MeetingOffice LiveOneNoteOutlookPowerpointProjectPublisherSmall Business AccountingVisioWordOffice Mac

Business SolutionsDynamix AXDynamics CRMDynamics GPDynamics NAVDynamics SLForecasterPoint of SaleRetail Management ystemSmall Business Financials

Windows GamesFlight SimulatorCombat Flight SimulatorAge of EmpiresAge of MythologyZoo TycoonFableDungeon SiegeRise of NationsKings and MythsHaloRalliSport ChallengeFreelancerImpossible CreaturesMechWarriorMechCommanderBoard GamesTrain SimulatorReturn of Arcade

XBOX gamesHaloShadowrunMass EffectCrackdownForza MotosportGears of WarToo HumanViva PinataKameoPerfect Dark ZeroProject Gotham RacingFableConkerMechAssaultBlixSudekiRalliSport ChallengeCounterStrikeProject Gotham RacingCrimson SkiesGrabbled by the GhouliesMidtown MadnessShenmueTao FengBrute ForceMechAssaultBlood WakeQuantum RedshiftAzurikFuzion Frenzy

HomeEncartaMoneyStreets and TripsDigital Image SuiteMapPointPocket StreetsWorksMicrosoft TV

HardwareXBoxXBox Wireless ControlerXBox Memory UnitXBox HeadsetXbox Wireless Networking

AdapterXBox LiveKeyboardsMouses

MSNLiveMessengerHotmailSearchSpacesAdWordsPremiumMusic

Source: http://www.microsoft.com

Product Category Market Adoption

Mar

ket

sh

are

or p

enet

rati

on

Xune

Server and Tools ($9,6B, 22%)

Windows Client ($13B, 30%)

Office & Business Tools ($14,5B,

33%)

Entertainment and Devices ($4,6B,

10%)

Online Services Group ($2,3B, 5%)

Revenue mixRevenue mix

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

Revenue and profit growthRevenue and profit growth

-1000 -500 0 500 1000 1500

Server and Tools

Windows Client

Office & BusinessTools

Online Services Group

Entertainment andDevices

Profit growth

Revenue 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

Microsoft top level organizationMicrosoft top level organization

Microsoft Microsoft ResearchResearch

850 p850 p

Platform & servicesPlatform & services WindowsWindows Server & toolsServer & tools Live & MSNLive & MSN

BusinessBusiness OfficeOffice Business SolutionsBusiness Solutions

Entertainment & devicesEntertainment & devices Xbox, gamesXbox, games Media CenterMedia Center Mobility, hardwareMobility, hardware

MathematicsMathematics Development Development

optimizationoptimization Scalable Scalable

computingcomputing User interfacesUser interfaces NanotechsNanotechs

FieldField28000 p28000 p

Sales / marketingSales / marketing ServicesServices

HRHR FinanceFinance LegalLegal ITIT OperationsOperations

Functional8000 p

Product Product DivisionsDivisions

30000 p30000 p

Estimated headcount as of June 2006, various internal and external sources used

CTOsCTOs<120 p<120 p

R&D geographical splitR&D geographical split

RedmondFargo

SanFrancisco

UK

Israël

India

China

France

Denmark

Ireland

Spain

Budget R&D

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

Pfizer

Micr

osof

tIB

MIn

tel

Sony

Mer

ck

Hewlet

t Pac

kard

Cisco

PSA Aut

omob

iles

Sun

Oracle SAP

Compu

ter A

ssoc

iates

Electro

nic A

rts

Apple

Dell

Adobe

R&D budgetsR&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.

