Microsoft 2008 Annual Report Download - page 13

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BUSINESS DESCRIPTION (CONTINUED)
OPERATIONS
To serve the needs of customers around the world and to improve the quality and usability of products in
international markets, we “localize” many of our products to reflect local languages and conventions. Localizing a
product may require modifying the user interface, altering dialog boxes, and translating text.
Our operational centers support all operations in their regions, including customer contract and order
processing, credit and collections, information processing, and vendor management and logistics. The regional
center in Ireland supports the European, Middle Eastern, and African region; the center in Singapore supports the
Japan, Greater China and Asia-Pacific region; and the centers in Fargo, North Dakota, Puerto Rico, Redmond,
Washington, and Reno, Nevada support Latin America and North America.
We contract most of our manufacturing activities for Xbox 360 and related games, Zune, various retail software
packaged products, and Microsoft hardware to third parties. Our products may include some components that are
available from only one or limited sources. Our Xbox 360 console includes certain key components that are
supplied by a single source. The central processing unit is purchased from IBM and the graphics chips and
embedded dynamic random access memory chips for the graphics processing unit are purchased from Taiwan
Semiconductor Manufacturing Company and NEC Corporation, respectively. Although we have chosen to initially
source these key Xbox 360 components from a single supplier, we are under no obligation to exclusively source
components from these vendors in the future. Beyond the exceptions noted, we generally have the ability to use
other custom manufacturers if the current vendor becomes unavailable. We generally have multiple sources for
raw materials, supplies, and components, and are often able to acquire component parts and materials on a
volume discount basis.
PRODUCT DEVELOPMENT
During fiscal years 2008, 2007, and 2006, research and development expense was $8.2 billion, $7.1 billion, and
$6.6 billion, respectively. These amounts represented 14%, 14%, and 15%, respectively, of revenue in each of
those years. We plan to continue to make significant investments in a broad range of research and product
development efforts.
While most of our software products are developed internally, we also purchase technology, license intellectual
property rights, and oversee third-party development and localization of certain products. We believe we are not
materially dependent upon licenses and other agreements with third parties relating to the development of our
products. Internal development allows us to maintain closer technical control over our products. It also gives us
the freedom to decide which modifications and enhancements are most important and when they should be
implemented. Generally, we also create product documentation internally. We strive to obtain information as early
as possible about changing usage patterns and hardware advances that may affect software design. Before
releasing new software platforms, we provide application vendors with a range of resources and guidelines for
development, training, and testing.
Investing in Business and Product Development. Innovation is a key factor in Microsoft’s growth. Our model
for growth is based on broad adoption of the products and services we develop and market, our willingness to
enter new markets, and our ability to embrace and act on disruptive technology trends. We continue our long-term
commitment to research and develop, in a wide spectrum of technologies, tools, and platforms spanning
communication and collaboration; information access and organization; entertainment; business and e-
commerce; and devices. Increasingly, we are taking a global approach to innovation. While our main research
and development facilities are located in Redmond, Washington, we also operate research facilities in other parts
of the United States and around the world, including Canada, China, Denmark, England, India, Ireland, and Israel.
This global approach will help us remain competitive in local markets and enables us to continue to attract top
talent from across the globe.
Based on our broad focus on innovation and long-term approach to new markets, we see the following key
opportunities for growth:
Consumer technology. To build on our strength in the consumer marketplace with Windows Vista, the
2007 Microsoft Office System, Xbox 360, Microsoft Windows Live, Windows Mobile, and Zune, we are
focused on delivering products that we believe are compelling and cutting edge in terms of design,
features, and functionality. To succeed in consumer technologies, we also are working to define the next
era of consumer electronics. In the past, consumer electronics was a hardware-centric business; today, the
innovation in consumer electronics devices lies in the software that powers them. This is creating new
opportunities for us to