Gates wants to grow even more

That was the message he delivered at a conference of investment bankers here, outlining his mega-company's plans to boost spending on research and development to 20 percent of revenues.

Compared with other companies of comparable size, Microsoft (MSFT) spends the most on R&D, the software giant's chairman said at the NationsBanc Montgomery Securities 15th annual Technology Week conference. Microsoft now devotes about 17 percent of revenues to R&D.

"We feel our research is going well," Gates said, describing several Microsoft products currently under development. Among Microsoft's growth areas, Gates mentioned the company's plans to add natural language capability to products like Word and its email collaboration efforts.

On areas of critical innovation, Gates said consumers generally still underestimate the importance of low-cost, high-quality, flat-screen technology. He predicted that, within five years, the majority of computer users will utilize devices similar in size to a tablet of paper that will be able to take notes, analyze information, and recognize handwriting.

"Microsoft needs to create software that enables that new machine," Gates said. "The user interface has to change, the ability to work with large documents easily has to change, and we're hard at work at pulling together those advances."

In addition, Gates predicted that PCs with digital photography technology will make up a majority of mainstream computers in five years, but he said the pieces of such a project "are still falling into place."

"If there is any area that I have a little bit of concern about, in proceeding fast enough, it is communications technology--being able to connect these machines up at very fast speeds," Gates said. He said he is concerned mostly that this area of technology will be heavily regulated by government agencies, which could slow progress.

Gates briefly reiterated his company's stance that the government is unfairly hindering its progress. The Justice Department is fighting Microsoft over allegations it violated a 1995 consent decree prohibiting the software giant from tying the sale of Windows to any other application.

"To me, the lawsuit is ironic. This is the most competitive industry with the most jobs, and this is a lawsuit about crippling products. Now that is a fascinating lawsuit to have," Gates said. "[Government] tells us not to put the Internet into Windows, but those standards should be built in. The perspective of the consumer is lost here."

Gates said the easy installation of software is another issue that must be resolved before the software industry as a whole can move forward, and showed the conference a video aimed at demonstrating his point.

A wave of laughter swept through the packed room as images--including one of Martha Stewart installing a motherboard before dinner and another of Gates and his right-hand man, Steve Ballmer, Microsoft's executive vice president of sales and support, doing a parody of a Volkswagen commercial, cruising the streets in a red car and picking up a Sun Microsystems computer only to junk it for a beat-up easy chair--flickered across an overhead screen

Gates also demonstrated how even Microsoft's software could stand to be simplified as a "cryptic" error message popped up on his screen. He said such industry jargon can paralyze a user with fears of destroying his or her computer if an incorrect button is hit.

As Gates talked about these issues, he invoked his company's mantra dictating that everyone will one day live a "Web lifestyle" in which all communications will one day take place via the Internet. He said that in anticipation of this lifestyle shift, corporations must adopt the "Digital Nervous System" that allows them to share information electronically--speeding the rate at which they disseminate information and increasing their competitiveness.

In his wide-ranging address, Gates stated once again that product-release dates on NT 5.0 are not yet known. He said that developers first must sign off on the beta that will be released in the summer, and said his expectation is that it will be years before corporations make a complete transition from Windows to NT.

Windows 98 is still slated for release in the springtime, however.

Gates also said today that Microsoft does not plan to step into the services arena in any major way. Microsoft gets less than 2 percent of its revenues from services, and the remainder from products. As a result the company plans to continue working with large consulting agencies like EDS and small consulting companies for its services needs.

"We have chosen not to be in the services business, even though we do have some consultants," Gates said.

When reporting its second-quarter results earlier this month, Microsoft predicted that its growth in the third and fourth quarters would slow, in parly because of turmoil in Asia.

The software giant's second-quarter profits and revenues, however, jumped, beating Wall Street's expectations. Microsoft posted net income of $1.13 billion for the quarter, compared with earnings of $741 million a year ago. Revenues for the quarter rose to $3.59 billion, up from $2.68 billion a year ago.