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Microsoft innovates with a vengeance

David Kirkpatrick

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(FORTUNE.COM) -- In his keynote address to the Comdex computer trade show Monday night, Microsoft's Bill Gates demonstrated several things: that innovation really does still flourish in technology; that to call the IT industry "mature" is foolish; that, for better or worse, one company remains the undisputed flag-bearer for the entire technology industry; and that flag-bearing Microsoft still considers itself to be in the starting phases of the process of changing the world.

For many of you, these statements are undoubtedly not intuitive--people routinely accuse Microsoft of not being sufficiently innovative, of copying the breakthroughs of Xerox, Apple, and others to create its mind-bendingly profitable franchise. I won't take on those arguments here. But regardless of Microsoft's past, there are real signs that now, thanks to spending $5 billion annually in R&D (going up substantially every year, Gates pointed out) Microsoft is getting real bang for its buck in new products.

Three advances pushed

In the speech, Gates unveiled three big new advances--one in software, one in hardware, and one in services--along with a bunch of other cool stuff.

Probably the most important product was a new software application called Microsoft OneNote. It will become part of the Microsoft Office software suite when a major revision emerges next summer. OneNote is integrated software for taking notes. That may not sound like much, but Microsoft aims to remake the way we track everyday information, especially at work. The product allows a single document to record and incorporate text, images, audio, video, and HTML. It is especially suitable for use with one of the new Tablet PCs (another recently-launched Microsoft innovation). For instance, you can click on a passage from notes you scribbled on your Tablet to hear the audio from that same moment in time. (This could be a blessing for journalists.) OneNote also has other interesting features, including the ability to easily e-mail a document containing all those different data types.

Smart displays don't go everywhere

The new hardware Gates introduced is a kind of home computer screen called a Smart Display. These wireless flat-panel monitors can be detached from the computer and carried around the house. You can interact with the web, control an application, or read e-mail on the couch. Unlike the Tablet PC, these displays are not meant to go everywhere, but rather to be the computer equivalent of a cordless phone. The first Smart Displays ship from hardware companies starting in early January (Microsoft won't make them itself.). At first they will be way too expensive--around $1,000 for a 10-inch screen. But in time this functionality will only add $200 or so to the cost of a regular flat-panel monitor, says National Semiconductor, which builds the critical processing chips that make the displays possible.

Also, Gates announced a new way to print documents that will be especially useful when you're away from the office. It's a service due to launch in the middle of next year called "File Print Kinko's." When you go to print a document, besides the conventional printer options, you'll get the choice to enter your location and see a list of nearby Kinko's. You can choose one, enter credit card information, and the file will be printed there, in any volume. This may be a godsend to business travelers doing big jobs away from their normal office equipment. It's also an early example of the kinds of services that Microsoft's .Net strategy will make possible.

Wireless impresses

And these are just the announcements that especially impressed me. In addition, Gates demonstrated newly launched Microsoft hardware that allows you to eliminate cables on your desktop by connecting your keyboard and mouse to a PC with Bluetooth wireless technology. And we saw the first in a new class of so-called Smart Personal Objects--ordinary household devices that respond to the world in real time, for instance an alarm clock which knows its time zone, remembers the various times you tend to rise in the morning, and can tell you whether the traffic is light enough to allow you to sleep a few minutes longer. Another example: a refrigerator magnet that displays the weather. You, like me, might not feel the urgent need for either of those smart objects, but Microsoft people insist very useful things are coming soon in this category.

With the antitrust suit basically over, Microsoft is again an aggressive--and public--innovator. This company clearly intends to keep leading the way toward new uses for computers and technology. Some of these newly announced innovations will probably fail. But despite the fact that each one costs many millions to develop, rest assured that Microsoft will keep tossing out ideas to see if they catch on.

Waiting for profits

The company can afford supreme patience when it comes to profits--as long as Gates and CEO Steve Ballmer see them coming eventually. For all it's extraordinary profitability, Microsoft only makes money in its operating systems, server software, and office productivity applications. New SEC filings show that its many other businesses, including MSN and the Xbox game platform, are in deep investment mode.

A monopolist could sit on its hands and just count the money. Gates continues to run scared--to believe that if Microsoft doesn't keep doing new and useful things for us it will lose its market success. However daunting and even worrisome it may be that one company has so much overweening influence, it's unquestionably good in this dark time for the industry that somebody, at least, is aggressively moving forward.

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