Bryan Cantrill and Mike Shapiro, Distinguished Engineers at Sun, dreamed up a new type of storage product and convinced executives to let them build it in relative isolation. Image: Sun

Maybe there's something about unconventional office space that gets Silicon Valley's creative juices flowing.

Bill Hewlett and Dave Packard worked their magic in a garage. Apple's (AAPL) Macintosh development team flew a pirate flag over the Bandley 3 building. Now Sun Microsystems (JAVA) hopes a young team that toiled in an unmarked — and reportedly unkempt –  San Francisco loft can spark a turnaround in a tough economy, and build a new billion-dollar business.

The pizza-fueled group, led by engineering whizzes Mike Shapiro, Bryan Cantrill and Jeff Bonwick, spent about three years developing a new type of data storage box that uses flash technology, off-the-shelf parts and open-source software to help companies store and manage information more effectively. Don't doze off, now – data storage may sound boring, but it's also lucrative. With the explosion in online video, social networking, Web-based software and online commerce, it's about as close to a recession-proof business as you can find.

Just think: Every stock transaction, YouTube video, and Facebook friend request gets stored somewhere. That's why market research firm IDC has network storage pegged as a $4 billion business in the second quarter alone, up 22% over a year before. Tech heavyweights like Hewlett-Packard (HPQ) and Dell (DELL) have recently bought storage outfits to gain a competitive edge.

For Sun, a respected Silicon Valley data center supplier that never completely recovered from the dot-com bust, this growing pot of money is too big an opportunity to pass up. Investment firm Southeastern Asset Management has recently accumulated a fifth of Sun's shares, and has hinted that it might start hunting for suitors whether Sun's board likes it or not. A hit product could buy Sun some time – or even convince investors that it can do just fine on its own.

Shapiro and Cantrill certainly had the brains to come up with something game-changing. The two college buddies, who had risen through Sun's ranks to become Distinguished Engineers, believed that by tapping software they have developed over the years, they could build a new breed of networked storage box that's faster, cheaper, and simpler to operate than the mainstream fare from companies like EMC (EMC) and Network Appliance (NTAP). They decided to bring the idea to top executives. "I honestly though we'd get laughed out of the room and just get told to go back and do our jobs," Shapiro said.

One day in the cafeteria the two cornered Greg Papadopoulos, Sun's chief technology officer, and made an unlikely pitch for resources to pursue their vision. They continued the conversation in his office — and to their surprise, he said yes on the spot. A project code-named Amber Road was born. "Some of our top engineers came and they said this is profoundly important, the time has come, and we want to go do it," Papadopoulos recalled. "I'd better have a good reason to say no."

Actually, he could have come up with several good reasons. Unlike high-fliers like Google (GOOG) and Apple, which have billions in cash and zero debt, Sun doesn't have money to burn on every engineer's pet project: Recently the company reported it had $2.6 billion in cash, $1.2 billion in debt, and enough potholes in its balance sheet that it has announced plans to lay off 350 employees in January. (That alone doesn't sound like much, but Sun has let go of 1,500 employees in recent months.) In the most recent quarter, sales slumped 7% to $3 billion. Sun stock also reflects the harsh reality: it's trading near $4 per share, where it was in early 1995. That's down 80% from a year ago.

If that weren't enough, the Amber Road team asked for its own office space, away from Sun's big-company atmosphere and product development protocols. Shapiro in particular felt that to design an easy-to-use storage system, the team would need to escape Sun's culture. "We build for engineers – lots of knobs and dials and gauges — and that's really anathema for ease of use," Papadopoulos admitted.

So he and systems group chief John Fowler agreed to the group's pleas for independence, under a few conditions. The space couldn't be as nice as Sun's official offices, and there would be no elaborate decorating budget; the team of about a dozen engineers painted it themselves, and found furniture at flea markets. "They love it, it's right across the street from the bus terminal," Papadopoulos said. "You just sort of slide pizzas under the door."

If it sounds like a startup, that's the idea. There's some history of this at Sun; legend has it that James Gosling left the company's offices to work on the Java programming language in rented space on University Avenue in Palo Alto — not far from where Facebook's headquarters is today. But the question is whether this infusion of outside-the-box thinking will be enough to make a difference for Sun's bottom line. "How fast it can grow to be a billion dollars plus, which is what it needs to be, is not clear," admitted Fowler, the systems group chief. But he's optimistic; customers who have seen the new storage product in action can't wait to get their hands on one, he says.

Analysts so far are skeptical. Sun will have to prove that its Sun Storage 7000 appliances are powerful enough to serve the needs of large customers, who tend to be comfortable with companies like EMC whose storage products have longer track records. But the fact that Sun has elegantly built flash-based solid-state storage technology into these boxes should help. IT managers are eyeing solid-state storage as a way to boost performance, and while all of the major storage companies are promising to include it in future systems, Sun is among the first to deliver.

"Can Sun get out there quickly enough and grab market share so they can grow their base before others arrive to the party?" asked Gene Ruth, analyst with Burton Group. "A year from now I suspect we're going to see all the majors out there with significant solid-state products. I always look at Sun as being a technically strong company. Whether they can execute is the question. I hope they do."