Incremental or disruptive Incremental or disruptive innovationsinnovations DisruptiveDisruptive

innovationsinnovations Relational databasesRelational databases SpreadsheetsSpreadsheets GUI and Xerox StarGUI and Xerox Star Electronic publishingElectronic publishing Web browserWeb browser XMLXML

Incremental Incremental innovationsinnovations GUI improvementsGUI improvements Word spellcheckerWord spellchecker Commonplace in Commonplace in

softwaresoftware Based on customer Based on customer

feedback and feedback and competition watchcompetition watch

FonctionNokia n90

Media Center

PC

Elonex Plasma +

MCEOptoma

DV10 Fuji V10Samsung

i6Archos Video

XBOX 360 XM Radio

Frigo 7179

OemELTéléphone XBrowser web X X XMessagerie X X XCalendrier X X XAppareil photo X X XCaméra vidéo XPlayer MP3 X X X X X X XPlayer Vidéo X X X X XPlayer Photos X X X X X XHauts parleurs X XGPS XDVD X X X XCD X X X XTV X XEnregistrement TV X XRadio FM X X XRadio Sat XProjecteur XAmplificateur X XHorloge X X X XJeu X XEcran X XFrigo X

Innovation and integrationInnovation and integration Parallel hardware and software integrationParallel hardware and software integration Integration must create real user valueIntegration must create real user value Many integration combinationsMany integration combinations Integration and complexity trade-offsIntegration and complexity trade-offs Interoperability and legal limits to integrationInteroperability and legal limits to integration

B&W printersNetwork cards

Mouse

B&W printersNetwork cards

Mouse

Color printersMulti-function printers

ScannersJoysticks

MicrophoneLoudspeakers

CD-ROM drives32 bits CPUs

USB connectivity

Color printersMulti-function printers

ScannersJoysticks

MicrophoneLoudspeakers

CD-ROM drives32 bits CPUs

USB connectivity

ADSL modemWifi, Bluetooth

Smartphones and PDAsDVD drives

Digital camerasDigital camcorders

MP3 playersTV screens

HDTVHifi & 5.1USB discs

External disk drivesSmartcards

Multi-core processors64 bits processors

Tablet PC

ADSL modemWifi, Bluetooth

Smartphones and PDAsDVD drives

Digital camerasDigital camcorders

MP3 playersTV screens

HDTVHifi & 5.1USB discs

External disk drivesSmartcards

Multi-core processors64 bits processors

Tablet PC

Printer sharingFile sharing

Modems

Printer sharingFile sharing

Modems

Mainframes connectivityLocal networks

WebNewsgroups

Electronic paymentOnline music

MessagingInstant messaging

Calendaring

Mainframes connectivityLocal networks

WebNewsgroups

Electronic paymentOnline music

MessagingInstant messaging

Calendaring

Wifi connectivityBlogsRSS

Mobile messagingMobile calenderingVisio-conferencing

IPTVVOIP

Home automation

Wifi connectivityBlogsRSS

Mobile messagingMobile calenderingVisio-conferencing

IPTVVOIP

Home automation

PC peripherals

Communication tools

1980’s 1990’s 2000’s

Exploding Platform Exploding Platform EcosystemEcosystem

Windows innovations Windows innovations categoriescategories

GUI evolutionsGUI evolutions Information Information

organizationorganization SearchSearch Digital convergenceDigital convergence MobilityMobility CommunicationsCommunications

ReliabilityReliability SecuritySecurity DeploymentsDeployments InternationalizationInternationalization Upgrade easinessUpgrade easiness CertificationCertification

Developer toolsDeveloper tools New hardware New hardware

supportsupport DRMDRM Interoperability Interoperability

standards standards (XML, IP V6)(XML, IP V6)

Usages Quality Ecosystem

Pleasure ProductivityConsumer Entreprise

Microsoft Innovation ProcessMicrosoft Innovation Process

Growth and innovation drivers, Growth and innovation drivers, leadership and management culture, leadership and management culture,

research and development research and development organization, partnering with the organization, partnering with the

ecosystem, external growth ecosystem, external growth

Microsoft key growth driversMicrosoft key growth drivers Share and value gainsShare and value gains

Server, desktopServer, desktop

Beyond the PCBeyond the PC Mobility, living room, gamesMobility, living room, games

Up in the applications foodchainUp in the applications foodchain ERP and CRM for small businessesERP and CRM for small businesses

Advertising revenueAdvertising revenue Search, Live!Search, Live!

