Five years ago, at his 50th birthday celebration, Moshe Lichtman got up onstage at the Zappa club and sang to resounding applause. Last week, the departing head of Microsoft Israel's research and development center took the stage again, again before a cheering crowd, but this time to bid his employees farewell. After 20 years at the global corporation, Lichtman had decided to strike out on a new path.

Lichtman is among Israeli high-tech's highest achievers and most competitive executives. He is also one of the most well connected. "Not buddy-buddy, but a manager with friends," says a senior executive in the industry who knows Lichtman well. "He made a meteoric leap and became vice president of Microsoft when he was just past 30."

Open gallery view Moshe Lichtman Credit: Koby Kalmanovich

Lichtman, who joined Microsoft in 1991, held various jobs at the company before becoming one of the most prominent Israelis in global high-tech. In June, he announced his retirement from Microsoft, after five years as director of the Israeli R&D center. Now, three months after leaving, he is discussing his past and his future.

"The Israeli economy is in good shape, and the momentum is positive, but there are clouds on the horizon," he says. "It's as expensive to employ an engineer in Israel as it is in the United States, and Israel has taxes and overheads that you don't face in the U.S. In addition, there's the sense that things are going in a bad direction politically. This combination - the South Africanization process, the overheads and cost of the engineers - along with competition from emerging markets, could have an impact on Israel's high-tech industry. This has me worried. If it continues, the economy will be damaged."

Why did you leave?

"I believe in self-renewing systems. We built a management team that is one of the strongest in the high-tech industry. I decided to leave after 20 years. I see myself continuing to invest and helping companies build technological products.

"I'm thinking about creating large high-tech companies with sales volumes of $1 billion a year and more. In the past 15 years, Israel hasn't produced many companies like that. The industry's base is getting weaker. The venture capital is shrinking. At the beginning of 2000, there were 133 venture capital funds in Israel; now there are fewer than 30. The challenge is to raise capital globally, and that is more challenging than raising money for Israeli venture capital funds.

"One of the reasons that institutionals don't invest in Israeli VC funds is that they haven't seen companies worth billions of dollars coming out of here. Plus, venture capital is moving to the East, because there are major markets there and you can make an amazing return on local initiatives. These dynamics are hurting Israeli start-ups.

"Beyond that, there is also a cultural issue. Entrepreneurs feel that if you've sold a start-up to a big company for tens of millions of dollars, you've got it made. In the U.S., nobody gets excited about an exit like that. There aren't enough entrepreneurs here who want to build a billion-dollar company.

"Another problem is that in Israel, not enough capital is being invested in mature technology companies - the so-called growth stage. The entire VC industry is aimed at 'early-stage investments,' building new companies. But when those companies reach sales volumes of $10 million and need a major investment to keep on growing, there's no one to fund them. Therefore Israeli entrepreneurs have no alternative: Their only option is to sell their start-up for $20 million.

"I take my hat off to people like [Jerusalem Venture Partners founder] Erel Margalit, who decided to dive into the political cauldron. I believe Israel's leaders behave tactically and not based on visions. I plan to invest some of my time in preventing us from becoming isolated from the enlightened world, because that would hurt the economy."

Do you believe our leaders are not worried enough about this scenario?

"They think Israel is unlikely to end up isolated. There is no doubt that if it does, it will cause damage."

What did you think of the social protest this summer?

"I am a big believer in protest, and I found it heartwarming. I participated in some of the demonstrations, and I know people who can't make ends meet. I am in favor of changing the country's priorities: placing more emphasis on economic welfare, on being able to lead a normal life. I also agree with the demand for balancing the [civic] burden. There is no moral justification for the fact that entire sectors of the population are carrying other sectors on their shoulders."

Where is your own show of responsibility? How many older, Arab or ultra-Orthodox workers does Microsoft employ at the R&D center?

"True, we do not employ enough older, Arab or Haredi workers. Our recruiters don't look at workers' ethnicity, but the bottom line is that the numbers speak for themselves. I hope things will change. We are part of President Shimon Peres' initiative to integrate Arabs into high-tech companies."