This may be one of Sun's last chances to prove it can get something going. For years, rumors have swirled around Silicon Valley that someone will swoop in and buy out the company. Granted, that seems mighty unlikely in this environment –- with scads of plucky startups for sale at bargain-bin prices, why buy a struggling giant? But if the stock stays this cheap, valuing the company at just $3 billion, it's a safe bet that antsy investors will make a move.

The redesigned Dell Latitude line will offer colors, a Linux mode, and other un-Dell touches. Photo: Dell

I'm at Dell's design headquarters near Round Rock, Texas, getting a first glimpse of the company's colorful new line of business laptops that go on sale Tuesday, and I mention that the pink looks a lot better in person than online. A Dell executive is quick to tell me why. What I've seen on the website, he says, is consumer pink. "This is business pink."

Huh? Surely this must be some sort of joke. Everyone knows that buttoned-down Dell (DELL) doesn't do business pink. It's better known for dutifully boring machines, made to order with the latest technology from Microsoft (MSFT) and Intel (INTC), at a price a corporate bean counter could love.

But Dell is doing a few things differently as it navigates an overdue turnaround. Over the past three years its position in the PC industry has gone from dominator to underdog, as shoddy customer service, weak international distribution, and outdated designs have cost it the title of global market leader. (That isn't all it cost, as investors will tell you; Dell has also lost nearly $35 billion in stock market value since December 2004.)

One of the clearest signs of change is this redesigned Latitude laptop, the company's flagship model, which will be its first business laptop line to come in rainbow colors. The laptop's core design gets updated only every four or five years, making its debut a supremely important moment. Get this right, and Dell can shore up a weak spot where rivals have taken market share, and surge ahead as corporate buyers upgrade from desktops to laptops. Get it wrong and the company can kiss its comeback goodbye. Michael Dell himself was clearly aware of the stakes a couple of weeks ago when we talked about Dell's future –he singled out the Latitude as a strategically important product.

So when I'm invited to Texas as the first reporter to see what the team has come up with, there is an undeniable subtext: Dell has something to prove.

It's understandable, given all the trash-talking Dell has endured lately. Once it started losing ground and its stock dipped, the detractors piled on with all the old put-downs: Dell doesn't innovate. Dell's marketing sucks. Dell designs machines with corporate IT departments in mind, not real people.

Back when Dell was whipping everyone in the PC industry, it was easy to shrug off the insults. Dell innovates where it matters, execs would say, in the supply chain and with its direct sales model. Now it's easy to imagine the talk is hitting a nerve.

Why? Because in a maturing PC market, Dell's traditional weak points have become must-win areas. In the early days of the PC market, when computers were expensive, every new Intel chip offered a major performance boost and every Microsoft operating system seemed to offer must-have features. Back then, Dell's IT department focus, direct-sales efficiency and price leadership trumped everything else. But these days, chip and OS upgrades are no longer major events, and PCs are mainstream enough that much of the growth is in the consumer market, and consumer trends even influence business purchases. Now, design, innovative features and broad distribution matter more than price cuts, and Dell is scrambling to adjust.

For instance, Dell realized its designers can no longer craft Latitude laptops simply to satisfy IT managers. Design director Ken Musgrave tells me that as tech-savvy Gen Y'ers have entered the workforce, they've brought a sense of digital entitlement; they don't want to use equipment that isn't cutting edge and cool, and Dell's brand doesn't have credibility with them yet.

"They're coming in having had a cell phone when they were 12, having had a MySpace page through high school, and they're used to having things their way," Musgrave explains. "They're not making the purchase decisions yet, but they will be."

The diminutive cherry-red laptop he sets on the table in front of me a few moments later should go a long way toward getting Dell some street cred. In development this model was code-named "Mini Cooper" I'm told, and as weight-conscious engineers put it together, they tracked each component on a spreadsheet and obsessed over how to trim excess grams to meet a weight target. (One weight-saving move was to strip the metal casing from the laptop's flash-based storage drive.) The payoff: it tips the scales at just a kilogram – 2.2 pounds. (A full range of Latitude sizes is available.) When I ask why the fixation on a kilogram, they shrug. It was just the goal they picked, they say. To keep them focused.

I'm used to seeing this kind of design daring from Apple (AAPL) and Sony (SNE). But Dell?

"Dell's laptops probably were stockier than average in the past, so it had more ground to make up," says Roger Kay, CEO of consulting firm Endpoint Technologies, who was also pre-briefed on the new Latitudes. "I think these might actually beat some expectations." They should also blunt Hewlett-Packard's (HPQ) efforts to steal away corporate customers.

There are some surprises beneath the surface of the Latitude line as well. One is an optional Linux-based low-power mode called Dell Latitude On, which boots in two seconds. It offers more than a day's worth of battery life for basic tasks like web surfing, Exchange e-mail, and viewing e-mail attachments, and runs on an ARM-based (ARMH) chip rather than the main Intel processor. (HP and Lenovo laptops offer similar Linux modes, but with fewer capabilities.)

Another is a Broadcom (BRCM) chip that brings stronger security to the laptops by handling encryption on the hardware. But the clincher seems so simple, it's a wonder no one had done it before – a door on the underside of the laptop that, after you remove it by loosening one screw, offers up all the major components for quick maintenance. One engineer told me that despite all the other bells and whistles in the new Latitudes, the easy-access door is what got one Fortune 10 IT manager's heart pounding during a recent show-and-tell.

All of which bodes well for Dell's chances of extending its comeback with the Latitude launch. The company seems to be doing everything right – courting Gen Y, minding design, and still managing to keep IT managers happy.

