AOL drags Time Warner earnings

Published in August 8th, 2007

Time Warner said Tuesday it was on the “right track” at AOL and other units. (Daniel Acker/Bloomberg News)

NEW YORK: Time Warner said Wednesday that second-quarter profit had gained 5.2 percent on higher cable revenue, but shares dipped after sales at the AOL Internet unit plunged 38 percent.

AOL reported its worst sales drop since adopting a strategy last year to replace paid subscribers with free e-mail messages and advertising. Revenue from divisions that include the Warner Bros. studios and the HBO cable network also declined.

“The revenues disappointed for all divisions except cable,” said David Joyce, an analyst at Miller Tabak & Co. in New York. He has a “buy” rating on the shares and doesn't own any. “AOL needs to do even better in ad revenue growth,” he said.

Time Warner, the world's largest media company, said net income had risen to $1.07 billion, or 28 cents a share, from $1 billion, or 24 cents, a year earlier. Sales rose 6 percent to $11 billion. The company announced a $5 billion stock buyback.

Shares were down 53 cents, or 2,8 percent , at $18.73 in New York after falling by as much as 4.8 percent earlier Wednesday. They had dropped 12 percent this year through Tuesday.

The company also said it was not focused on seeking “creative structural alternatives” for AOL and was confident of its current strategy.

“We are on the right track,” said Richard Parsons, the chief executive of Time Warner, responding to a question on the future of AOL and other units. “The focus is on executing that strategy, not on looking for what some people may think of as creative structural alternatives.”

There has been speculation that Time Warner would eventually spin off part or all of its Internet unit, which it has denied in the past.

AOL said last week that it had agreed to buy closely held Tacoda for technology to place Internet ads based on consumers' online behavior. Tacoda will track how users view AOL and its partner Web sites to come up with more targeted ads tied to those preferences. The $275 million acquisition is the third this year aimed at boosting AOL's advertising to make up for declining revenue from Web access service.

Parsons has grappled with declining revenue at AOL, six years after the Internet business bought Time Warner in a transaction that led to record losses in 2002. Parsons, who has said he will decide by the end of the year whether the AOL free strategy is working, said last month it would take two more quarters for AOL to turn around.

Cable sales jumped 59 percent after Time Warner bought assets from Adelphia Communications last year to add customers in Los Angeles and Dallas.

AOL's sales fell to $1.3 billion after the unit's Internet access service lost 1.1 million subscribers in the quarter.

Excluding some charges and gains, earnings were 22 cents a share, exceeding a 20-cent average of 18 analyst estimates compiled by Bloomberg. Online ad sales gained 16 percent.

To counter declining Internet-access subscribers, AOL started offering e-mail and other services for free last year to lure users and advertisers. Parsons, 59, hired an NBC veteran, Randy Falco, as chief executive of AOL in November to carry out the free-service strategy. The division, based in Dulles, Virginia, has since upgraded products such as its instant messaging service.

“This is the first weak quarter they have had since they initiated the free ad-based strategy,” said Justin Sumner, an analyst at Sentinel Asset Management in Montpelier, Vermont, which owns more than one million shares of Time Warner. “It will be interesting to see if this recent acquisition, Tacoda, can get integrated or if they will have to consider something more dramatic such as a spin-out or sale of the business.”

FCC acts to create a more open U.S. wireless network

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SAN FRANCISCO: The U.S. Federal Communications Commission moved cautiously toward creating a more open national wireless broadband network, handing a partial victory to Google, which has pushed for more competition in cellphone services.

The agency approved rules Tuesday for an auction of broadcast spectrum that its chairman, Kevin Martin, said would promote new consumer services. The rules will let customers use any phone and software they want on networks using about one-third of the spectrum to be auctioned.

The commission did not approve a provision that would have required the winner of the auction to sell access to its network on a wholesale basis to other companies. Google favored the rule as a way to hasten competition and innovation in the cellphone industry, a market it is eyeing.

While the language of the ruling has not been made public, it appears that any company that buys the new spectrum will have to leave it open to devices it does not approve or control. If, for instance, Verizon Wireless were to buy spectrum, consumers would have to pay Verizon for access to its network but they could use devices of their own choosing on it.