'High tech was my second choice'

Moshe Lichtman was born in Tel Aviv. His father, Yona, is a Holocaust survivor who came to Israel at the age of 14. His mother, Ruth, was a housewife. In the early 1970s he was exposed to science and technology at Tel Aviv University's program for science-oriented youth, but back then his second home was the Scouts, Gadna Avir (the air section of the Youth Corps ) and the Aero Club of Israel.

"High tech was my second choice," he says. "My first choice was aviation. I started building model airplanes at a young age."

In the military, he served in a Phantom squadron, and he carried out attacks on Lebanon during the first Lebanon war.

"I took part in all sorts of operations," he says. "I never got to be in a dogfight, but I was shot at from the ground. It wasn't scary at the time. My dream was to become an astronaut. I thought it would be exciting to discover new planets."

He also had an affinity for mechanics. "At age 20 I bought a 1959 VW Beetle, and every time I got leave from the army I'd take it apart and put it back together. I love building mechanical things," he says.

After his military service, Lichtman planned to continue working in aviation, designing and building planes. His twin brother Arik, who studied aeronautics, eventually realized this goal. Instead, Moshe opted for computer engineering at the Technion - Israel Institute of Technology.

"While in school I began working at a start-up company, although back then it wasn't called a start-up. It was a different era. Entrepreneurs funded themselves, because there were no venture capital funds. I worked during the day and studied at night, so that by the time I graduated, I had a sizable amount of practical experience."

Two years after receiving his bachelor's degree, Lichtman published a computer programming book he had co-written with a friend. That book, "The Complete Guide to the C Language," became a Hebrew best seller. In 1989 he began studying for an MBA at MIT. Two years later, he was hired by Microsoft, and he returned to Israel only 17 years later.

At the company, Lichtman accompanied the PC revolution that began with the Windows 95 operating system, which turned Microsoft into a software giant and catapulted it into the field of personal computing. In 1995, Lichtman moved to the company's consumer platforms division and was appointed president of Softimage, a Microsoft subsidiary that provides tools for creating digital content for the film and video industries. Three years later he was appointed vice president in charge of Microsoft's digital TV platform strategy, and in 1999 he was promoted to head its international Internet business.

In that role, Lichtman increased the market share of Microsoft's MSN portal in 33 countries outside the U.S. Under his leadership, users and revenues grew 400 percent, and it became the most popular Web portal in Europe, Canada, Australia, New Zealand and several Asian countries. His next job was corporate vice president for Microsoft's TV division.

"The plan was to finish the degree and return to Israel, but 17 years later we woke up with three kids," Lichtman says. "When my eldest daughter turned 16, at the end of 2005, we decided it was the point of no return. I was a senior executive, but we concluded that we had to put family first. To some extent I sacrificed my career because I wanted to return to Israel, but I realized that family and returning to Israel were more important.

"For a while I contemplated what would come next, but Microsoft CEO Steve Ballmer asked me to take up a new company initiative. At first I continued to run the company's TV business from Israel, but it was clear it couldn't last. I told Ballmer that if he wanted me to stay on, he should let me set up a strategic development center in Israel.

"I wanted to build something here that reflected all my experience. I ran a development center in Montreal, based on a start-up company we bought, and later I managed Microsoft's R&D center in Silicon Valley, so I knew what it means to run a development center outside the mother ship. Microsoft has 20 development centers outside the U.S., but only three are defined as strategic development centers: in India, China and Israel. Setting up and managing a strategic development center was my vision, my holy grail. I wanted to recreate my Microsoft experience someplace else.

"Everything taking place at the development center in Herzliya stems from that vision: basic research, practical research, close ties to start-up companies, developing products and working on existing products, connections to industry, academia and high tech. This is why I stayed at Microsoft for so many years: I could reinvent myself every three or four years, meet new business challenges, work with different people and solve different problems."

The law of large numbers

Over the past 40 years, a number of Israeli entrepreneurs have persuaded big conglomerates to set up development centers here, where thousands of employees make a living. Dov Frohman did it with Intel, and Benny Landa did it with HP.

Microsoft's first R&D center in Israel opened in 1991 thanks to two Israelis, Yaron Shamir and Avi Natan, whom Microsoft didn't want to lose. The company let them establish a development center in Haifa.

