Do We Get Enough In Innovation for What We Give to Microsoft?
from Wall St. Journal

It's 2004; do you know where your computer dollars are going?

One can learn a lot about the computer industry by looking at the breakdown of manufacturing costs in an average desktop PC, as compiled by iSuppli Corp., a market-research firm. Excluding labor and shipping, and leaving out the costs of a monitor, keyboard or mouse, the typical desktop PC these days costs the Dells or the H-Ps of the world roughly $437 in parts.

The biggest portion of that -- 30%, or $134 -- goes to Intel for a Pentium processor. The disk drives, including whatever CD or DVD is installed, cost around $104; the RAM memory is $54; and the remaining hardware items -- power supply, case, circuit boards -- total $100.

The final 10%, or $45, goes to Microsoft for the Windows operating system.

Because these prices are never disclosed, the figures here represent best guesses. But you can start to see the contours of the computer industry in that bill of fare. Specifically, you begin to understand how Microsoft could amass its $61 billion in cash and other assets. It's easy when you collect nearly 10% of the cost of every PC that's shipped, while having no manufacturing costs of your own.

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Most technology companies that do well justify the money they make by saying that is what is required to fund innovation, that were it not for all the profits they were accumulating, the industry would be standing still.

The claim is suspect. The disk-drive industry, for one, manages to release drives with ever-larger capacities while often barely breaking even. And the technical challenges they face are among the most formidable, involving squeezing more and more bits of data onto ever smaller portions of a rapidly spinning magnetically charged platter.

Intel is no stranger to big profits. Analysts estimate the Intel CPU costs more than a comparable product from rival Advanced Micro Devices. What about the added charge? Think of it as an Intel tax on each PC.

Even if you're not an Intel shareholder there's arguably a benefit associated with that tax. Intel is like a research-and-development operation for the entire semiconductor industry. The manufacturing processes it uses for its latest-generation Pentiums are the most advanced in the world and cost billions of dollars. Eventually, though, these processes become widely available to everyone in electronics. This is one case where trickle-down economics seems to work.

That leaves Microsoft, and the question: What does the world get for the 10% Microsoft tax on every PC?

No one could ever say Microsoft is sitting idle. That was clear last week at a Research TechFest the company held at its Redmond, Wash., campus. Microsoft has an advanced research operation that employs about 600 people all over the world. These are some of the smartest people around, and they don't work on specific Microsoft products, but rather on long-range ideas, usually matching their own interests.

The TechFest was like a science fair. Researchers set up booths, and the managers of Microsoft's many products milled around, looking for useful ideas they could deploy in future products. The number of people doing the milling was in the thousands.

But is the innovation from Microsoft commensurate with the awesome resources it has been given? The average Microsoft customer probably wouldn't say so. Indeed, the advances the company lists for its new products all too often involve fixing shortcomings of earlier products, such as security and reliability in the case of its operating systems, and ease of use with its Office suite.

In fact, you can argue that genuine innovation is the last thing monopolists want, since it threatens to upset the very applecart that made them rich in the first place.

When asked which research from its labs has made its way into Microsoft products, the list from Microsoft officials doesn't exactly bowl over a listener: better software-verification techniques, digital media-player technologies, additions to the SQL database language.

And while the TechFest was full of bright and earnest people with useful ideas, a lot of university computer-science departments, or even open-source software collaborations, could have put on a similar show, though on a smaller scale of course.

The world expects a lot from great monopolies, and in the past, many of them delivered. In January, this column wrote about the unsung heroes of the consumer-electronics world. The list included the likes of lasers and data-compression software.

After the piece ran, I got an e-mail from the PR director at Bell Labs, once the research arm of onetime-monopoly AT&T, and now part of Lucent. He pointed out that four of the five items on the list had been invented by Bell Labs scientists. IBM, too, is famous for its research, and it has five Nobel Prizes to show for its work.

Of course, Microsoft's research group is still young, and its best years may still be ahead. They had better be. PC taxpayers might start rebelling.
• Send your comments to lee.gomes@wsj.com1, and check back on Friday for some selected letters at WSJ.com/Portals2.

ABOUT LEE GOMES
Lee Gomes, who writes the Portals column on Monday and the Portals Exchange on Friday, has been covering various topics, technical and otherwise, for The Wall Street Journal since 1996. He is a graduate of the University of Hawaii and the Columbia University Graduate School of Journalism, and lives in San Francisco. He can be reached at lee.gomes@wsj.com3. His Boomtown and Boomtown Exchange columns are available here4.

posted by prof_booty | 09:37 AM