In the midst of all the bad Microsoft news and yesterday's four-year low, it's worth asking the somewhat theoretical question: what premium does Microsoft's laudable and long-term commitment to basic research add to the long-term value of the stock?
There's little question that MSFT has created a research establishment that's much in the
mold of the early Bell Labs and Xerox PARC (more in a moment as to whether that's a good or bad thing): lots of pure
academics hired from top universities who apparently have quite a bit of freedom to select research topics and to
publish. Here's a quote from a recent speech by Rick Rashid,
the well-respected Microsoft head of research: "...we started investing in basic research at Microsoft 14 years
ago...today we’ve grown to over 700 researchers worldwide. And to put that in perspective, that’s the
equivalent of growing a major computer science department, like a
But is it critically important to the value of the company?
I got a sense of the depths of Microsoft's research efforts last year when I was visiting a friend at the
All that research turns into patents: Microsoft received number 5000 just a couple of months ago. That still puts them well behind IBM, but then Big Blue had a head start. So far Microsoft hasn't been much of a patent troll--they'd rather license and spread the Microsoft way around--and they'd probably run into even more regulatory problems if they got too aggressive. So patents per se aren't really the pay-off for research. But in an industry that's built on new ideas, shouldn't all that research count for something?
History isn't clear on this. Bell Labs was a wonderful source of technology and arguably was good for AT&T, although back in those monopoly days it's hard to judge exactly how that technological cornucopia really affected Big Bell's bottom line. But spinning Bell Labs out into Lucent certainly hasn't helped LU shareholders. Whole books have been written, of course, about how Xerox PARC changed the face of personal computing but didn't contribute all that much to Xerox, although some insiders question that view: laser printing, for example, has been very good to Xerox.
I believe that basic research helps sustain major technology companies over the course of decades, even if the benefits can't easily be quantified in a tidy timeframe. Playing that card wisely--figuring out how to turn deep and original knowledge into competitive advantage--will be a key to Microsoft's future. Basic research is not sexy, but it's one huge advantage that Microsoft, for now, has over most of the other companies it faces. It's the kind of value that quarterly-focused Wall Street analysts have a hard time measuring.
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Reader Comments (Page 1 of 1)
5-04-2006 @ 12:31PM
Claude Foutch said...
THE ANSWER: Something between ZERO and maybe! This from a company that has had less reward for the stockholder than a 10 year Treasury over the past five years? Microsoft management reminds me of my childhood when we played in sandboxes; the box was relatively small and only the biggest kids got to make their own little fragile castles. Ultimately they all fell down or were washed away in the next shower. Sometimes their moms (the shareholders) called timeout for lunch and everyone took their shovels and went home to enjoy tomato soup. Somehow my business school training missed the boat: I thought firms operated to provide returns to the shareholders? Where are these returns? What kind of management survives the failure to provide the usual 7% or more return in the market place? Snake oil folks?
5-04-2006 @ 3:04PM
Mike Kauffman, Ph.D said...
Excellent commentary. For those who look over the horizon, basic research is the driving force of our society. It may not be visible for decades and may not impact the immediate bottom line for investors, but it enhances long range survival.
Private companies need to step up to the plate and help finance basic research. We cannot count on politicians to look that far into the future. Federal funding always is uncertain.