"The Haifa center developed various products," Lichtman says. "It was significant but not strategic. The moment authorization was given to set up the Herzliya development center, they decided it would be a strategic center - which meant expanding activity in Israel substantially. The new center was charged with developing a telecom platform. The idea was to develop location-guided applications based on existing information in telephone networks. For example, if you receive a call from someone who is not in your address book, you could still find out who the caller is from the telecommunications network. The bigger vision was to shift the whole telecom system to cloud computing."

Do giant conglomerates really set up development centers based on a single person?

"I guess it was very helpful. I had been a member of Microsoft's worldwide executive team since 1998, and that made the company feel comfortable when it decided to set up a center like this, with me as manager, and to invest hundreds of millions of dollars a year.

"The strategic development center in India was set up by an Indian who had worked in the U.S. for 11 years and then decided to return home. Microsoft's other development centers are set up based on acquisitions of start-ups, but there is still a difference between Israel and India and China: Markets in the Far East have more than a billion customers. Thus, aside from the company's decision to rely on an employee to run the development center, it's also deciding to set up the center in a place like this. Israel is a gamble: 7.5 million people live here, and it's not clear that there are enough outstanding engineers for us to employ at such a center.

"Microsoft's top executives, including Ballmer, asked me how we could recruit hundreds of amazing people in such a small country. In India and China the law of large numbers applies; we're recruiting only the top percentile, the very best workers. Taking a gamble on Israel seems to have paid off: For example, the chip behind the Kinect was developed by Israeli start-up PrimeSense."

Kinect, a motion sensor that lets users control Microsoft's Xbox 360 game console through body motions instead of a control pad, is one of Microsoft's best-selling devices, and has earned the company more than $2 billion.

"Microsoft holds weekly meetings to identify companies with significant potential for integration with Microsoft, mainly in areas we consider strategic," Lichtman says. "Microsoft believed using gestures as a user interface [as with Kinect] was strategic. In 2006, we started thinking about the next version of the Xbox game console, and we realized that operating products through gestures fits in not only with the console, but also with other Microsoft products. We knew we had to invest in this field and to recruit a whole lot of experts.

"We flew representatives from six Israeli start-ups to Seattle, and had them meet with executives from Microsoft's entertainment division. Two companies that we took on this tour, DV3 and PrimeSense, impressed the right people, and that led to collaboration with Microsoft. That was where Kinect's seed was sown. I believe Kinect will alter history as much as the tablet."

Another successful project conceived at Microsoft's Herzliya development center was the free antivirus program Microsoft Security Essentials.

"Two and a half years ago we decided we needed to offer a free security solution," Lichtman says. "At that time 60 percent of computers - 1.5 billion - were not protected by an antivirus program, and we wanted to change that. It was important to us that our antivirus program could be installed only on legal versions of our operating system. Within a year, that product, which was developed by fewer than 30 people, had 100 million downloads. It quickly became the No. 1 information security product. That is rare."

The IDF advantage

Can you say how Israel became a nation of start-ups?

"It wasn't by chance. There are excellent universities here, a VC industry that invests in start-ups and enables entrepreneurs to realize dreams. There is a culture that encourages taking risks and accepts failure. This is all very similar to Silicon Valley.

"What is unique to Israel is the intelligence units of the Israel Defense Forces. Everywhere else in the world, the top math and science students go to college and then enter the high-tech industry to support their households. In Israel, high-school graduates go into the army and face problems early on. When they are released into civilian life, they are more mature and better trained than young people with degrees from Stanford or MIT. It is fertile ground for innovation.

"The combination of Israeli technological culture with Jewish heritage - which is inquisitive by nature - helps as well. I am not ashamed to say that one of the center's objectives is also Zionist. It has helped draw Jews back to Israel - high-tech people who couldn't see how they might realize their potential here.

"It may come off as odd that all of the giant global corporations establish R&D centers here. There is something very special here and it must be preserved."

