Why is Microsoft giving all that money back? Shareholders are about to receive a gift in the order of $32 billionroughly half of Microsofts cash holdings. I am a modest shareholder in Microsoft. I would rather they invested this money in research and development, to create, in other words, still more value in which I can share.
Now, there are probably lots of really good reasons, scrutable only by the likes of the kids I used to teach at the Harvard Business School. But I wonder if the pay out might also be a symptom of trouble at Microsoft.
At a conference this year, a well placed source spoke to me privately, and a little bitterly, about “monetizing at Microsoft. S/he said, that at Microsoft, they interrogate new ideas hard. Will they pay? How much will they pay? How soon will they pay? Or should we just kill it now? Put it out of our misery. That kind of thing.
We now have volumes on how creativity and innovation happen from the likes of Robert Sutton, Rosabeth Moss Kantner, Clayton Christensen, Eric Von Hippel, Andrew Hardagon, and Henry Chesbrough. No one on this list recommends playing the school yard bully. Ideas like to keep their lunch money. They dont like being pushed around. Eventually, they will avoid you on the playground. And that where are you then? Friendless and idea free. Hmm, could this be the Microsoft we know?
Google has another idea, apparently. Employees get a day a week in which to pursue their own innovations. They call this the “20% rule. You work on what you want once a week.
This is a nice variation on the “skunkworks notion, the one that says innovation sometimes happens most surely when you take a team of people and stick them in a corner by themselves. Skunk works liberate people from the “death by committee conservatism of the corporation. The trouble with skunkworks is that the corporation loses the services of the skunkworker. Both in the short term and the long. How are you going to get someone back in the corporate box once they have tasted the real intellectual freedoms and engagement of real creativity?
The 20% rule says you can keep people inside even as you let them outside. Now, when stuck in interminable committee work, they resort to dreaming about their project instead of buzz work bingo. More than that, you give them the chance to go places the corporation cant imagine. Still more than that, you take them seriously as idea producers, whatever else they do for you. Most of all, you pay them in intrinsic satisfaction, which, as we all know, is a much higher grade of value than a fat pay check and a fast car (especially once you have the fat pay check and the fast car).
I have an idea. Microsoft should keep that $32 billion and use it to buy everyone in the corporation a day a week of real creativity. This shareholder would be well satisfied.
Linn, Allison. 2004. Microsoft to pay out $32 billion. AZCentral. November 10, 2004. here
Row, Heath. 2004. Google, Innovation and the Web, the SxSW presentation by Marissa Mayer, Director of Consumer Web Products at Google. here
Mr Peabody tell Sherman to set the way back machine .
“Bell labs concludes transistor technology has gone as far as it can. Sony buys rights. But I’m sure Sony was making a mistake, 40 years from now, Bell labs will still be on top due to this judicious move, and Sony will have just wasted their money.”
To me this is a classic demonstration that capitalism and free-trade are not the same economic realities. Capitalists horde capital as a game plan (funny enough, even when they give it away) Free-tradists look to producing more.
Capital is only grease. Respect the capitalists (otherwise they tend to take their ball and go home), but don’t honor them. They are needed, the way garbage collection is, but they do not innovate, nor produce, and they have a tendency to fear the free market.
Microsoft already spends an enormous amount on research and development–I believe far more than anyone else in the industry (which is logical, given their size). They have some of the brightest minds in the world there, many of whom are in pure research.
The problem Microsoft has isn’t resources but organization. It has never been particularly good at innovation within. It has historically been good at recognizing innovation without and purchasing it (with said capital). Almost no major software sold by Microsoft had its origins at Microsoft. It was either developed in a company that was bought, or the product was bought, or the product was copied from a competitor and monopoly position used to sell the product until it could be revised enough times to become a legitimate competitor.
However, it remains to be seen which is the better strategy for a company of Microsoft’s size and goals. Apple and Sun produce lots of cool technology in-house, but they do not have the size and shareholder return that Microsoft does (though Apple is approaching it on a per-share basis).
Not having worked at Microsoft, I can’t say what their organization limitation is, but I would guess it has to do with marketing and project management decisions which favor features which test well for vocal market segments but fails to reward features that do not build upon a known process and require a leap of imagination to grasp how much they will be accepted once in the hands of the public.
That being said, it’s hard to argue with their bottom line. Perhaps keeping investors happy as they approach the end of their market share expansion for their base products is more valuable to them than plowing the money back into research which is already not returning much of a bang for the buck.
Sandy, thanks for the ethnographic backgrounder. Very illuminating! Thanks, Grant
The idea of allocating some of employees’ time to their own projects goes back at least as far as 3M in the 1960s and 1970s. The corporation also had a rule that x% (I can’t remember the number) of revenue in each division had to come from products introduced in the previous three years. They held internal “innovation fairs” where employees could put their ideas in front of managers with budgets–much like a high-school science fair.
All this stuff worked for a long time, but eventually the company was unable to sustain its success. I do not know the exact reason, but I suspect one important issue is scaling–as a company grows, an idea has to have much bigger impact in order to have the same percentage impact on revenues and profits. Because companies are ultimately pyramidal, the filitering and administrative capabilitiy at the top is fixed and can only process so many initiatives at a time. (Delegating the project approval process farther down the hierarchy works up to a point, but top managers are held responsible for the firm”s major investment choices and so find it difficult to go completely hands-off.) Hence, there is pressure for each initiative to show bigger sales and profit impact than previous initiatives, so as to economize on management’s scarce attention, even as good ideas in traditional areas are getting mined out. It starts to seem like “innovation is getting harder.”
This syndrome appears to have hit firms as diverse as P&G, DuPont, and now, possibly, Microsoft, all of which built their businesses by launching lots of new products. (One wonders whether Wal-Mart has an encore following its astonishing success in moving into groceries–Wal-Mart is now so big that the only new areas they can move into that would have a noticeable impact on their sales and profits are things like auto sales (a suggestiion a colleague made to me recently.))
Of course, very large firms can specialize in attempting innovations which require very large up-front expenditures and large-scale coordination in marketing and distirbution. Ideas suitable for this come along much less frequently, however, than the typical sort of product innovation these firms were built on.
Having excess cash on the balance sheet hurts sales people’s attempts to close big enterprise deals. Corporate customers say: Give us a price break — you have so much cash. MSFT’s balance sheet is in better shape than its income statement, so it is shrinking the one to help the other. Decreased cash on hand helps close big corporate enterprise licensing agreements at higher prices.