Microsoft Philanthropy

WHICH is the most philanthropic corporation in America?

According to the newsletter Corporate Giving Watch, it's none other than Microsoft Corp. The software colossus, which devotes much of its energy trying to pauperize its competitors, seems to have a soft spot for those already poor, handing out a total of $73.2 million to charities in fiscal 1995. (The 1996 figures, in characteristic Microsoft fashion, are shipping late.) That ranks Microsoft as the top U.S. corporation in giving gifts to charity, nosing out such upstanding corporate alms-givers as Johnson & Johnson ($72.8 million), IBM ($72.2 million), Eli Lilly & Co. ($71.9 million) and Hewlett-Packard Co. ($71.2 million).

News outlets reporting the figures portrayed Microsoft as the model Corporate Citizen, a company doing well by doing good. "Microsoft shares wealth," headlined the San Francisco Examiner, in a typical treatment. Microsoft has accepted the accolades with blushing modesty. "It's been a long-standing tradition at Microsoft to be involved in philanthropy," says Microsoft spokesperson John Pinette. "That goes back to before the company was founded, when Bill [Gates'] mother was on the board of the United Way."

Some are even starting to place Bill Gates in the pantheon of the great philanthropists of all time. When Microsoft donated $10.5 million in computers and software for rural and inner-city libraries last October, the head of the Brooklyn Public Library was moved to proclaim from the podium, "In the same way that [Andrew] Carnegie built the buildings, Gates is providing the second wave that will continue the opportunities." Computer users may well start experiencing a warm fuzzy feeling every time they boot up Windows, knowing it's the product of a company that Really Cares.

But like many things in the computer world, there's more to the story than what fits on a single screen. A quick scroll through Microsoft's charitable donations soon makes it clear that Bill Gates is not so much a philanthropist as he is a Virtual Philanthropist. Of the $73.2 million that Microsoft donated to charity in 1995, $62.1 million, or about 85 percent, was in the form of free software.

Now, free software is a grand thing. I wouldn't mind having some free Microsoft software myself, maybe that cool new version of Word with the fully customizable Toolbar. But free software  even $62.1 million of it  ain't philanthropy, not if the word is to have any meaning (derived from the Greek philanthropos, meaning humane, benevolent, loving people).

First of all, the software donations cost Microsoft considerably less than the $62.1 million figure suggests. That total isn't what it cost Microsoft to produce the software they gave away; it's what's known as the "fair-market value" of the software, or what it might have commanded if sold on the retail market with no discounting. The higher the value of the donation, the bigger the tax write-off, and Microsoft is hardly the only company to stretch the equation to their advantage.

"I'm not going to fault Microsoft on the way it reports their numbers because we do the same thing," says Fred Silverman, senior manager, Worldwide Community Affairs for Apple Computers, which last year gave away computer equipment the company valued at $5 to $6 million. "But anyone who looks at Microsoft's numbers is welcome to make his or her own analysis of the true value of the donations based on their knowledge of mark-up in the industry."

Since software retailing for $300 often costs less than $20 to manufacture, the value of Microsoft's donated software is probably inflated by a factor of 15 or more. But more telling than the funny math is the self-interest involved in Microsoft and other high-tech companies giving away product in the first place. Far from being a selfless act of charity, there are strategic benefits to Microsoft in donating software. Giving away software increases market share among people who probably couldn't afford to buy the product in the first place. It squeezes out marginal competitors by preventing them from grabbing a foothold in the market, creates a pool of future customers, and widens Windows' lead as the dominant operating system.

Giving away software is a sound marketing strategy, but it's not philanthropy, any more than it would be if the Ford Foundation gave away millions of dollars' worth of free transmission parts that only fit Ford cars.
But then, maybe it's a sign that the old analog concepts of philanthropy are giving way to a new digital paradigm, a more efficient delivery system in which the benefits of corporate giving flow smoothly back to the corporation.

Philanthropy has come a long way since the time of Andrew Carnegie, the man to whom Bill Gates has been compared. Considered by many to be the father of American philanthropy, Carnegie spent much of his adult life amassing a huge fortune by creating the Carnegie Steel Company. At age 65, he sold the company to J. P. Morgan for $400 million and devoted the rest of his life to giving nearly all of his money away.

Others before him had made substantial charitable contributions, but Carnegie was the first to state publicly the audacious notion that the rich have a moral obligation to give away their fortunes, a philosophy which became known as the Gospel of Wealth. One of Carnegie's lifelong interests became the establishment of free public libraries as a way of making education available to everyone. There were only a few public libraries in the world when Carnegie began promising a library to almost any town that would provide a site and promise to maintain the building. He donated more than $56 million to build 2,509 libraries throughout the English-speaking world, many of which are still serving their communities. By the time Carnegie died in 1919, he had given away more than $350 million, practically his entire net worth.

To this day, Carnegie remains the altruistic standard against which all philanthropists are compared. Of course, Carnegie did get one tangible benefit in return for his generosity — seeing the family name plastered on impressive buildings and foundations. That's the same benefit being reaped by Bill Gates' personal philanthropy, which is separate from Microsoft's corporate giving. As an individual, Gates was particularly generous last year, donating $15 million to Harvard (where he dropped out in his sophomore year) to fund a new electrical engineering, computing and communications facility in his name. Gates and his wife, Melinda French Gates, have pledged $12 million to help pay for a proposed $52 million building for the University of Washington Law School, to be named after his father. In addition, Gates gave the University of Washington $12 million in 1991 to establish a department of molecular biotechnology and $10 million in 1995 to fund an endowment for undergraduate students, named after his mother.

