Innovation is hard.
Turning ideas into commercially viable products and services is as much about luck and timing as it is about brilliance. It's like "sperm trying to fertilize an egg," observes Gary Hamel, chairman of consulting firm Strategos and an adviser on innovation strategy. "Increasing the number of really strong swimmers doesn't increase your success rate. That's not how biology works. Only one [sperm] gets to fertilize the egg." No surprise that Microsoft has had plenty of R&D duds.
Bigger isn't better.
It's simply tougher for a large company to sustain rapid growth through innovation than it is for a smaller rival. Good ideas are scarce, much less ideas that will generate big sales. Google's revolutionary search technology, created with a relatively modest R&D investment of $233 million over five years, produced a company with $1.5 billion in revenue in 2003. Even if Microsoft had matched Google's efforts (it hasn't), that business would add just 4% to its top line.
Defense is easier.
And for now, it's more profitable. Harvard Business School's Clayton Christensen coined the expression the "innovator's dilemma" to describe what happens when entrenched companies confront new technologies. Good managers instinctively direct people and investment toward "sustaining innovations" that protect established businesses -- and away from new ideas that threaten current profitability. That's why Microsoft spends a lot on Office and Windows.