At present, the carriers decide what devices are used on their networks and therefore control many of the services and software available to consumers. The carriers assert that this lets them control the quality of the customer's experience.

The ruling does not affect the existing spectrum, controlled by major companies like Verizon. But it appears to signal a shift in how policy makers and, in turn, companies, will approach access to and control of the wireless networks of the future.

The ruling did not go far enough for some consumer-activist groups, who had wanted more open access to those networks, but even those groups applauded parts of it.

In recent weeks, Google and other technology interests pressed the commission to create an open-access wireless network - in contrast to the current closed cellular networks - and to permit owners of the spectrum to sell portions of it wholesale to other companies. That would loosen the carriers' grip on service offerings and might also open the door to new entrants like Google.

The 700-megahertz wireless band has been referred to as the “last beachfront property” in the radio spectrum. It is being made available for new digital wireless services, including emergency communications, by television broadcasters moving to digital television transmission in February 2009. By law, the auction must start no later than Jan. 28, 2008. It is expected to raise $15 billion or more for the U.S. government.

Google called the decision an indication of progress at the commission. The agency adopted two of the four openness standards that Google proposed this year, including open access to software applications and devices.

“The Federal Communications Commission made real, if incomplete, progress for consumers this afternoon,” said Richard Whitt, Google's telecommunications and media counsel in Washington.

In trying to influence the commission debate, Google had said it would bid at least $4.6 billion if the commission approved all its proposed rules. However, Whitt said it was not out of the question that Google might still bid. The company plans to study detailed rules the agency is expected to release in the next two weeks and talk with potential partners before making a final decision.

Google's efforts also drew attention to the debate over the pace of innovation in the wireless market.

Speaking before the commission Tuesday, Jason Devitt, co-founder and chief executive of Skydeck, a Silicon Valley wireless content firm, said the U.S. cellphone industry had failed to innovate. “Ten years and we have ring tones,” he said.

The commission tried to strike a balance between the interest groups, Martin said. “The commission needs to decide what is in the public interest, not what one company advocates,” he said.

Public interest groups and Silicon Valley technologists said they were disappointed with the ruling. Public interest groups said the $4.6 billion minimum auction price set by the commission might discourage bidders. The rules say that if the reserve auction price is not met, the open access provisions adopted by the commission will be dropped in later bidding.

The meeting, which was scheduled to begin at 10 a.m., was delayed into the afternoon because of last-minute negotiations over the open access provision, an industry executive said. The limited open access agreement resulted from a compromise between Martin, a Republican, and two Democratic commissioners, Michael Copps and Jonathan Adelstein, who favored the wholesale rule that Google proposed.

Internet domain names return hefty profits

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THE END USER

BOSTON: The Web addresses that businesses and people online call home have generated the equivalent of a real estate boom in the real world with speculators, appraisers, developers, investors, and brokers turning the names typed on navigation bars into hefty profits.

“It is a global, multibillion-dollar industry,” said Peter Lamson, senior vice president and general manager of NameMedia, a domain name marketplace based in Waltham, Massachusetts. “Customers need to find your doorstep. A brick-and-mortar business needs an attractive address, and it's no different online.”

In the 1990s, speculators registered Internet domain names on the cheap, often hoping to make a lucrative flip selling them to someone else. When the tech bubble burst, many were left with little more than words.

But as money has flooded into Web-based businesses like MySpace and YouTube and online advertising has grown explosively - rising by nearly a third each year for the past three years - domain names have again become a hot investment.

Some industry watchers said that the market could prove volatile over time, and there's always the potential that a speculator will be left with nothing more than a string of words.

“There's value there - a few of these companies think they're worth half a billion because they've got all this waterfront property,” said Todd Dagres, general partner and co-founder of Spark Capital, a firm that invests mainly in media, technology, and entertainment businesses.

Backed by the venture capital firms Highland Capital and Summit Partners, NameMedia has raised more than $100 million in debt with the help of Goldman Sachs and owns 750,000 domain names as well as marketplaces where people can buy or sell names. This outfit of “cyber real estate tycoons,” as president Jeffrey Bennett calls it, is just one of three local firms that are playing a leading role in the rush for prime virtual space.