Geographic / penetrationGeographic / penetration Particularly China and IndiaParticularly China and India

Microsoft Innovation DriversMicrosoft Innovation Drivers Leadership and management styleLeadership and management style Product teams environmentProduct teams environment Big long term questsBig long term quests Fundamental research investmentsFundamental research investments New products incubationNew products incubation Partnering with the ecosystemPartnering with the ecosystem External growthExternal growth

Decision making processDecision making process

Top to bottomTop to bottom Billg memosBillg memos Competition watchCompetition watch Product reviewsProduct reviews Opportunity analysisOpportunity analysis

Bottom upBottom up Customer feedbackCustomer feedback Technical support logsTechnical support logs Geek ethnocentrismGeek ethnocentrism Skunk projectsSkunk projects

Successes and FailuresSuccesses and FailuresSales successes Open game Failure or withdrawal

Desktop

MS-DOSWindows 3.0 et suivants

Multiplan, WordOffice, Access, Project

VisioMapPointTablet PC

Windows XP Embedded

MS-MailWindows 1.0 et 2.0

OS/2

Servers Windows ServerExchange

SQL ServerSharePoint Server

BizTalk ServerCommerce ServerArchitecture .NET

OS/2LAN Manager

Architecture DNA

Tools BasicVisual Basic

Visual StudioQuickPascal

Visual Basic for MS-DOS

Business Applications

Business SolutionsMS Finance

MS Tax

Mobility and new medias

Pocket PCWindows CESmartPhone

MSTVWebTV

ConsumerEncarta

Flight SimulatorMoney

XBOXWindows Media Center

MSN

BobMagic SchoolbusSmart Displays

Hardware MouseKeyboard

JoysticksWindows Sound System

Microsoft ResearchMicrosoft Research MSR brain trustMSR brain trust Research partnershipsResearch partnerships Joint MSR/INRIA labJoint MSR/INRIA lab

PublicationsPublications PatentsPatents TechFestTechFest

ThemesThemes Algorithms and theoryAlgorithms and theory Hardware development (including nanotechs)Hardware development (including nanotechs) Human-computer interactionsHuman-computer interactions Machine learning, adaptation and intelligenceMachine learning, adaptation and intelligence Multimedia and graphicsMultimedia and graphics Search, retrieval and knowledge managementSearch, retrieval and knowledge management Security and cryptographicsSecurity and cryptographics Social computingSocial computing Software developmentSoftware development Systems, architectures, mobility and networkingSystems, architectures, mobility and networking

See list on http://research.microsoft.com/research/default.aspx

outcome examplesoutcome examples

Windows Media CodecsWindows Media Codecs Cryptography librariesCryptography libraries ClearTypeClearType Tablet PC concept and ink managementTablet PC concept and ink management Speech recognition in Windows MobileSpeech recognition in Windows Mobile Chinese and Japanese Input Method EditorsChinese and Japanese Input Method Editors Spot watchesSpot watches

TCP-IP V6 implementationTCP-IP V6 implementation Datamining in SQL ServerDatamining in SQL Server TerraServer and SQL Server scalability TerraServer and SQL Server scalability

showcaseshowcase SkyServer and .NET Web Services SkyServer and .NET Web Services

showcaseshowcase

Microsoft knowledge base automated Microsoft knowledge base automated translationtranslation

Security code audit toolsSecurity code audit tools Automated bug detection toolsAutomated bug detection tools

Word automatic language recognitionWord automatic language recognition Grammar checker in WordGrammar checker in Word Email mining in OutlookEmail mining in Outlook Junk mail filtersJunk mail filters Answer wizardsAnswer wizards Smart TagsSmart Tags Antipiracy technologiesAntipiracy technologies

Tools and supportTools and support

Product Groups OrganizationProduct Groups Organization Team jobsTeam jobs

Developers only 1/3rd Developers only 1/3rd of product teamsof product teams

Team sizeTeam size 5 to 60 developers per 5 to 60 developers per

componentcomponent Up to 30 components Up to 30 components

per productper product Special rolesSpecial roles

Lead ArchitectsLead Architects Business ManagersBusiness Managers Hardware reference Hardware reference

designersdesigners EthnologistsEthnologists User Interface User Interface

designersdesigners Marketing in a Marketing in a

separate divisionseparate division Usability labsUsability labs

Program management

18%

Developers36%Test

Developers19%

Testers20%

Other7%

Approximate product team HC split with enterprise software

Development process & toolsDevelopment process & tools ProcessesProcesses

SpecificationsSpecifications Yearly Engineering ConferenceYearly Engineering Conference Developer Security TrainingDeveloper Security Training Software build processSoftware build process Alpha & Beta TestingAlpha & Beta Testing Internal IT « dog-fooding »Internal IT « dog-fooding »