From the time of its inception, Microsoft's Herzliya center has focused on three main fields: telecom (a project that ultimately did not go commercial ), information security and Internet. Some of the technologies Microsoft developed in Israel stemmed from its acquisition of seven local start-ups. Some of the products that global Microsoft uses were created in Herzliya's innovation labs, which carry out technological research from scratch. One such group, for example, is adapting the search engine Bing for mobile phones.

"The world has become flat: In the past, you had to get on a plane to experience major markets, but now you go onto Facebook," says Lichtman. "Israelis excelled at information security and communications thanks to the skills they learned in the military, but now that is no longer the case. There is one aspect in which we are still not fully competitive, and that is user experience - the interaction and design of technological products and services.

"I've been an angel investor in private companies since the late 1990s, and I invested in eight start-ups. Three of them were sold. In many cases I see entrepreneurs with the right idea, but with an unattractively designed product. User experience is not really embedded in Israel's high-tech culture. In the U.S., on the other hand, there are faculties where you can study this."

Despite the array of products that Microsoft Israel has contributed to the software giant, it is still impossible to say whether the local R&D center will expand. In tough times, global technology companies tend to prefer activity close to headquarters, and some shut R&D centers or move them to the Far East. Lichtman believes the Israeli center's fate will be different.

"I can't say the center will exist for all eternity, and nothing can be taken for granted," he says. "But one of the factors that allowed me to leave with peace of mind is my feeling that the center is here to stay, even without me; that Microsoft is committed to Israel. This commitment used to come from my bond with Ballmer, but I believe the R&D center in Israel is now just as strategic as those in China and India. Obviously the center will have to continue producing successes and innovation."

Constant reinventions

Microsoft is going through a difficult period right now. Its competitors include Apple, Google and the rest of the Internet and technology giants. Its main source of revenue still comes from selling its Windows operating systems and Microsoft Office software. Yet many criticize it for its meager achievements in fields where its rivals have excelled, such as social media, where Microsoft has almost no presence.

Microsoft is struggling in the Internet field as well: Its browser, Internet Explorer, is still the market leader, with a 45 percent share, but Google Chrome is rapidly closing in. In the field of search engines, Microsoft's Bing is still trailing Google, and when it comes to hardware, Microsoft seems to be having trouble fending off Apple. Its music player, Zune, was not a success; it doesn't have a spectacular applications store like Apple's; and it lacks a strong player in the tablet field.

If Apple is a sexy brand that is based on design, and Google is a symbol of openness and endless applications, what does Microsoft project?

"We project productivity, but we hope our products convey sex appeal and speak to customers on an emotional level. Productivity appeals to the brain, and we certainly want to create an emotional experience."

In 1999 you were placed in charge of MSN. It was one of the biggest Internet brands at that time, alongside Yahoo and AOL. Since then, MSN has been in decline. It seems that all of Microsoft's Internet labels are being wiped out by social media. Is Microsoft giving up on the Internet?

"When I ran MSN, it succeeded in every English-speaking country outside the U.S. In the U.S., we were in third place after Yahoo and AOL. Much of the activity was creative, and we waged guerrilla warfare. We had strong rivals in every local market, like Walla! in Israel, Lycos in the U.S., and others. More than half a billion people now use Microsoft's online services.

"Since then, two new business models have changed the rules, and they're challenging Microsoft. One is in the search field: Along came a monopoly that does very good work. Bing is challenging it, but it is a very big challenge. The second model is social networks: Facebook does an amazing job of creating a world that renders previous online services redundant.

"The beautiful thing about high tech is the ceaseless dynamism and competition. I can't remember a single day without a rival who changed the rules. It's irrational to expect that we will always be first. The question is whether you can react fast enough before you're challenged. Microsoft should be commended for the fact that in numerous fields where it was challenged, it competed and created value, such as in gaming and computing for large organizations.

"If you had asked me a year and a half ago how competitive Microsoft is, I would have told you that we are more challenged than usual. Nowadays I feel great. Within the next year and a half we will release Windows 8, and everyone will see that Microsoft offers incredible technologies and presents the broadest, most complete vision for the cloud.

"You ask what Microsoft's place is in social media and the Internet, and the truth is that I'm not happy with our situation in these fields. We do have a partnership with Facebook, and we were the first to invest in it, and after that came the search cooperation with Facebook. The question