The Wall Street Journal asks "Is Microsoft Driving Innovation or Playing Catch-up with Rivals?" People tend to confuse invention with innovation, as the WSJ has here. They use the words interchangeably, but they are very different. Robert Scoble debated Dave Winer for the WSJ article. Smart guys, but they both missed the point.
Invention is the creation of a technology that is totally new. Innovation takes a collection of prior inventions to the next level by combining them with existing products or technologies, and producing a commercially viable product that solves a customer problem.
Research & Development get mushed together all the time too, but they are different. Research is like Invention, something totally new. Development is like Innovation, making research useful in a business context.
Both invention and innovation are vitally important to our industry. Microsoft does both but rarely gets credit for it. That is OK...it comes with the territory. Take a look at the Microsoft Research page to see what they are doing. Look here for innovations in Windows Vista and Office 2007. A commenter on Scoble's blog lists over 50 Microsoft innovations. Pretty impressive list.
The WSJ article points to Xbox and the new Zune digital music player as examples of Microsoft playing catch-up. True, Microsoft didn't invent video games, neither did Sony. And Microsoft didn't invent digital music players, neither did Apple. In both cases it is innovation, taking it to the next level, that is important.
Ultimately customers decide what is important. Customers don't really care who invented what or how it was developed. The software business is like any other business. Just stay focused on the customer. Provide a high quality product, with great service, at a reasonable price, and you will do well. Deliver innovation at a pace your customers can utilize it. Get too far ahead of that curve and you will have problems. Believe me. I know. I have been there with several start-ups in my past.
For more on this subject see "Innovate or Imitate...Fame or Fortune?"