Well, there are a couple of kinks to work out – and the sooner the better for the company's revenue and buzz. I'm told during my visit that Dell Latitude On won't be available until a few weeks after the launch, because there are a few issues to iron out still. And – darn it – Musgrave tells me that engineers are still puzzling over how to get paint to consistently stick to the Latitude's magnesium skin. Which means we'll have to wait for the promised range of rainbow colors.

And I was so looking forward to business pink.

There haven't been many tech IPOs lately – only three this year, in fact. People here in Silicon Valley have certainly noticed  – this place thrives on venture capital, so in financial terms, the mood has been a little like a maternity ward going without any deliveries. Yes, entrepreneurs have still gotten rich selling out to big companies like Google and Microsoft, but without the same kind of cigar-passing glee that follows a Wall Street debut.

So it's fair to expect some buzz on Friday, when San Antonio hosting company Rackspace takes a bow. As tech IPOs go, the prospectus on this one reads like a pretty safe bet: the ten-year-old company logged net revenues of $362 million in 2007, and a profit (yes, profit!) of $17.8 million. It's offering 15 million shares at between $12 and $16 per share in a Dutch auction format (what Google used for its IPO), and it's backed by some great names in venture capital, including Sequoia and Norwest Venture Partners.

Sounds good, right? But there are also some red flags to watch out for. We'll get to those later.

Rackspace's game is hosting, which basically means its computers manage other companies' internal and external Internet presence. This can be anything as basic as handling e-mail, or as complicated as serving up an internal sales tracking system. It's no easy business – hosting companies need lots of powerful servers to put their customers online, buildings to hold the servers, and cash to pay the outrageous power bills. Even tech darling Apple (AAPL) had some trouble with hosting; its new MobileMe service, designed to manage e-mail, calendars and other functions, belly-flopped on its debut, losing customer e-mails and intermittently going on the fritz.

The folks at Rackspace (they call themselves Rackers) pride themselves on their ability to keep customers happy while shrewdly managing real estate and equipment costs, and commanding top-dollar subscription fees for their white-glove service. "Our Fanatical Support culture serves as a competitive advantage that has allowed us to establish our position as the world’s leading hosting company," the Rackers brag in their prospectus.

For prospective investors, there's a lot to like about Rackspace. On the plus side, they've got healthy sales, growing profits, and a claim to some of the "cloud computing" and "software-as-a-service" mojo that, thanks to names like Salesforce.com (CRM), Amazon (AMZN) and Google (GOOG), are all the rage these days. From what I'm told, the cutting-edge companies that offer their services on top of Rackspace's system respect the way they run their business. And Rackspace executives say 15 percent of their annual growth comes from loyal customers who keep buying more services. That loyalty has formed the baseline for the company's 59 percent sales growth rate over the past four years.

"Rackspace is well-positioned as a provider of next-generation hosting services," said Bill McNee of Saugatech Research Services, a consulting firm. "The question is, what will they do to differentiate themselves in an increasingly crowded market?"

Which brings us to the red flags.

First, Rackspace is one of many hosting providers, and the field is getting more crowded all the time. Though the company has done a good job contending with competition from telcos like AT&T (T) and Verizon (VZ) and from others like Savvis (SVVS), The Planet and Terremark, the fight is about to get hairier. Big names like Amazon, Google, and most recently IBM (IBM), Yahoo (YHOO) and Hewlett-Packard (HPQ) have begun turning their attention to cloud computing, which is one of Rackspace's fastest-growing services. And as more big companies start looking to sign hosting contracts for their new online initiatives, who do you think they'll go with – Rackspace, or the big guys?

Second, Rackspace's hosting business is a bit like the real estate market, with similar pitfalls. Over the past few years, the demand for hosting services has outstripped supply, fueling meteoric growth in the category. In response, Rackspace and others have been massively building out data centers to serve new customers.  Like home builders during the housing boom, hosting providers are building out expensive data centers ahead of time, based on what they think demand will be later. If they're right, the hosting party continues. If they're wrong? Picture lots of big, expensive buildings with no tenants to help pay the rent.

Finally, one of those little things in Rackspace's prospectus bears mentioning – and it has to do with compensation. Specifically, bonuses. It's always interesting to see how a company goes about giving cash to its people, because cash awards are totally disconnected from stock performance. And if a company's board hands out too much of it, there's reason to fear that the executives (and employees) will end up marching to a different beat than the shareholders. So how does Rackspace handle cash bonuses? To start, the bonus range, between 40 and 70 percent of an executive's annual salary, isn't far outside the norm for public companies, which is good to see. Employee bonuses are also calculated on many of the same criteria that's used for bigwigs. From there, though, things get a little dicey.

The prime example came last year, when the company's equipment investments pinched profits. Figuring it wasn't fair for employees to suffer because the company had to make some long-term investments, the board tweaked the bonus calculation for the second half of the year. As long as profit levels held steady from one quarter to the next, everyone would get a full bonus. But then disaster struck: A wayward truck near Rackspace's Grapevine, Texas, data center crashed into a transformer, causing a power outage. Even though a backup system was in place, Rackspace had to take several servers offline and compensate customers for the resulting downtime. That meant a hit to Rackspace's profits, and thus its bonus pool – but the board decided to give full bonuses to everyone anyway, because their response to customer outrage was so "fanatical."

