What Money Can't Buy

It was on November 12, 1990, in a speech at the Comdex/Fall show in Las Vegas, that Microsoft chairman Bill Gates first proclaimed his vision for "information at your fingertips" -- software that would let people easily find the data they wanted, wherever it was on their computer or office network. The new system, he promised, would arrive within three years.

Those three years passed, of course. Then another 10. Today, Microsoft is still promising information at our fingertips, now in the guise of powerful search technology built into the next generation of Microsoft's operating system, code-name Longhorn. But Longhorn, originally expected this year, remains just beyond our grasp: It now isn't likely to reach customers until 2006.

Meantime, an upstart named Google, founded eight years after Gates announced his quest, has pretty much stolen the day. Google's string of Internet search innovations has not only won the hearts and minds of customers but also made a ton of money. It has spent a total of $233 million on research and development since 1998 -- just 3.4% of Microsoft's annual R&D budget -- yet its market value now tops $3.7 billion.

Which raises the question: Why not Microsoft? Here is a giant company that for two decades has dominated computer software. It generates $9 billion in cash flow and $8 billion in profits from $37 billion in sales, making it twice as operationally efficient as General Electric and more than twice as profitable as IBM. But when it comes to online search, arguably the hottest technology of the past five years, Microsoft has missed the boat. Heck, it hasn't even been near the dock.

Say the same for the Web browser (created by Netscape), the streaming media player (by RealNetworks), the game box (Sony), interactive television (TiVo), so-called smart phones (Nokia, Ericsson, and Motorola), and digital-music distribution (Napster and now Apple). Once the bellwether of the computing industry, Microsoft has watched from the sidelines as comparatively smaller, poorer companies brought to market virtually every important technical innovation of the past decade.

It's not the sort of track record that inspires confidence about Microsoft's prospects. "It's not good enough. And it's not just the incremental product innovations that matter. Microsoft's inability to create leadership in entirely new product areas . . . is a real problem," says Adrian Slywotzky, strategy guru at Mercer Consulting. "If they didn't have $61 billion in cash, if they had only $40 billion but they had dramatically stronger strategic positions in games, or [digital] music, or technology in the home -- which is where they really want to be -- then people would think very differently about this company."

Instead, Microsoft shares have gone nowhere in the past five years, more or less tracking the market in that time. In July, chief executive Steve Ballmer basically conceded that his company couldn't find enough opportunities in which to invest its enormous cash hoard, announcing plans to pay shareholders a $32 billion special dividend. And Wall Street analysts have quietly begun comparing Microsoft to a power utility circa 1990: well suited to generate steady cash flows and dividends, but not growth.

Naturally, Gates and Ballmer fiercely deny that their company is either past its prime or stuck in midlife, or even that it is a "fast follower" when it comes to innovation. "If you want to go with that myth, that's fine," Gates scoffed in an interview. "Were we a fast follower when we invented the PC idea?"

Well gosh, Bill, how to break the news? Yes, you were: Microsoft didn't invent the PC itself, or even the operating system that made PCs tick (it famously bought that from a third party). Its innovation -- call it genius -- was divorcing the operating system from hardware. It was this new business model that fueled the mass proliferation of personal computing in the 1980s and 1990s.

That distinction says something about Microsoft's dearth of innovation since: Redmond, Washington, has never been a great cradle of invention. In fact, Microsoft's research labs, though enormous and enormously well funded, are also strikingly inefficient. Beyond missing big opportunities, the company has placed some very poorly conceived bets (digital toilets -- no kidding -- come to mind) and poured hundreds of millions of dollars into technologies with neither sizzle nor apparent commercial prospects (SPOT Watch, anyone?).

But Microsoft's own missteps explain only so much. The truth is, the failure to consistently produce dramatic and successful innovations may be less a comment on Microsoft than it is on the nature of innovation itself. Innovation is, after all, capricious -- a function of luck and good timing as much as brains. It's tough to score once, much less repeatedly, with big-money bets and sky-high ambitions. Harder still to feed and mine creativity in established organizations, where scale becomes the enemy. It's simply more difficult for a $37 billion business to find and commercialize inventions that will sustain profitable growth at the same rate as in smaller rivals.