Internet Real Estate Group in Boston takes a luxury developer's approach to the domain names game.

The company turns a select number of “premium” domains - site names that are instantly recognizable, like jeans.com, chocolate.com, or software.com, into full-fledged Internet businesses with content, ads, and products for sale. Taking another tack, Sedo.com, a German company with U.S. headquarters in Kendall Square in Cambridge, Massachusetts, handles more than $3 million of transactions every month, acting as a kind of eBay for domain names.

DN Journal, an online publication that follows the industry, has tracked five sales this year that topped $1 million each - including Porn.com and Seniors.com - and 50 at $100,000 or more as of July 22.

“We're about three years into a major upturn,” said Ron Jackson, editor of DN Journal. “A ton of ad revenue started flowing from traditional media models onto the Web and it's been unbroken upward momentum.”

While people frequently navigate the net by punching keywords into search engines, an estimated 10 percent of searches occur when people type keywords directly into their address bar.

That means a Web site with a common name, such as WiFi.com, already generates a certain amount of natural traffic, and people who buy a portfolio of names could earn a dividend on their investment just by putting ads up, according to Jeremiah Johnston, chief operating officer at Sedo.com.

Think of domain names “as analogous to buying spectrum in the wireless world or channels on television or buying real estate,” said David Liu, managing director of Jefferies Broadview in Silicon Valley.

Mike Zapolin and Andrew Miller, founders of Internet Real Estate Group, got into the domain business in 1998, buying beer.com for $80,000 from a young man in Colorado, who, they said, used the Web site to post photos of inebriated people vomiting. The owner, hoping to buy more beer, posted a banner asking for advertising. They sold beer.com four months later for $7 million. Now, they believe the businesses they are building will ultimately be worth hundreds of millions.

“In real estate, if you built a building and were offered three times what you paid for it in a week, you'd be thrilled,” Zapolin said.

EMusic in deal with AT&T on song downloads from independent labels

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Ethan Miller/Reuters Music by groups like the Donnas will be sold over Sprint and Verizon.

NEW YORK: EMusic, the second-largest online music seller in the United States after Apple's iTunes, announced a deal with AT&T on Tuesday that will allow people to buy songs from independent labels through their cellphones, without the need to go through a personal computer.

Several services, including those run by Sprint and Verizon, let people buy songs directly. But they focus on songs by mainstream performers like Prince, who has a deal with Verizon.

EMusic sells only music from independent labels, a category that these days includes the new album from Paul McCartney as well as obscure punk bands. The arrangement with AT&T Mobile Music will make those songs available just as easily as the more conventional ones.

Nearly all of the 2.7 million tracks eMusic has the rights to sell will be available through the service, which will work on several handsets by Samsung and Nokia.

“We know that we have a lot of customers in the segment that eMusic is trying to reach,” said Mark Collins, vice president of consumer data services for AT&T's wireless unit.

Record labels have long believed that selling songs in cellphone-based music stores will encourage impulse purchases. EMusic will encourage consumers to browse, reading about bands and hearing snippets of songs to discover music they might like.

Tracks will cost more than they do over the Internet - $7.49 for five songs, as opposed to $9.99 for 30 at the online site - because of the expense of sending them over a mobile network to a user's phone.

For that price, however, users can also get another copy of the song, which they can download from the Internet as an MP3.

EMusic, which is owned by Dimensional Associates, the private equity arm of JDS Capital, currently has a marketing deal with AT&T to encourage consumers to “sideload” their phones with MP3s from its existing Internet store. This means they can plug their phones into their computers to transfer the music.

But this will be its first time selling music on a mobile network.

“We think there are customers that are ready for eMusic, but they haven't heard of it yet,” said David Pakman, the company's president and chief executive. “We've focused on making this easy to use.”

Few of the albums that eMusic carries are likely to sell as briskly as the kind of pop singles the mobile phone services have concentrated on selling so far. But its strategy has always been to sell comparatively fewer copies of the vast number of releases available on independent labels.

For some of those labels, rarely seen in big-box retail stores, eMusic has become an important partner.

“EMusic isn't pushing Top 40 on you when you get to the front page,” said Allison Robertson, guitarist for the Donnas, a rock band with its own label, Purple Feather. “You find stuff that you can't find on the iTunes Top 100.”