As turn-of-the-century industrialists discovered before Gates, philanthropy has its rewards, serving to associate the family name with noble civic projects rather than bank vaults bulging with money. Otherwise, Gates' personal giving has displayed an admirably low level of self-interest.
The same cannot be said, however, of the generosity brandished by Gates' company. Microsoft — along with many other corporate givers — has turned Carnegie's Gospel of Wealth into a strategic marketing tool. Over the last decade in particular, corporate giving has become intimately associated with marketing and corporate image, seeking as much to enhance the company as help the community.

"There's much more pressure now to prove that charitable donations are producing a return to the company," says Myra Alperson, senior research associate for The Conference Board, which tracks corporate giving. "In many companies, corporate giving is no longer a small department floating out on its own. There's much more involvement by the public relations, advertising and marketing departments. Sometimes they're run entirely out of the marketing department."

High-tech companies, and Microsoft in particular, were slow to institute corporate giving programs. The young nerds who built the computer industry were social outcasts, unburdened by the notion of "giving back to the community" that more established industries had developed over the years. But of late, high-tech companies have discovered how to make their corporate giving, like their hardware and software, faster and more efficient. By making donations to targeted groups in key market areas, corporate giving can be turned into a strategic advantage. Charity not only begins at home; it ends there, too.

In the case of computer companies, giving away free product is a way to increase market share, influence future purchases, create good will at relatively low cost, and get a tax write-off for your efforts. Hewlett-Packard gave away $56.3 million in equipment in 1995, about 79 percent of its reported total corporate giving, second only to Microsoft. IBM donated $56.3 million in non-monetary support, about 79 percent of its total corporate giving.

Donations of free product in the computer/office equipment industry make up about 47 percent of total contributions, compared to an average of just 17 percent among all industries. The only other business sector that comes close to giving away as much free stuff is the pharmaceutical industry, in which one-third of its charitable contributions were donated product. There may be no such thing as a free lunch in America, but there's plenty of free software and drugs.

To hear most high-tech companies tell it, they donate product for the same reason Andrew Carnegie gave away his money — pure altruism. Any benefits that flow back to the company are merely an unintended by-product of Doing the Right Thing.

"I suppose you can make the argument that if you're giving software away, that in the end you're increasing public acceptance of your product," says Microsoft's John Pinette. "But most of the people getting these products are very, very happy to get them. And the places we're giving away software are pretty small markets. So I think we can stand up and say that the motivation behind our giving is altruistic. We believe in our products and we want to give them to people who have a need for them. We're trying to help in any way we can."

But behind the scenes, Microsoft works hard to maximize the strategic impact of all of that love for their fellow man. Two years ago, the company hired an outside consultant, Craig Smith, to devise a strategic plan to direct Microsoft's corporate giving in ways that guarantee the greatest return to the company.

"There are a lot of profits to be made by computer companies in the schools," says Smith, president of Corporate Citizen, another non-profit organization that tracks philanthropy, and author of the book "Giving By Industry." "There's brand loyalty you're after with the kids. The schools are one of the last areas where there's a huge loyalty factor to Apple. Microsoft has a big education group to try to change that. The schools are also a way of reaching parents and getting into edutainment. The main reason parents buy home computers is to augment their children's education."

In 1995, Microsoft's contributions to "education," mostly in the form of free software to schools, amounted to $44.9 million, or about 61 percent of its total donations. Microsoft committed $1 million in software, hardware and online access to the national headquarters of the PTA to enable it to link with its state offices and to provide technological training to its members.

"Getting involved with the PTA can assist the marketing agenda of getting computers in the schools and helping to reach parents," says Smith.

Microsoft is also seizing a beachhead in the public libraries, Andrew Carnegie's old love. Microsoft is spending about $10.5 million on computers and software for rural and inner city
libraries, and also funds the Libraries Online! program, which has provided technology to 68 branches from nine different public library systems. Unlike Carnegie, who didn't profit a dime from his support of libraries, Microsoft is expecting its investment to pay dividends in the
future.

"Right now there's no company that 'owns' the libraries, so to speak," says Smith. "It's an uncluttered market. At this time, there isn't any direct marketing advantage to being in the libraries, but it's a great place to demonstrate some possibilities with computers."

Other Microsoft donations have a political purpose, rather than a marketing bent, such as its support of a variety of job training programs.
"Supporting job training sends a message to Washington that the computer is a job creator, not just a job killer," says Smith. "Basically, it can help retain the deregulated status of the computing industry, keep the regulators at bay, and gain a marketing advantage."

Of course, it's Microsoft's money and software to give away, so it's hard to complain too much about the company's steely-eyed philanthropy.

"It's not philanthropy, it's marketing," corrects Smith. "It's all coming out of their marketing budget."

But you wouldn't think that if you read Microsoft's Annual Report of Giving, a heartwarming celebration of the company's own generosity. Laden with the sort of soft-focus photographs of jes' plain folks that HMOs feature in their brochures during open season enrollment, the report makes Microsoft sound more like a social service agency rather than the world's largest software company. "Everyone at Microsoft celebrates our connections with the people and organizations who make the world a better place," the report declares. Bill Gates, the man who would be Carnegie, closes the brochure with a stirring end note: "As a young growing company, Microsoft and its employees are not often recognized as having any traditions. But we do have one that reaches back well over a decade. We give."

Microsoft gives, but increasingly with an eye fixed on what it will get in return. Andrew Carnegie supported libraries, too, but unlike Microsoft, he didn't fill the shelves with Carnegie-compatible books designed to create a pool of future Carnegie customers, nor did he view philanthropy as a strategic tool in accumulating more wealth. Microsoft may have learned the value of giving, but not what it means to be truly generous.