ToolsTools Automated Testing Tools Automated Testing Tools Automated Security Audit Tools Automated Security Audit Tools Automated User Interface LocalizationAutomated User Interface Localization Windows Error Reporting databaseWindows Error Reporting database

Organizational Innovation DriversOrganizational Innovation Drivers

Hiring and staffingHiring and staffing Risk cultureRisk culture R&D budgetingR&D budgeting Industry Industry

collaborationcollaboration IncubationIncubation AcquisitionsAcquisitions Standards creationStandards creation

BureaucracyBureaucracy Installed baseInstalled base HierarchyHierarchy InterdependenciesInterdependencies Unbalanced aged Unbalanced aged

pyramidpyramid Badly managed Badly managed

acquisitionsacquisitions

Product lifecycleProduct lifecycle<2 years2-6 years3-10 years

PatchesService Packs

Major releases

Research

Hardware

IntegratorsChercheursInvolved

parties

OEMs

ISVs

Large accounts Other customers

ConsumersCommunauties

Technology EvangelismTechnology Evangelism Feeding the ecosystemFeeding the ecosystem Driving “killer apps” creationDriving “killer apps” creation

Growth strategiesGrowth strategies

Internal growthInternal growth R&DR&D Hiring and Hiring and

staffingstaffing >90% of historical >90% of historical

growthgrowth India / China new India / China new

R&D labsR&D labs

External growthExternal growth Merger and Merger and

acquisitionsacquisitions InvestmentsInvestments Joint venturesJoint ventures Technology IP Technology IP

acquisitionsacquisitions Joint innovation Joint innovation

with customers with customers and partnersand partners

Startup programsStartup programs

http://www.microsoft.com/msft/invest.htm

External growth track recordExternal growth track recordInvestment

typeServer and tools Windows Desktop Business

SolutionsMobility Consumer MSN

Acquisitions Placeware, Connectix, Flash Communications, Network Courrier, Softway, Zoomit,

Valence, VXTreme, LinkAge, Cooper &

Peters, Intersé, NetCarta, ResNova,

eShop, Active Views, Giant, FrontBridge, ProClarity,

AssetMetrix, Whale Communications,

Softricity

Entropic, Dimension X, Colusa,

Giant, FrontBridge,

Alacris, FolderShare, Winternals

Visio, Powerpoint,

Project, Vermeer, Groove, Media-

streams.com AG, iViews

Great Plains,

Navision, SMS

SNTC, Sendit

Rare, Ensemble Studios, Digital

Anvil, NetGames,

Bungie, Access Software, Fasa

Interactive, Bruce Artwick,

SofImage, WebTV,

LionHead

Hotmail, Vinciniti,

Mongo Music, Driveoff.com,

Jump Networks,

Comparenet, LinkExchange,

Firefly (Passport),

Teleo (VOIP), MotionBridge,

Onfolio, Massive, Vexcel

Acquired IP NetIQ, NatSystèmes, Panorama, Prologue,

Citrix, Unveil Technologies

FinJan General Magic

JV or investments

Avanade, Commerce One

Corel Lernout & Hauspie,

Apple

Lots cablos,

telcos and mobile

operators, Digex

TMM/TAK, Dreamworks SKG, Inprise

MSNBC, RealNames

Microsoft ChallengesMicrosoft Challenges

Success and failures, business Success and failures, business challenges, Vista and Google challenges, Vista and Google case studies, competing with case studies, competing with

open source, innovations open source, innovations marketing challengesmarketing challenges

Microsoft challengesMicrosoft challenges Engineering challengesEngineering challenges