The right move? Maybe. You can't blame employees for a truck accident (though you could argue that a better backup system might have helped.) We'll just have to see how Rackspace management handles the inevitable disasters as a public company, and where the buck stops then.

As laptops go mainstream, it's good for Intel's sales – but it also puts pressure on its profit margins. Image: Dell

Click above for a video interview with Intel CTO Justin Rattner.

Intel's overall sales and profit numbers for the second quarter beat Wall Street's expectations on Tuesday, but bargain-hunting laptop buyers rained on the chip giant's parade.

Thanks to strong global mobile PC sales, Intel (INTC) hauled in $1.6 billion in earnings on $9.5 billion in revenue for the quarter that ended June 28, better than recession-wary analysts expected on average. The company's projections for the third quarter were upbeat, too: sales as high as $10.6 billion, better than the pundits had guessed, as consumers and businesses are expected to snap up chips in computers from Hewlett-Packard (HPQ), Dell, (DELL), Apple (AAPL) and others. Nonetheless, the stock ticked upward only about 1 percent in after-hours trading.

With all that good news, it's fair to ask why the stock barely budged. And while it's often tough to pin down one reason, this time there's a likely culprit: the company's flagging profit margins.

Intel, being the biggest manufacturer of computer brains on the planet, typically commands a hefty premium for its wares, but this quarter it had to work a bit harder for the money. The company's gross margins (one measure of profitability) came in at 55.4%, a tad under management's projection of 56%. Doesn't seem like a big deal, right? Well, when you're dealing with billions of dollars in revenue, every decimal point counts. So while Intel analysts seemed generally pleased by the results, on a conference call with CEO Paul Otellini and his team Tuesday afternoon they peppered him with questions about that missing .6% of margin. Where did it go? Why? Will it be back?

The answer from Intel executives: Laptop-hungry consumers sank the margins, because they're ditching desktops faster than expected. And no, the margins won't exactly be coming back as strong as they once were.

Consider it the slight downside to the world's blossoming love affair with the laptop. Though folks at home are increasingly buying them to watch video, surf the web and digitally socialize, the surge in demand from price-conscious consumers means Intel ends up selling more low-end, lower-profit laptop chips. This trend could spell trouble for Intel's long-term profitability, unless the company can figure out how to lower its production costs.

Of course, that's exactly what Intel is trying to do. In the chip game, the way to lower production costs is to crank up production, because while it can cost billions of dollars to invent a chip and build a plant to manufacture it, the raw materials involved are pretty cheap. Those economics mean that it costs a lot more to produce the first chip than the next 100 million.

That's one reason why the company's Atom chip is important. Atom, launched in March, is Intel's smallest chip, intended to power wireless devices and stripped-down PCs. It's not powerful enough for a great experience editing photos or viewing online video – but Intel designed it as a cheap way to get more people connected to the PC-based Internet. It's a clever Trojan horse strategy to get PC power into the hands of consumers in developing markets, and it seems to be working.  Intel executives say Atom chips are selling five or six times better than they projected last year. Atom's gross margins are also slimmer than Intel's overall margins, but that's a hit the company is prepared to take in service of its strategy. It's like Toyota getting first-time car buyers to go home in a Yaris, hoping they'll one day upgrade to a Lexus.

In this case, the upgrade from Atom is the Centrino 2 platform, which the Intel unveiled on Monday. Centrino 2, a combination of a processor, chipset and wireless functions working together, is Intel's mobile tour de force. It plays and decodes high-definition movies, conserves power, and thanks to three wireless antennas handles 802.11n wireless signals at a top speed of 450 megabits per second. (Which, you'll have to trust, is very fast.)

Centrino 2 has just begun shipping in volume, and it's part of the reason why the company feels good about projecting healthy results for the third quarter. Executives had just better hope that in this Yaris economy, there are still enough laptop buyers out there with Lexus tastes.

Watch out, Intel: Advanced Micro Devices has a laptop with turbo power.

In essence that's what the chipmaker has created in its Puma chip platform, which it plans to unveil Wednesday. On regular settings, a Puma-powered laptop conserves battery life and does a so-so job handling complex graphics. Switch to turbo and it's a powerhouse that effortlessly renders 3D games and plays HD video.

It's a neat trick that AMD (AMD) hopes will remind us of its potential, and take our focus off of its recent screw-ups. The mistakes were big. Last year, in an effort to leapfrog rivals Intel (INTC) and Nvidia (NVDA), AMD gambled on ambitious chip designs and then blew its deadlines for delivering the goods. Profits evaporated and the stock plummeted. Now AMD is eager to show it can handle the basics: Regaining profitability, keeping its promises and churning out smart ideas like Puma.

What's so special about Puma? It mixes two technologies that have never been combined this way before: Integrated and discrete graphics. Integrated graphics, the lower-power and lower-cost method, shoves mediocre graphics functions onto main computer chip. Discrete graphics chips provide high-end graphics performance. Normally a laptop uses one method or the other, but because AMD owns graphics chipmaker ATI, it was able to blend the two. So in turbo mode, Puma laptops turn on integrated and discrete graphics at the same time for an extra performance boost.

