Bloomberg News

Microsoft Backs Israel as ‘Silicon Valley Junior’ for Innovation

April 11, 2013

Microsoft Corp. (MSFT) (MSFT), hurt by a slump in global PC sales, is looking to Israel for innovation from its developers and acquisitions, as well as local startups, according to the company’s top executive in the country.

“We are trying to create assets for the company, and we recognize that we are Start-Up Nation and we can provide innovation,” Yoram Yaacovi, general manager of the Microsoft (MSFT) Israel R&D Center, said in an interview in Tel Aviv, referring to the title of a book on the country’s entrepreneurial culture.

Microsoft has acquired seven companies and made four strategic investments since 1989 in Israel, where it employs 800 people, including 500 in research and development. These developers are focused on business intelligence for cloud computing, said Yaacovi. Resulting products, such as an Excel tool for the cloud that was integrated into Office 365 BI software, help give companies insight into their data.

“Business intelligence is an area of double-digit growth” for the software maker, said Yaacovi. “We in Israel do all the cloud-based business intelligence for Microsoft. We can envision business intelligence migrating to the cloud and then we will build it in Microsoft.”

The Redmond, Washington-based software maker is looking for new sources of revenue as falling demand for PCs crimps demand for traditional applications. Global PC shipments fell 14 percent to 76.3 million units in the first quarter, according to Interactive Data Corp. The slump was the steepest since IDC began tracking shipments in 1994.

Technology Advantages

“It is important to understand what Microsoft is seeking in Israel,” said Yaacovi. “It’s not a big market and labor isn’t cheap. What it is looking for is technology advantages and entrepreneurial spirit.” Chief Executive Officer Steve Ballmer describes Israel as Silicon Valley Junior, he added.

A system to deliver tailored advertisements to Microsoft’s Bing search engine and Live Mail was developed in Israel by engineers from YaData, a company Microsoft bought in 2008. Face- recognition technology developed by a small team in Israel is now used in Microsoft’s Bing, Photo Gallery, and Kinect motion- sensing software, Yaacovi said.

Microsoft invested more than $700 million in Israeli acquisitions between 2002 and 2009, according to Israel Advanced Technology Industries, a group representing technology companies and related businesses.

Startup Programs

Microsoft (MSFT)’s Israeli purchases include Internet security company Whale Communications, data-organizing specialist Zoomix Data Mastering Ltd. and Gteko, a maker of networking and support software. The company met with more than 600 startups last year in its quest for acquisitions, Yaacovi said.

A year ago, Microsoft (MSFT) also began offering a series of four- month “accelerator” programs to help startups for the cloud, mobile and online markets. Twenty-three companies have benefited from the courses so far.

“We recognize that we need to be more in touch with startups,” Yaacovi said. “We need to speak their language and what better way to bring startups to run on our platform.”

Startups now on the accelerator program include Screemo, which is developing a cloud-based application to create low-cost advertising campaigns; and WCS Sports, a maker of a system to help owners of sports media rights to give fans personalized video clips and highlight preferred footage.

“There are so many things going on in the accelerator that can be exciting for the future,” Yaacovi said.

Shares Drop

Microsoft stock fell as much as 5 percent in New York after Goldman Sachs Group Inc. said personal-computer market-share losses are accelerating and the company’s push into consumer electronics hasn’t gained traction.

The stock was down 4.7 percent at $28.85 as of 9:52 a.m., paring its advance to 8 percent this year, compared with an 11 percent advance for the S&P 500 index.

Microsoft released Windows 8 and the Surface tablet on Oct. 26 to appeal to consumers who are increasingly adopting mobile devices to surf the Internet, access e-mail and store pictures, music, documents and other information.

To contact the reporter on this story: Gwen Ackerman in Jerusalem at gackerman@bloomberg.net; Elliott Gotkine in Tel Aviv at egotkine@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net


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