This service could make some independent music even easier to find.

“For eight bucks a month, you can get exposed to music you can't hear elsewhere, so you might be more likely to experiment,” said Mike McGuire, a vice president of research at Gartner. “It could be an interesting way to discover music.”

AT&T is also the service provider for Apple's iPhone, but eMusic's over-the-air service will not work on that device. Although the iPhone is fully compatible with Apple's iTunes program, it does not allow users to purchase songs without signing on to a computer.

The N.Y. Times and NBC News will share campaign coverage

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NEW YORK: The New York Times and NBC News have agreed to work together to cover aspects of the 2008 presidential campaign.

As part of the arrangement, NBC will feature political coverage from the Times on its MSNBC.com Web site, while The Times said it planned to use NBC video on nytimes.com.

The two news organizations also said Monday that they would look for opportunities to report together, both on the news of the day and on longer-term enterprise articles.

As one consequence of the deal, each news organization said it would give the other early access to its reports from the campaign trail.

In a similar arrangement, USA Today and ABC News said last month they also would work together on campaign coverage.

In a message to The Times news staff, Bill Keller, the paper's executive editor, said: “In brief, the arrangement goes like this: We will give NBC stories, graphics, pictures and the Caucus blog for their Web site. They will give us video for ours, along with links that should expose many new readers to our online journalism.”

Keller added that political reporters of The Times, which also owns the International Herald Tribune, would make regular appearances on NBC and MSNBC, including “Today” and “NBC Nightly News With Brian Williams,” and that the paper's political editors and the network's producers would maintain contact.

In an interview, Mark Lukasiewicz, vice president of digital media for NBC News, said: “As we've seen journalism move in a direction where all of us are working on all platforms, it's natural that journalistic organizations that share the same values and priorities are going to come together.”

Separately, Vivian Schiller, a former CNN executive who is senior vice president and general manager of nytimes.com, said: “NBC and MSNBC have something we don't: They have tons of video they shoot in the field every day. While we do have video, we're a bit of a boutique shop.”

In his message to the newspaper staff, Keller acknowledged that the two cultures may need some time to get used to collaborating.

“No doubt forbearance will be required from time to time,” he wrote. “We think the potential benefits are great - for our political coverage and perhaps, eventually, beyond.”

Bancroft family divisions cloud $5 billion bid for Dow Jones

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NEW YORK: The outcome of the $5 billion bid for Dow Jones, publisher of The Wall Street Journal, appeared to go down to the wire Monday as members of the Bancroft family - and even some of its advisers - seemed sharply divided over whether to sell the company to Rupert Murdoch and News Corp.

The Bancrofts control 64 percent of the voting shares of Dow Jones. The Wall Street Journal reported Monday that slightly less than half of the family's votes favored the deal as of late Sunday, citing a source close to the Dow Jones board.

In a sign of investor skittishness ahead of the Monday deadline, shares of Dow Jones fell $2.05, or 3.75 percent, to $52.63 in afternoon trading after a News Corp. spokesman said Murdoch was “highly unlikely” to proceed with the bid for the company unless the deal received more support from the Bancroft family.

The splits within the family made it almost impossible to handicap whether enough members would vote in favor of a sale or whether they could reach any conclusion by the deadline late Monday.

The boards Dow Jones and News Corp. were bracing for the possibility that they would not have a definitive answer, people close to both boards said, and were trying to determine their next moves. For Dow Jones, that could include a general shareholder vote.

“The potential for chaos is high,” said a person close to Dow Jones management who had been briefed on the family's deliberations but who was not authorized to speak about them.

Even within the Bancroft camp, opposition to the deal is divided. Some family trustees, like Christopher Bancroft and Jane Cox MacElree, are opposed to a sale because they do not care for the brand of journalism practiced by Murdoch and worry that he would interfere in the news pages of the Journal.

Others, like a group of family trusts controlled by lawyers in Denver, are willing to sell but first want to hold out for a 10 percent to 20 percent premium over the $60-per-share offer News Corp. has made, at least for the supervoting shares of the company. Both Dow Jones and News Corp. have emphatically said that they would only consider one price for all shares.

