In the language of Wall Street, the Windows operating system is over valued
and we are paying too much for it and getting little in return compared to
the other technology found inside your computer case.

Kelly



The Wall Street Journal

march 8, 2004


    Do We Get Enough In Innovation for What We Give to Microsoft?

by Lee Gomez

    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.

    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.

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