Gates today kicked off his annual CEO summit held at Microsoft's campus in Redmond, an event reportedly timed to coincide with the availability of a certain tasty breed of salmon. The event is Gates' chance to hobnob and brainstorm with prominent CEOs from around the globe. This year undoubtedly a major theme will be the current market condition.
In his keynote speech this morning, Gates said that instead of regarding the economic downturn as a major catastrophe, he views it as a market struggling to come to grips with a new way of thinking. "It's not just the dot-com phenomenon that has changed," Gates said. "But it's a coming-of-age of thinking about intellectual property."
While the industry buzz during the height of the dot-com era surrounded a concept of a New Economy, to Gates, the enduring piece of that concept today is the information economy. Key to that economy is intellectual property that is invented once and distributed widely at low costs. That model is far different from the typical manufacturing model that has run the economy for decades and it's far less predictable.
Take a manufactured product like shoes, for example. If demand is low, the manufacturer can scale back production and lower costs to get some return on investment. But with intellectual property, the investment is made up front. "If demand is lower . . . your fixed cost means there's no return," Gates said.
For Microsoft that's not such a big problem. If the company decides to throw $100 million into a program that bombs, usually another effort is successful and compensates for the loss. But for smaller companies or start-ups, a miscalculation of demand can be disastrous.
In the information economy, however, a company can control factors like people and objectives. It's important to know when to pull the plug on a project, he said, which can be difficult when human emotion grows attached to an effort. "The information economy will be one where judgment like this will be key," Gates said.
Another challenge, and one that Microsoft has faced, is learning how to continue to earn revenue. "Intellectual property has an interesting problem - it lasts forever," Gates said. Unlike a Coke, which a consumer may drink and decide to drink again, companies that make money on intellectual property have to find ways to continue to earn revenue after the product is first sold.
Gates believes that the market eventually will come to terms with this new way of doing business and he has high hopes for the future. When people overestimate change in the short term, which many have done in light of recent market changes, they tend to underestimate the longer five-to-10-year period. We're yet in the early stages of the digital economy and in time we'll realize its greatest benefits, he said.