The Denver trust position, which was made public Friday, has apparently emboldened other opponents of the deal who are using it as leverage to argue that there has not been a serious effort to get the best deal, say people who have advised some of the family members.

Murdoch has said that he has no intention of raising his offer and that he is prepared to walk away if the family does not approve the bid by the deadline Monday.

There are also divisions opening within the ranks of family advisers. Michael Puzo, a partner at the family's law firm who sits on several family trusts, is believed to oppose a sale at the current price, people close to the family said.

That would put Puzo in direct opposition with Michael Elefante, the primary trustee and the family's closest adviser who, as a member of the Dow Jones board, voted in favor of accepting Murdoch's offer, worth about $5 billion.

Over the past few days, family members exchanged pointed e-mail messages, and family lawyers have tried to make changes to the terms of one of the family's trusts. The changes would allow Christopher Bancroft - a vocal opponent of the deal who controls shares both as an owner and as a trustee - to vote one way and other family members to vote another.

Spurred by bid for Dow Jones, Pearson seeks allies for The Financial Times

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Pearson is in talks with LVMH to sell its French business paper, Les Echos, to focus attention on expanding The Financial Times. (Antoine Antoniol/Bloomberg News)

LONDON: Pearson, the owner of The Financial Times, said Monday that it was talking to a number of potential partners about new ways to display the newspaper's journalism as it weighed the effects of Rupert Murdoch's bid for Dow Jones, owner of The Wall Street Journal.

“We're talking to all sorts of people about different distribution channels,” Marjorie Scardino, chief executive of Pearson, told reporters in London. Potential partners include CNBC, the business news television channel owned by NBC Universal, she said.

Pearson and General Electric, the parent of NBC Universal, recently decided against making a joint approach to Dow Jones, after exploring the possibility of combining CNBC, Dow Jones and The Financial Times Group in a separate entity.

Those talks, which Scardino characterized as “kicking the tires,” were prompted by News Corp.'s bid for Dow Jones. Members of the Bancroft family, which controls the fate of Dow Jones, faced a deadline late Monday on whether to accept the offer.

Scardino, speaking as Pearson announced its financial results for the first half of the year, said that combining The Financial Times, the leading international business daily, with The Wall Street Journal, the top-selling business newspaper in the United States, would have offered “a lot of cost synergies.”

But she said any combination would have been complicated by different strategies at the two papers, she said.

The Financial Times, with a circulation of about 450,000, aims to serve a “niche” market of global business leaders and politicians, she said. As part of its strategy, the paper recently raised its cover price - to $2 from $1.50 in the United States, for example.

She described The Journal, which has a circulation of more than 2 million, as pursuing a “high-volume consumer audience.”

Scardino explained Pearson's recent decision to enter into exclusive talks with LVMH Moët Hennessy Louis Vuitton, the luxury goods company, on a sale of Les Echos, a business newspaper in France, as a move to focus Pearson's journalism strategy on global brands like The Financial Times.

The circulation of The Financial Times rose 1 percent in the first half from a year earlier, while subscribers to its Web site increased 12 percent, to 97,000, Pearson said. Advertising revenue rose 5 percent.

After a difficult few years, the FT returned to profitability in 2005, and earnings from the newspaper rose in the first half to £10 million, or $20.24 million, from £5 million a year earlier.

“The FT is making hay while the sun shines,” said Paul Richards, an analyst at Numis Securities in London, noting that financial markets, notwithstanding recent jitters, have been strong. “The operating environment has been pretty rosy.”

Over all, Pearson said its pretax profit rose to £40 million in the first half from £14 million a year earlier. Sales rose 3 percent, to £1.72 billion.

Growth was driven by the company's education division, which accounts for nearly two-thirds of Pearson's revenue, as American schools spent more on textbooks.

The professional education division, which provides testing services, and IDC, a provider of technology data in which Pearson owns a majority stake, were both doing better than expected. Revenue fell slightly at the Penguin publishing unit.

Shares of Pearson rose 8 pence, or 1 percent, to close at 778 pence in London on Monday.

Some analysts have speculated that Pearson might be worth more if it exited the cyclical newspaper business by selling The Financial Times and, potentially, drawing a trophy price for the paper. But Richards, the analyst, said that Scardino's comments to analysts and reporters Monday suggested she might relish a battle with Murdoch.

