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

2. Agenda  Microsoft’s business overview  Microsoft R&D processes  Microsoft innovation challenges

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

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

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

6. Product Category Market Adoption Market share or penetration Xune

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

8. Revenue and profit 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.dochttp://www.microsoft.com/msft/download/fy06/letterhead_Q4.doc

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

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

11. 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 FY2005 ending june 2005.

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

13. Innovation and integration  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

14. B&W printers Network cards Mouse B&W printers Network cards Mouse Color printers Multi-function printers Scanners Joysticks Microphone Loudspeakers CD-ROM drives 32 bits CPUs USB connectivity Color printers Multi-function printers Scanners Joysticks Microphone Loudspeakers CD-ROM drives 32 bits CPUs USB connectivity ADSL modem Wifi, Bluetooth Smartphones and PDAs DVD drives Digital cameras Digital camcorders MP3 players TV screens HDTV Hifi & 5.1 USB discs External disk drives Smartcards Multi-core processors 64 bits processors Tablet PC ADSL modem Wifi, Bluetooth Smartphones and PDAs DVD drives Digital cameras Digital camcorders MP3 players TV screens HDTV Hifi & 5.1 USB discs External disk drives Smartcards Multi-core processors 64 bits processors Tablet PC Printer sharing File sharing Modems Printer sharing File sharing Modems Mainframes connectivity Local networks Web Newsgroups Electronic payment Online music Messaging Instant messaging Calendaring Mainframes connectivity Local networks Web Newsgroups Electronic payment Online music Messaging Instant messaging Calendaring Wifi connectivity Blogs RSS Mobile messaging Mobile calendering Visio-conferencing IPTV VOIP Home automation Wifi connectivity Blogs RSS Mobile messaging Mobile calendering Visio-conferencing IPTV VOIP Home automation PC peripherals Communication tools 1980’s1990’s2000’s Exploding Platform Ecosystem

15. Windows innovations categories  GUI evolutions  Information organization  Search  Digital convergence  Mobility  Communications  Reliability  Security  Deployments  Internationalization  Upgrade easiness  Certification  Developer tools  New hardware support  DRM  Interoperability standards (XML, IP V6) UsagesQualityEcosystem PleasureProductivity Consumer Entreprise

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

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

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

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

20. Successes and Failures Sales successesOpen gameFailure or withdrawal Desktop MS-DOS Windows 3.0 et suivants Multiplan, Word Office, Access, Project Visio MapPoint Tablet PC Windows XP Embedded MS-Mail Windows 1.0 et 2.0 OS/2 Servers Windows Server Exchange SQL Server SharePoint Server BizTalk Server Commerce Server Architecture.NET OS/2 LAN Manager Architecture DNA Tools Basic Visual Basic Visual Studio QuickPascal Visual Basic for MS-DOS Business Applications Business Solutions MS Finance MS Tax Mobility and new medias Pocket PC Windows CE SmartPhone MSTV WebTV Consumer Encarta Flight Simulator Money XBOX Windows Media Center MSN Bob Magic Schoolbus Smart Displays Hardware Mouse Keyboard Joysticks Windows Sound System

21. Microsoft Research  MSR brain trust  Research partnerships  Joint MSR/INRIA lab  Publications  Patents  TechFest

22. Themes Themes  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.aspxhttp://research.microsoft.com/research/default.aspx

23. outcome examples outcome examples  Windows Media Codecs  Cryptography libraries  ClearType  Tablet PC concept and ink management  Speech recognition in Windows Mobile  Chinese and Japanese Input Method Editors  Spot watches  TCP-IP V6 implementation  Datamining in SQL Server  TerraServer and SQL Server scalability showcase  SkyServer and.NET Web Services showcase  Microsoft knowledge base automated translation  Security code audit tools  Automated bug detection tools  Word automatic language recognition  Grammar checker in Word  Email mining in Outlook  Junk mail filters  Answer wizards  Smart Tags  Antipiracy technologies Tools and support

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

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

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

27. Product lifecycle <2 years2-6 years3-10 years Patches Service Packs Major releases Research Hardware IntegratorsChercheurs Involved parties OEMs ISVs Large accountsOther customers ConsumersCommunauties

28. Technology Evangelism  Feeding the ecosystem  Driving “killer apps” creation

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

30. External growth track record Investment type Server and toolsWindowsDesktopBusiness Solutions MobilityConsumerMSN AcquisitionsPlaceware, 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 IPNetIQ, NatSystèmes, Panorama, Prologue, Citrix, Unveil Technologies FinJanGeneral Magic JV or investments Avanade, Commerce One CorelLernout & Hauspie, Apple Lots cablos, telcos and mobile operators, Digex TMM/TAK, Dreamworks SKG, Inprise MSNBC, RealNames

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

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

33. Windows history Longuest delay between versions

34. Vista delays  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

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

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

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

38. Competing with Google  Situation  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 ?

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

40. Conclusion  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

41. Appendix Bibliography and speaker bio

42. On innovation strategies

43. On Microsoft

44. Olivier Ezratty bio Olivier Ezratty has 20 years of experience in software research and development, marketing and business development. He started his career in 1985 at Sogitec, a wholly owned subsidiary of Dassault Aviation, where he was a software design engineer then project manager and group manager of a development team working on custom electronic publishing projects. He then became an early adopter of the Windows platform, starting projects on its initial 1.0 release. Starting in 1990, he then acquired at Microsoft France a broad experience in all dimensions of marketing: products, channels, customer, communication and public relations. He launched the first version of Visual Basic in 1991 as well as Windows NT in 1993, and a bunch of partner programs. All these are now IT industry standards. Olivier Ezratty became Chief Marketing Officer of Microsoft France in July 1998. He reengineered internal and external communication tools, charter, processes and vendors, reshaped its public relations including starting dealing with government institutions, managed customer’s and partner’s transition to Year 2000 and Euro, consolidated its call centre and telesales operations and also launched Windows 2000 and Office 2000. In May 2001, Olivier Ezratty became Director of the Developer and Platform Evangelism Division which he created and staffed for the France region. This organization of 50+ is chartered with driving the adoption of the Microsoft enterprise platform by software developers, IT professionals, software vendors, as well as with the computer science academia and research. He launched the «.NET » platform, new partnerships with the best universities, research organizations and local software vendors, as well as initiated the first strategic.NET projects with large accounts across many industries. Since June 2005, Olivier Ezratty is coaching and consulting for innovative high-tech start-up and in the venture capital community. He also delivers conferences and speeches on innovation strategies, digital convergence and management. Olivier Ezratty graduated from Ecole Centrale Paris in 1985, MsC in computer science. oezratty@hotmail.com 06 67 37 92 41 http://www.oezratty.net