Based on early signs, Puma should be a success. Major laptop makers including Hewlett-Packard (HPQ), Dell (DELL), Acer and Toshiba have already agreed to use it, and analysts like the design. "It's the first time AMD has really gone out of its way to optimize a product for the mobile environment," notes chip analyst Nathan Brookwood of Insight 64. "The new chip uses less power, and in mobile that means improved battery life and in many cases improved performance. What's not to like?"

Is that praise for the downtrodden AMD? Yep. Despite the hand-wringing on Wall Street over the stock's fall, the company itself is far from dead. (My colleague David Kirkpatrick pointed this out in an April column.) In fact, conditions are ripe for AMD to make a comeback – as long as management avoids a repeat of last year's fiascos.

And of course, that's what they are promising to do. Executives note that the late Barcelona chip that ruined 2007 is now shipping to server makers such as IBM (IBM), HP and Dell, which seem happy so far. Graphics unit ATI has recovered from last year's setbacks, and is delivering products that match up to Nvidia's. And now there's Puma. Looking ahead to 2009, executives say AMD will offer chips that bring more of its graphics expertise into everyday computers, resulting in more Puma-like products that competitors can't match.

Meanwhile, AMD is quietly gloating over Intel's recent mistakes. Intel's own next-generation laptop chip, code-named Montevina, should be arriving soon but is late because of problems with its graphics and wireless features. If the delays drag into the back-to-school buying season, AMD could benefit by picking up orders Intel can't fill. (Also, AMD is arguing in various countries that Intel has illegally used its dominance to bully customers out of buying from rivals. If regulators order Intel to pay damages and change its behavior, that could give AMD's fortunes a boost.)

But don't expect a quick turnaround. Even if everything lines up for AMD, it won't soon regain the Wall Street clout it enjoyed a couple of years ago. Intel is better at marketing than AMD, and has more money to do it – so even if AMD's new products are good, there's no guarantee that the company will be able to quickly lure away Intel customers.

That's why it's good to see that AMD is preparing for the long haul. Employees I've spoken with seem genuinely confident in the company's strategy, and CEO-in-waiting Dirk Meyer has brought in new leadership and refocused the company's attention on getting projects completed on time.

So even though AMD's struggling, Intel had better watch its back – AMD could switch into turbo mode at any moment.

Mint CEO Aaron Patzer isn't itching to sell his online budgeting service, but a company like Microsoft would do well to buy it anyway.

No one's said much about it, but there it was, plain as day, in Apple's (AAPL) earnings call this week: Chief Financial Officer Peter Oppenheimer said the 'A' word.

Acquisitions.

When an analyst asked what Apple would do with more than $18 billion in cash it's sitting on, Oppenheimer downplayed the possibility of a major stock buyback, and hinted that Apple could go shopping instead. "Our preference," he said, "continues to be to maintain a strong balance sheet in order to preserve our flexibility to make strategic investments and/or acquisitions."

Which is a fine segue to my piece in the latest issue of Fortune, which seeks to tackle the issue of what, exactly, Apple and others should do with their growing stacks of Benjamins. Among my recommendations: Apple should buy a green startup, Microsoft (MSFT) should buy Mint, and Google (GOOG) should buy TiVo (TIVO).

Though Apple normally doesn't buy many companies, I suggest 2008 might be a good time for Jobs & Co. to throw some money around. (Same goes for Microsoft and Google, which do a lot more spending than Apple.)

Flash-based laptops? Suped-up iPhones? The wait is over for Apple's biggest announcements of the year.

The crowd at Macworld 2008 settles in for the Steve Jobs keynote. Photo: Jon Fortt

SAN FRANCISCO — The keynote has begun. There's a Mac vs. PC commercial showing. PC is talking about what a bad year 2007 was, with all of Apple's announcements including the iPhone. PC says 2008, though, will be a great year. "What are you going to do?" Mac asks. "I'm just going to copy everything you did in 2007."

Steve Jobs walks onstage from the left.

Welcome to Macworld 2008. We've got some great stuff for you, there's clearly something in the air today, he says.

Jobs says he wants to look back at 2007, and says thank you to the crowd.

He's got four things he wants to talk about today. More than 5 million copies of Mac OS X Leopard have been delivered, making it the most successful release ever. Almost 20 percent of the Mac OS X installed base has upgraded, he says. He's going through the reviews, including raves from the Wall Street Journal and New York Times.

Microsoft Office 2008 is here. "This is the last big app to go native on Intel."

First Thing: Time Capsule

He's talking about Time Machine in Leopard. (Jobs calls it Tiger, the previous version, by mistake.) Today Apple is announcing a companion product to Time Machine, called Time Capsule. I has WiFi and a hard drive in it (802.11n) and together it lets you wirelessly sync your stuff. "You can back up your notebook wirelessly to Time Capsule." In fact, you can back up all the Macs in your house. Time Capsule will be sold in a 500 gigabyte drive and a terabyte drive. The 500 will be $299, and the terabyte will be $499.

He's playing the ad about Time Machine. There are a lot of Macs explaining that Time Machine automatically makes copies of him so that nothing ever gets lost. That's the first thing Jobs wanted to share.

Second Thing: iPhone

The second thing is about the iPhone. Today is the 200th day since the iPhone went on sale, he says. Apple has sold 4 million. That's 20,000 iPhones a day on average. In terms of the overall market, according to Gartner's Q3 data, RIM had 39 percent with the Blackberry, Apple had 19.5 percent with the iPhone, Palm had 9.8 percent, and Motorola had 7.4 percent.