“Certainly the way Marjorie was talking about the FT brand today, it doesn't look like a breakup of the group is imminent,” Richards said.

Scardino declined to discuss any plans for head-to-head competition with a Wall Street Journal owned by News Corp.

Regarding Murdoch, she said: “He is obviously a very successful newspaper publisher. It is impossible not to respect him as a newspaper man.”

The Ludlum conundrum: A dead novelist provides new thrills

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Eric Van Lustbader has lengthened the troubled life of Jason Bourne, the CIA assassin who had amnesia when readers first met him and whose memories have returned in glimmers. (Gordon M. Grant for The New York Times)

Robert Ludlum died six years ago, but that has done nothing to slow the release of books published under the name of the actor-turned-novelist who specialized in thrillers built on a foundation of paranoia.

Twelve Ludlum books have been released since his death, with a 13th due out in September. The business is deployed now as a kind of film studio, presenting books completed by others or new ones written using his name.

Since early 2006 alone there have been three: “Robert Ludlum's The Moscow Vector,” the sixth in the “Covert-One” series of paperback originals; “The Bancroft Strategy”; and “Robert Ludlum's The Bourne Betrayal,” by Eric Van Lustbader.

Ludlum did not want to be forgotten or leave behind only an enormous backlist that started with “The Scarlatti Inheritance” in 1971. He had little reason to worry: He is now a brand extended far into his afterlife.

“This goes back to 1990 or '91 when Bob had quadruple bypass,” said Henry Morrison, Ludlum's agent. “One day we were talking about what would happen when he was gone. He said, 'I don't want my name to disappear.' “

His estate has borrowed from the examples of V.C. Andrews, dead since 1986 but selling well thanks to novels in her name written by an uncredited author; Ernest Hemingway, whose estates issued several books after his suicide; and Tom Clancy and Clive Cussler (both quite alive), who diverted from their solo thrillers to create series written in conjunction with, or solely by, others.

“People expect something from a Robert Ludlum book, and if we can publish Ludlum books for the next 50 years and satisfy readers, we will,” said Jeffrey Weiner, the executor of Ludlum's estate.

The Ludlum estate's postmortem publishing game plan is reminiscent of licensing and other deals for dead stars like Elvis Presley, Marilyn Monroe and Babe Ruth, and the film industry's comfort with familiar franchises.

“Publishing does look to the past to see what will work in the future,” said Sara Nelson, the editor in chief of Publishers Weekly.

Whether it is fair to readers to publish Ludlum books posthumously - in the form of spruced-up old manuscripts or new novels written by others - is not a serious concern to the estate or to Grand Central Publishing, the former Warner Books, where the rights to all new novels moved from St. Martin's Press.

“I don't think anyone objects as long as you maintain the quality of the book,” Morrison said. “The Sherlock Holmes novels have been a business since 'The Seven-Percent Solution,' and some have been better than others. It's the characters that interest people.”

Weiner and Morris have executed an aggressive plan that has perpetuated the “Covert-One” series of paperback originals that Ludlum created with the central character of Lieutenant Colonel Jon Smith. He oversaw the first three (two by Gayle Lynds and one by Philip Shelby) before he died, but three more have been published since. A seventh, “The Arctic Event,” by James Cobb, the fifth writer in the series, is due in September.

Two best sellers by the veteran thriller writer Lustbader have lengthened the troubled double life of Jason Bourne, Ludlum's CIA-handled assassin who had amnesia when readers first met him and whose memories have returned in glimmers.

Lustbader's newest novel bears the title “Robert Ludlum's The Bourne Betrayal,” in which the agency believes he has gone rogue by killing two of its own and orders him terminated. The title underscores the franchise and the hope that readers will buy a Ludlumesque book that he did nothing more than inspire but which displays his name in letters twice as tall as Lustbader's.

Lustbader, a friend of Ludlum's and a client of Morrison's, was enlisted to refresh the literary Bourne after the success that Matt Damon had in playing the character in the 2002 film “The Bourne Identity,” very loosely based on Ludlum's first Bourne novel of the same name. That and the 2004 film “The Bourne Supremacy” have grossed nearly $500 million. (The third film in the franchise, “The Bourne Ultimatum,” opens Friday in the United States.)

