The future is the internet as a software application in itself and the undisputed technology leader is putting its massive financial clout to work to beat out its rivals.
Microsoft has its head in the clouds for future
Microsoft is spending more on research and development (R&D) than any other company in the world. This year's R&D budget alone will be US$9.5 billion (Dh34.89bn), most of which is earmarked to develop so-called cloud computing technology to take on its latest archrival Google.
To put this staggering figure in perspective, it is more than the GDP of many countries, including Uganda and Afghanistan. Microsoft claims it is $3bn more than its nearest technology rival. It also tops companies in the pharmaceutical sector with their traditionally big drug development budgets. By comparison, GlaxoSmithKline has an annual R&D budget of $7bn. But the $9.5bn question is what does Microsoft actually produce that can justify its massive R&D spend? The company does not deny reports that Longhorn, its code name for the operating system Vista while it was under development, cost as much to develop as the US spent putting a man on the moon.
When the American astronaut Neil Armstrong walked on the moon on July 21 1969, he described it as "one small step for man, one giant leap for mankind". Others back on earth naively accused the US of wasting billions of dollars on a moon landing when the cash could have been used to feed the Third World or discover a cure for cancer. But it could be argued that Windows Vista, an operating system that was clunky even by Microsoft standards, represents a far more questionable use of scientific resources than the hugely historic and impressive moon landing, not forgetting the collection of space dust.
The commercial failure of Vista and Microsoft's botched attempts to rival its competitor Apple in the mobile phone market, coupled with Google's dominance of the internet, are raising questions as to how Microsoft's huge R&D budget is being spent. "The whole Vista release was a disaster for Microsoft," says Neil MacDonald, a vice president at Gartner, a research company based in the US. "There were early compatibility issues as it would not connect with cameras, printers etc. When the press got hold of this it generated a massive amount of adverse publicity."
Despite the fact that Microsoft's latest operating system, Windows 7, has had a kinder reception, questions still remain about the software giant's R&D spending. A major question is how companies such as Apple and Google, which have lower R&D budgets, appear to be far better at innovation. The reason for this anomaly could be that Microsoft has a far more restricted strategy than newcomers such as Google, which was able to develop its Chrome operating system from scratch. To a large extent, Microsoft is bound to its own legacy technology. Its Windows operating systems are reported to comprise large amounts of historic code, making them far more unwieldy than more recently developed software. This means that Microsoft's hands are tied when it comes to innovation.
"Microsoft is caught between a rock and a hard place," says Mr MacDonald. "If it innovates too quickly it can easily alienate its existing customer base, which is what happened with Vista." Microsoft's historic relationships with other companies also prevent it from reinventing itself as an electronics manufacturer to go toe to toe with Apple. "Microsoft has built up an ecosystem with manufacturers such as Dell, HP and Toshiba who make PCs and laptops running Microsoft software. This would make it hard for Microsoft to turn around and start manufacturing PCs and laptops under its own brand the way Apple does," he says.
But the battle between information technology giants such as Microsoft, Apple and Google is as much about market sentiment as it is about technology and it is here that Microsoft's image is most tarnished. "Whether it gets value for money from its R&D has been an issue for Microsoft for some time," says Laurent Lachal, a senior analyst at Ovum, a technology research company. "This has been an issue for Microsoft for some time as it is one of the largest R&D investors.
"It is important to see that there is a very real difference between a company's ability to innovate and the market's perception of that company, and Microsoft suffers from a market perception that it lacks innovation. On the other hand, Microsoft is incredibly good at monetising its R&D through licensing its technology." As always, Microsoft's critics are faced with the fact that, despite the best efforts of all its rivals, the US-based software giant still continues to make the kind of revenues that justify its huge R&D spending.
"Microsoft has multiple businesses that generate tens of billions of dollars. Windows, Office and its server arm between them bring in about $60bn a year and Microsoft therefore has to invest a large amount in R&D to safeguard those revenues in the long-term," says Mr MacDonald. One reason for the size of Microsoft's R&D budget is its need to research new technologies that are kept under wraps until they make commercial sense, he adds.
"Microsoft has had a Web-enabled version of Office for years, but has only chosen to release it now with Office 2010," says Mr MacDonald. "Part of R&D is preparing for what might evolve and having something to fall back on in order to react to the competition." And having to react to competition in the form of Google is what is behind Microsoft's huge R&D budget. Mr MacDonald estimates that Microsoft spent billions last year perfecting its own search engine Bing as this involved planning and developing vast new data centres to rival Google's.
When he announced the company's R&D budget, Kevin Turner, Microsoft's chief operating officer, said the company was going to have to reinvent itself around cloud computing, which involves remote hosting of software and data rather than storing it on individual PCs and laptops. Mr Lachal says: "Microsoft is undergoing a cultural revolution. It has no choice as the internet is evolving from providing content delivery to becoming a software application platform.
"Its investment in cloud computing is crucial to its future." email@example.com