What's equally interesting, Jobs says, is that Apple equally Palm, Motorola and Nokia in Q3. In the December quarter, Jobs says, he thinks Apple did even better.

What everyone's excited about is the software development kit in late February, Jobs says. But Apple wanted to roll out new features, including maps with location. Also, you can now make web clips on your home screen — up to 9. You can SMS multiple people at once, and have chapters and subtitles in videos. You can also show song lyrics.

Now he's going to demonstrate.

Google Maps. Push a pin, and it pinpoints the phone's location on the map. This makes directions easy; he just taps in "Apple," and it gives directions back to the headquarters. He cans also quickly get directions to a nearby Apple Store. Then he can move the pin and easily get directions. "We develop our Maps application in collaboration with Google," Jobs says. "We write the front end" and we really like working with those guys. (Interesting. I think this is the first time we've heard that Apple writes the front end of Google Maps for the iPhone.)

Now he's demonstrating sending SMS to more than one person. It's pretty straightforward.

He goes to Google, and goes to a plus button at the bottom. He can "Add to home screen," and he says add. Now the Google icon is added to his home screen. Now he goes to the New York Times. Web clips can remember where he zoomed and panned to, he says. He zooms up to the technology section, and says add to home screen. Now he has the zoomed-in technology section of the Times technology section as a web clip. When he's going to change things, the icons start wiggling, signaling that they're movable. He can rearrange them, and when he's done he presses home and they stop wiggling. (This is a really clever interface to show that the icons are editable.)

"There's no GPS inside the iPhone," Jobs says. So how do they do location? Apple's working with Skyhook Wireless and Google. Skyhook has 23 million WiFi hotspots in its database. Apple uses WiFi to pinpoint location, and Google uses cell towers to triangulate location. Apple is using both, Jobs says, "And it works pretty darn well."

Now he's demonstrating navigating through video by chapters, and easily turning subtitles off and on, and displaying lyrics to a song. "All of this is available today as a software update for every iPhone," he says.

"What can we do for the iPod Touch? … We've decided to add five apps," Jobs said. Mail, Maps, Stocks, Notes and Weather. The iPod Touch will even find location with Skyhook's system. Starting today, the apps will be built in to iPod Touch. For existing iPod Touch users, the new software is available as a $20 software update. "That was the second thing I wanted to talk about today."

Third Thing: iTunes and Apple TV

"Number three is about iTunes. I'm really pleased to report that last week we sold our 4 billionth song." On Christmas Day, we set a new record — we sold 20 million songs in one day.

Apple has also sold 125 million TV shows, he says.

And 7 million movies. "That's more than everyone else put together, but it did not meet our expectations …. Today we're announcing iTunes Movie Rentals," he says.

We've never offered a rental model in music because we don't think people want to rent their music, Jobs says. Movies are different. He shows the new section of the iTunes Store.

The majors are represented: Touchstone, Miramax, MGM, Lions Gate, New Line Cinema. But Apple also has Fox, WB, Disney, Paramount, Universal, and Sony Pictures. "We have every major studio supporting up with iTunes Movie Rentals. We're going to have all the great first-run films."

"Here's the deal. We're going to launch with more than 1,000 films in February, available 30 days after DVD release. You can watch on Macs, PC, iPod and iPhone. You can watch in less than 30 seconds after you rent. Once you start watching, you have 24 hours to finish watching it. You can move the film to another device while watching. Renting an old title will be $2.99. A new release will be $3.99.

He's demonstrating it. He rents by putting them in his lineup. He has days to start watching, and you can click a "move" button to put it on another device. "It rolls out in the U.S. starting today, international later this year. We're dying to get this rolled out international."

"What about this? What about this flat-screen TV I just bought? I'd like to watch them there, too. … All of us have tried. … And you know what? We've all missed."

He's admitting that Apple TV failed. "It's not what people wanted," he says. "We learned that what people wanted was movies, movies, movies." No computer will be required to use it.

"Here's what you can do." You can rent movies directly on a widescreen TV. You can rent them in DVD quality, and HD with Dolby 5.1. You can also get audio and video podcasts, and get photos both from your computer, and from Flickr and .Mac. And you can get YouTube. (This is a good move, particularly photos — I suggested a while back that photos are a great proposition.)

You can buy TV shows and movies, and play iTunes content and photos. He's focusing in on the HD movies. In HD, movies cost a dollar more than the prices he quoted for rentals earlier.

"All of these features in an entirely new user interface," he says.

He's showing it. One menu in the center. You can see what other people who have seen a movies have also watched. "I just go over here and push one button to rent this movie." He shows that it's ready to watch in just a few seconds. (This is impressive for a download, but he's probably on a very fast connection. We'll have to see how fast this is on a standard DSL line or cable modem — and it's not HD.) Now he's showing an HD movie that he's already downloaded, Live Free or Die Hard. It looks good, of course.

He's showing how to search, and says there are now more than 6 million songs available on Apple TV. He's looking for a Linkin Park music video, and he plays it. "So, music, music videos, the whole iTunes catalog at your fingertips, on your widescreen TV."

Now he's showing podcasts. One is called "Teton: Gravity research." A lot of them are now in HD, Jobs says. He shows one about what looks like extreme skiing. A guy skis off a cliff and opens up a parachute.

Now he goes to photos in .Mac. The albums are viewable. He goes to one album, and it's playing music and showing the photos, which of course fill the screen. (Apple's .Mac service requires a subscription though.)