The writers met at Morrison's annual Christmas party in 1980, the year in which “The Bourne Identity” and Lustbader's “The Ninja” were published. Lustbader said that they sat rapt in each other's company in a corner at the party.

“We talked for hours about characters and story arcs and how to fashion a book in three acts, where one act outdoes the next one. We talked about being the only thriller writers who knew anything about characters and wrote about characters in our books.”

Gates plans his leave from Microsoft amid great change

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Microsoft's founder, Bill Gates, flanked by his designated successors: Craig Mundie, left, head of research and strategy, and Ray Ozzie, top software architect. (Kevin P. Casey for The New York TimesKevin P. Casey for The New )

REDMOND, Washington State: Microsoft is beset with competition from all sides, unlike any it has seen in decades, and Bill Gates, who co-founded the company 32 years ago, still intends to step away next year as planned.

But so far, Gates, Microsoft's 51-year-old chairman, shows no sign of fading away.

One year into a planned two-year transition, there are few visible cues that Gates is ready to leave the world's technology stage to devote his energies principally to the $33 billion foundation he established seven years ago with his wife.

Indeed at the company's annual financial meeting last week Gates spoke first, outlining a decade-long agenda, not a mere 12-month outlook.

He described a world in which the widespread availability of broadband networks would reshape computing, giving rise to what he said would be “natural user interfaces” like pen, voice and touch, replacing many functions of keyboards and mice.

Gates has stayed deeply engaged in the company's technology strategy. He still frequently participates in high-level strategy planning sessions with Microsoft's closest partners, like Intel, according to executives who have attended the meetings.

During a wide-ranging interview last week exploring his diminished role at Microsoft, the company's challenge and its competitors, Gates insisted that he really has begun stepping back.

“I am in a lucky situation of having way more things that seem interesting to do and very exciting and important, and working with smart people, and highly impactful, way more than a 24-hour day will fit,” Gates said. To be sure, there is widespread skepticism in the industry about the possibility of Gates genuinely disengaging. Microsoft's dominance is being challenged as never before by Google in particular, and Wall Street refuses to believe the company will regain its edge. The company's stock has largely remained flat since the end of the dot-com era.

“It's very hard for someone at his age, who has built a company with that much success and with continuing challenges to really walk away,” said David Yoffie, a professor at Harvard's business school. “He will never be a titular leader.”

As he spoke in his office, Gates was joined by the two Microsoft executives, both veteran technologists, who are succeeding him. Craig Mundie, the chief research and strategy officer, and Ray Ozzie, chief software architect, agreed with Gates that despite significant industry challenges from all directions, Microsoft is at a perfect historic juncture for Gates's departure and the first stage of his withdrawal from Microsoft has been reasonably seamless.

“The weaning process inside the company is inevitable,” said Mundie, a computer scientist who began his career developing minicomputers and supercomputers before joining Microsoft in 1992.

The greatest danger, according to all three executives, would be if Gates continues to make decisions while not staying deeply involved. He will remain chairman.

“It can't be a situation where he's expected to suddenly, magically come up to speed,” said Ozzie, a software designer who developed a software collaboration tool called Notes for Lotus and then started Groove Networks, which was acquired by Microsoft in 2005. “You know, did you see the 20 announcements last week that Google did, Yahoo did, Cisco did?”

For his part, Gates said he planned to remain deeply involved in a few areas indefinitely.

“Other than board meetings, there's not much in terms of regular meetings,” he said. “It's much more sitting down a couple hours a month with Craig, sitting down a couple of hours a month with Ray.”

On Thursday, Steven Ballmer, who took over the chief executive role from Gates seven years ago, said the company's overall performance had never been stronger. Microsoft, he noted, has doubled its revenue and almost doubled its profits in the half decade that he has been at the helm. Despite that growth, the stock price has remained vexingly flat in the period.

Although smooth leadership transitions are infrequent among high tech firms, it appears that Gates has had the freedom to begin stepping away gracefully because Ballmer has been largely successful in shouldering the burden of running Microsoft.