Products complexity (Vista)Products complexity (Vista) Product delays (Vista, Office 2007)Product delays (Vista, Office 2007)

Software revenue models Software revenue models Open source competitionOpen source competition Google competitionGoogle competition

Organization challengesOrganization challenges Talent drainTalent drain Organization complexityOrganization complexity

Legal challengesLegal challenges Limits to software integrationLimits to software integration IP protection and litigations mitigationIP protection and litigations mitigation

Marketing challengesMarketing challenges

29/06/1985 29/08/2007

10/10/1992Windows for Workgroups

10/05/1992Windows 3.1

05/09/1998Windows 98

01/09/2001Windows XP

10/05/1990Windows 3.0

09/09/1996Windows NT 4.0

09/09/1995Windows NT 3.1

09/09/2000Windows Millenium

29/06/1985Windows 1.0

01/02/2007Windows Vista

05/05/1987Windows 2.0

10/07/1994Windows NT 3.51

24/05/1993Windows NT 3.1

01/02/2000Windows 2000

24/08/1995Windows 95

Windows historyWindows history

Longuest delay between versions

Vista delaysVista delays Way too complex productWay too complex product Track record of exec in chargeTrack record of exec in charge Desynchronization with licensingDesynchronization with licensing

Learned lessons• Complex technology management requires businessmen• Align product roadmap with business roadmap• Prefer modular software design

Software Licencing ModelsSoftware Licencing Models

Licences

OEMASP

Embedded

Subscription

Advertizing

CommissionFreeware

Shareware

Open SourceServices

Competing with Open SourceCompeting with Open Source Non traditional competitionNon traditional competition

Challenges software business modelsChallenges software business models Challenging intellectual property groundsChallenging intellectual property grounds Software with many so-called benefitsSoftware with many so-called benefits

Microsoft responseMicrosoft response Evangelize fundamentals of software publishingEvangelize fundamentals of software publishing Continue to heavily invest in R&D to make a Continue to heavily invest in R&D to make a

differencedifference Communicate on value and TCOCommunicate on value and TCO Debunk some open source mythsDebunk some open source myths Improve software interoperability and standards Improve software interoperability and standards

endorsementendorsement Embrace but not extendEmbrace but not extend

Shared Source licences and toolsShared Source licences and tools

Worldwide advertising revenue >

$550BWorldwide software

revenue > $230B

Software vs AdvertisingSoftware vs Advertising

SourceSource: based on IAB Internet Advertising Revenue Report, April 2006, 2005 : based on IAB Internet Advertising Revenue Report, April 2006, 2005 data.data.

Internet Advertising >

$25BWith >45% on search

Online ads

TV > $160

B

Competing with GoogleCompeting with Google SituationSituation

Google and search ‘new darlings’ in townGoogle and search ‘new darlings’ in town Microsoft Internet assets not well valuedMicrosoft Internet assets not well valued MSN lagging behind with search but leading with MSN lagging behind with search but leading with

communication tools (IM, Hotmail)communication tools (IM, Hotmail) Software as a service trendSoftware as a service trend Internet advertising market growing faster than Internet advertising market growing faster than

software marketsoftware market Challenged traditional software revenue modelsChallenged traditional software revenue models

What should they do ?What should they do ?

Marketing ChallengesMarketing Challenges Product portfolio complexityProduct portfolio complexity Customer and partners segmentationCustomer and partners segmentation Ecosystem drive vs spin Ecosystem drive vs spin

communicationcommunication Consumer vs enterprise schizophreniaConsumer vs enterprise schizophrenia Global strategy vs local executionGlobal strategy vs local execution

ConclusionConclusion Software development is becoming a Software development is becoming a

real industrial processreal industrial process Size matters but it’s a growing Size matters but it’s a growing

management challengemanagement challenge Innovation still comes from small Innovation still comes from small

teams or companiesteams or companies Business model innovations as Business model innovations as

important as technology innovationsimportant as technology innovations

AppendixAppendix

Bibliography and speaker bioBibliography and speaker bio

On innovation strategiesOn innovation strategies

On MicrosoftOn Microsoft