He's now showing a video from .Mac. It's the same one he showed at the launch of the new iMovie.

Now he's going to Flickr. He's going to lovetohike78, and sees that person's photos, and also that person's friend's photos. He's trying to show photos from this person, and the music starts playing, but no photos. First big screwup of the keynote. "I'm afraid Flickr's not throwing up the photos on that one. That's what I wanted to show you today. Isn't that incredible?" The crowd claps nonetheless.

He says Apple TV's new software is a free upgrade.

Given the fact that we've got all new software … we want to make Apple TV even more accessible. "The new price of Apple TV, starting today, is just $229. We are shipping the new software upgrade to existing owners and the new $229 Apple TV in just two weeks."

He's going back to talk about movie rentals. You can watch them on your computer, iPod, iPhone, or TV. Apple has support from every major studio.

"The first studio to sign up with us for iTunes Movie Rentals was 21st Century Fox," he says. Jim Gianopulos, Chairman and CEO of 20th Century Fox comes out. He's talking about new business models. He says the key, despite all the changes is to make great movies and give them to as many people as possible. Steve Jobs leaves the stage. Interesting that he's putting a Fox guy up on stage by himself. Could this signal the beginning of a more Hollywood-friendly Apple?

Gianopulos happens to mention that the next-generation format "will be Blu-ray, looks like." That's sure to rile up the HD DVD fans. He says that the new Family Guy DVD will contain a digital copy that you can easily move to iTunes and the iPod, which is an interesting development. "We're really excited about our partnership, and we look forward to bringing you lots of exciting entertainment in years to come."

Fourth Thing: MacBook Air

Now, on to the fourth thing Jobs wanted to talk about today. "That brings us to number 4. There's something in the air."

"As you know, Apple makes the best notebooks on the planet. The Macbook and the Macbook Pro. Today we're announcing a third kind of notebook. It's called the MacBook Air. What s the MacBook Air? In a sentence, it's the world's thinnest notebook."

He shows the Sony TZ series. "They generally weigh about 3 pounds, and they generally are about .8 inches to 1.2 inches." They also compromise, he says, because their displays are 11 or 12 inches, the keyboard is miniature, and the processor is slower than standard.

He says there's too much compromise on everything but weight.

He shows a profile of the MacBook Air, which is .76 inches down to .16 inches. "The thickest part of the MacBook Air is still thinner than the thinnest part of the TZ series." He says it fits inside an inter-office envelope. So he grabs an envelope off of the lectern.

It has a 13.3-inch widescreen, an LED backlit display, a built-in iSight camera, and a full-size keyboard. "This is perhaps the best notebook keyboard we've ever shipped." The keyboard is also backlit, as it is in some other Apple laptops. It has a trackpad, and multi-touch gesture support. It looks like the gestures work with the trackpad. You can pan and move windows with two fingers on the trackpad, and rotate photos the same way. You can use three fingers to pan between fingers. And you can zoom by pinching in and out.

(This laptop is really darn thin.)

"How did we fit a Mac in here? How did we do it?" It has a 1.8-inch hard drive in it. (Interesting … not flash.) There's an option for a 64-gigabyte flash drive. This uses the Intel Core 2 Duo, so, Jobs says, Apple didn't compromise on performance.

"We've got a great relationship with Intel. Both companies are engineering-driven, and they both like to challenge each other." Jobs said they wanted the Core 2 Duo chip on a smaller package. Jobs welcomes Otellini to the stage. (This is impressive because Intel has an earnings announcement today, and those usually take all-day preparation from CEOs. This is the second time Jobs has had him on stage. Last time, he gave Otellini a plaque to thank him.)

Jobs is going over the rest of the features. Wireless networking, and all the ports you'd expect. The one thing he hasn't mentioned yet is an optical drive. "No matter how hard you look, one thing you're not going to find in a MacBook Air is an optical drive." There's an external one for $99, he says. Jobs says he doesn't think most people will need one. Wireless movie rentals, iPods and other things take the place of optical drives.

What about software? There's a new feature called "Remote Disk" that shows Macs or PCs in your vicinity, and you can pick a machine and ask to borrow its optical drive. Special software asks to borrow the drive, and it wirelessly installs software from either a Mac or a PC. (This sounds pretty complicated for a lot of users. Lots of people will want the external drive.)

The MacBook Air will get 5 hours of battery life, he says. (That is really extraordinary.) Features, he's going over again: 3 pounds, .16-.76 inches thick, 13.3-inch display, full size keyboard, multi-touch gestures, iSight camera, 1.6 GHz Core 2 Duo, 2 gigabytes of memory, 80 GB hard drive (with a flash drive option), 802.11, more. It will be $1,799, he says. It ships in two weeks.

He's showing an ad. Someone takes it out of an interoffice mail envelope, and opens it. "MacBook Air. The world's thinnest notebook," the on-screen text says.

Now he's talking about progress toward environmental initiatives. He says Apple is going to talk about this with major product announcements from now on. It's mercury-free and has arsenic-free glass. Circuit boards are BFR-free, PVC-free. The packaging has 56 percent less volume than the previously smallest Mac product packaging, which was the MacBook Pro.

"That is the fourth thing that I wanted to talk about with you today."

He goes over what has been presented.

