Every development center established in Israel over the past two decades has seen turning points over the course of its life - when the parent company has asked questions about its future: Will the Israeli operations continue as they were or not? Is a main product or project which was developed at the center by Israeli workers important enough to continue? And how critical are the capabilities in Israel? The answers have in many cases decided the fate of the Israel center.
Cisco, EMC, IBM, Intel, and others have all been there. Microsoft's development center recently reached that point, with relatively good timing from its point of view. The center has been around for nearly five years, the financial crisis seems to be behind us, and Microsoft's investment in local operations has been intensive over the years, reaching several hundreds of millions of dollars in acquisitions and organic growth. Microsoft's strategic operations in Israel are important enough that many top executives from the company made their way here in recent years.
Still, for Microsoft Israel R&D center president Moshe Lichtman, there was reason for some discomfort when one of the outstanding projects at the local center was closed. The project employed 110 workers in the telecom sector - nearly a fifth of the workforce in Israel. "Personally, I was disappointed," says Lichtman to "Globes" in an exclusive interview, "because I was involved in setting up and recruiting the staff for the project. But that's part of the deal - some projects here turn into big internal companies, another portion does not survive, just like start-ups. But not for a minute did I entertain doubts about the future of the people here, and I knew that we would integrate them into existing operations at the center without layoffs. And in fact, we completed the process, the people were deployed in new projects, and we are on an employee recruitment drive." Microsoft has about 600 R&D workers in Israel.
Globes: Presumably you had some sleepless nights, worrying that things would not work out. After all, it has happened that Israeli centers have not gotten to where they intended.
Lichtman: "The quality of our people is the best there is, and with an asset like that I sleep soundly at night. The value of the center and the products that we have developed returned the investment in us a long time ago, among other things because Microsoft saved several hundreds of millions of dollars in acquisitions that it would have had to make if not for the center. We succeeded in creating an engine that builds new and ground-breaking products."
According to Lichtman, at any given time at the development center, there are 12-15 projects in fields such as security, telecom, cloud computing, and Internet - some in research stages at the lab, and some in development stages.
The future, according to Lichtman's plans, is to capture a more central place in the strategy of the global parent, Microsoft. "Our model is like Intel's," he points out, "50% - maybe 75% - of Intel's intellectual property came from Israel, and that's where I would like to be in relation to Microsoft."
The local center includes an impressive roster of managers, and it is promoted at corporate headquarters in Redmond, Washington, by Lichtman himself, who arrived in his job in Israel after a stint in the relatively high ranking role as the head of the television division at Microsoft. Lichtman is convinced that the center here is stable enough even without him.
Globes: You began to climb the corporate ladder in Redmond, and you came to Israel. Does a role at Microsoft - the corporate parent - lie ahead?
Lichtman: "No. I don’t see myself returning to a role in Redmond. That was a decision that we made when we returned here and decided to optimize the family," he says, sticking with a computer engineer's terms.
One of Microsoft's recent commercial successes is the Kinect, a gesture-detection add-on to the Xbox 360 console, which redefined the game experience.
The success of Kinect provides Lichtman not just with insights about Microsoft, but shows him things about Israeli high tech in general - and not necessarily positive things. "Successes like Kinect's don’t come overnight. It requires stamina that not every company has."
Globes: Are you referring to the Israeli culture of exits?
"Yes. I have the opportunity to meet many entrepreneurs, and I hear from them that to set up a company and sell it is a success. It is less worrying when they are talking about their first company, but when someone does that with three companies, from an economic standpoint he is OK, but clearly he has not thought about a goal beyond making money or a quick exit. In Israel, there are fewer people who thing about goals beyond that, and in Silicon Valley they think about it more. Entrepreneurship is a wonderful thing, but it is not the essence - at least not for people for whom it is already their second or third time. That is also the incentive they get from Israeli society in general, where the quick exit is seen as success."
As someone whose professional development was at Microsoft, Lichtman comes with a slightly different viewpoint from that of Israeli venture capitalists and high tech company executives. His history includes, chronologically, 20 years at Microsoft - including vice president for the Microsoft TV division, and vice president for international Internet operations. In between, he was a limited partner in a venture capital fund and an angel investor in the 1990s. After all that, he says, one gets used to measuring the worthwhileness of products from the perspective of hundreds of millions of uses and more, and one begins to think differently.
"We bring entrepreneurs to the development center and tell them that ideas that will bring sales of several tens of millions aren't interesting - and they go into shock. Every new product or business at Microsoft which is not focused on hundreds of millions of users, and revenue of billions of dollars, simply doesn't qualify for advancement with us. After you get used to creating revolutions, like I experienced in the world of television or the Internet, things appear different. We try to infect the local entrepreneurs with the positive virus that takes their creativity and connects them to slightly bigger ambitions. Even smaller companies can strive for big targets."
The integration of development centers with developing Israeli entrepreneurs is an integral part of the solution according to Lichtman, and that will help create big companies of the type that have not been seen in the past decade.
People are used to coming from development centers and thinking big, he claims. "People in Israel are not challenged with thinking how to set up a big company, and we need to understand research-wise why we haven't gotten smart enough as a country to do this and try to build the solution. Let's take care that the plans for academic-business education will show entrepreneurs how to build big companies, and not just how to build a start-up. The goal is not to create hundreds of big companies, but two companies per year. That will already create a revolution. Israel will need to continue to generate hundreds of start-up companies each year, most of which will not become large companies - but some of them will."
Globes: What is your opinion on the venture capital model?
Lichtman:"Over the course of the past decade, the model faced many challenges, and failed most of them, in terms of internal rate of return and even in terms of pure profit. Most of the big exits of the late 1990s - whether stock market offerings or acquisitions - disappeared as if they never existed.
"Even at the end of this decade, the situation is similar: In the first three quarters of 2010, venture capital investment activity in the US fell, and is at 50% of the already low levels of 2009. The talk in Silicon Valley is of the "walking dead" - those venture capital funds that work only with their existing portfolio companies, because they do not have the cash needed for new investments. In Israel, investors are turning their back on the venture capital model, preferring the greener grass of Asia's developing markets. Even growing activity by angel investors can't remedy the situation."
Lichtman does not agree with one of the consistent criticisms of Israeli entrepreneurs, about their managerial abilities and their ability to put ideas into action, where it is claimed that they have a relative weakness. "That's not correct. Amazing things happened in Israel because they thought big, and we have to go back to thinking big. One of the two companies that led the video sharing industry is Israel's Metacafe - alongside YouTube - and I don't see it as a given that Metacafe had to lose that race. We have graduates from the best universities in the world, who know how to think in business terms, and specialize in international marketing, and that is untapped potential. There are 120,000 people in high tech in Israel; it doesn’t make sense that we don’t have the people who can grow giant companies."
Published by Globes [online], Israel business news - www.globes-online.com - on January 12, 2011
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