Gates no longer attends senior leadership team meetings, and earlier this month he made what company executives described as a farewell appearance at the annual Microsoft sales force meeting in Orlando, Florida When Gates finished his speech to the thousands of sales people at the meeting, they gave him a five-minute standing ovation, underscoring the bond the company still retains with its co-founder, according to a person who attended the event.

In a complex world, innovation happens from the top down

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NEW YORK: User-generated content - from Wikipedia to YouTube to open-source software - is generating waves of excitement. But the opening of innovation to wider numbers of people obscures another trend: Many of the most popular new products, like the iPod, are dominated by a top-down elitist innovation model that does not allow for customization.

“New technologies are becoming so complex that many are beyond the possibility of democracy playing a role in their development,” said Thomas Hughes, a science and technology professor at the University of Pennsylvania.

Consider: electronic implants into human bodies; gene-splicing as common as cosmetic surgery; computer networks mining vast databases to discern consumer preferences. All of these innovations are the result of corporate or government initiatives overseen by the elite.

“The process of innovation leaves out a huge proportion of the population,” said Daniel Sarewitz, director of the Consortium for Science, Policy and Outcomes at Arizona State University.

Experts like Eric von Hippel, a professor at the Massachusetts Institute of Technology, argue that the proliferation of “user-generated” designs signals the “democratizing” of innovation. Armed with inexpensive digital tools and networks, ordinary people, he says, can band together to push their own innovations. They also can hijack existing technologies, taking them in directions only dimly envisioned by the original creators.

One example is an electronic community called Instructables, whose participants share methods for customizing standard products in unpredictable ways. The chief of Instructables, Eric Wilhelm, who earned his doctorate at MIT, where he was inspired by Eric von Hippel, has posted a clever means of turning a white Asics Gel-Foundation 7 running shoe into a purple model. (The $90 official version comes only in a white-black-and-blue combination.)

Today, Web-savvy consumers “expect innovations to meet their needs,” Wilhelm said. “If innovation isn't tailored to them, they expect to be able to tailor it to themselves. That is a big change.”

But does this really mean that the elite no longer sits at the top of the innovation food chain?

“Elites have a lot of leverage but less than they used to,” says Peter Leyden, director of the New Politics Institute in San Francisco. “More people are getting their voices heard.”

Leyden sees an emergent American “republic of innovation,” in which growing numbers of people influence what innovations are made and when.

Skeptics, however, say that the rosy scenario is exaggerated and that user-generated innovation is merely a kind of “democracy lite,” emphasizing high-end consumer products and services rather than innovations that broadly benefit society.

“Difficult questions are going unasked about who is participating in innovation and on what terms,” said James Wilsdon, director of the innovation program at Demos, a policy research group in London.

In that scenario, needed innovations can be overlooked. For example, huge amounts of money are spent on improving Internet search engines or MP3 players, while scant attention is given to alternative energy sources. Battling diseases like AIDS or Alzheimer's - efforts that lobbying groups in wealthy countries help to highlight - attract legions of well-financed innovators, while big global killers, like childhood diarrhea and sleeping sickness, are virtually ignored.

Popular pressure to pursue certain innovations sometimes gets results, of course. In 2004, voters in California passed a law to provide funding to a stem-cell research institute - in a rebuke to the administration of President George W. Bush, which has banned federal funding for such research.

“This was a great example of a democratic adjudication of an innovation issue,” said Sarewitz, of Arizona State. Even so, bureaucratic and legal delays have meant a slow start for the San Francisco lab, which has not yet received approval to spend any of the $3 billion in promised taxpayer funds.

For all the hoopla over the power and promise of user-generated content, consumer-directed design and other hallmarks of our new golden era of democratized innovation, one of the iconic products of our times - the iPod - can't be customized (no, I'm not counting putting on different-colored protective jackets). There is an unbroken line between Henry Ford (with his Model T) and Steve Jobs. The new iPhone similarly reflects the elite, corporate innovator's drive to find one size that fits many.

The cliché that committees can't create great ideas, or art, still seems to be true - though whether or not that is the best way to innovate remains an open question. Who knows how much longer?

G. Pascal Zachary teaches journalism at Stanford University and writes about technology and economic development.