"We have a special treat today. I wanted someone who could help us bridge the gap between iTunes Movie Rentals and music," he says, and the best person to do that agreed: Randy Newman. Newman is going to perform.

(Clearly, there's not going to be "One More Thing" or "One Last Thing" this time around, which sort of breaks a Macworld tradition.)

Sony's XEL-1 flat TV with OLED technology drew big crowds at the Consumer Electronics Show. Image: Jon Fortt

LAS VEGAS – After chatting with Sony Electronics President Stan Glasgow, I had to see what the hype was about. So I headed over to Sony’s booth here at the Consumer Electronics Show to check out a $2,500 flat-panel TV with a screen a little bigger than paperback book.

Yes, at 11 inches, it’s that small. So what makes the XEL-1 worth as much as an HDTV 10 times its size?

The picture. This TV delivered the sharpest, most eye-popping video I’ve ever seen. Blacks on the screen were completely black. My immediate emotional response was, “must have it.” And apparently I wasn’t alone.

Teenagers, businessmen, and elderly couples were all ambling into the Sony (SNE) booth like zoo-goers looking for a baby panda. Most seemed to make their way to the mini-stage at the center of the display area, where Sony had about a dozen of the little OLED TVs roped off and set up like jewelry. The crowd oohed and aahed and snapped pictures.

It’s tough to overstate the significance of the little TV’s popularity. Flat-panel screens at CES are like leaves in the forest. They’re everywhere. For people to crowd around one specific model — especially one this small — means they saw a visible difference in what those TVs delivered.

OLED, which stands for organic light-emitting diode, uses a technology completely different from its better-known flat-panel sibling, the LCD. OLED displays don't require a back light, which allows a higher contrast ratio, less energy consumption and a thinner design. (Some have raised concerns that OLED screens wear out quickly, but Sony said its displays should last 30,000 hours.)

Does that mean the XEL-1 will be a big seller? Not even Sony expects that. Glasgow told me that the company is building and selling them in retail qualities mainly so that it can learn about the technology, and figure out how to manufacture the panels less expensively and in larger sizes. While the technology industry has developed standard ways of making LCD screens, OLED is still a bit of a mystery; each of the companies experimenting with making the screens does it a little differently.

Glasgow does believe that OLED is the future of television, and that while it took LCD about 18 years to go from cool idea to mass-market product, OLED will develop much faster. Whether much faster means affordable OLED is 10 years away or three, he wouldn’t say — but in the meanwhile, he and Sony’s marketing executives are surely enjoying the big buzz they’re generating with their little TV.

At next month's Macworld show, will the trendsetter say goodbye to hard drives?

Apple's MacBook Pro could get a storage upgrade soon. Image: Apple

What do you get when you cross an iPod with a Mac?

A super-slim laptop that uses chip-based flash memory in place of a spinning hard drive, of course. If the rumors are right, Apple (AAPL) will unveil one at the annual Macworld confab next month.

Before you begin salivating from gadget lust however, be forewarned. The rumors should be taken with a grain of salt (or a whole tub of it if you have one handy) — and not just because Apple prognosticators have predicted for years that an ultra-light dream machine is right around the corner.

The real reason to doubt is this: If Steve Jobs unveils a flash-based laptop in January, it could be his gutsiest move since the iPod nano. Why would a FlashBook be such a gamble? Because while it’s a cool idea, it’s not clear whether enough customers would pay the premium Apple would inevitably charge for such cutting-edge technology.

Yes, flash storage helps a laptop to do cool tricks like slim down, boot up faster and extend battery life. But there are tradeoffs too. For instance, flash handles data differently than a hard drives does, so software workarounds are needed for heavy-duty tasks like video editing. Marketing VP Greg Joswiak mentioned the storage performance issue to me during an Apple event this past summer, which suggests that the company is weighing the pros and cons.

Samsung's flash storage drives can replace hard drives in laptops. Image: Samsung

More from Big Tech

New iPod nano: up close (Photos 1-5) Nokia's answer to the iPhone (Photos 1-7) Game-changing cell phones (Photos 1-7)

There’s also price. Consider that the MacBook Pro, Apple’s professional laptop, already starts at $2,000 with a 120-gigabyte hard drive. How much of a premium would a flash drive add? For a clue, take a look at Sony’s Vaio TZ Series, which includes models with 48GB and 32GB flash drives. Models with the flash drive option can easily cost $900 to $1,300 more, with a third of the storage space. As Apple seeks to expand its market share, it has to be careful about adding features that put its wares out of reach to all but the fattest wallets.

But don’t take this to mean Apple won’t put flash in its laptops at all. The company is notorious for getting components at bargain prices, thanks to the negotiating chops of CEO Jobs and the logistics prowess of chief operating officer Tim Cook. Because of the iPod and iPhone, Apple is already a very important customer of Samsung, the world’s largest provider of flash memory — so the company is in as good a position as anyone to get the best deal if it decides to add flash to the mix.

And Jobs is clearly not afraid to take chances; don’t forget the bold move Apple made with the iPod nano. Even though the hard drive-based iPod mini was at the height of its popularity, Apple replaced it with the flash-based iPod nano and a new design — a risk that boosted the gadget’s popularity even further.

If you can pay for the parts, flash-based laptops can deliver some sweet surprises. I recently spent some time with a laptop running Microsoft (MSFT) Windows XP with an Intel (INTC) Core 2 Duo processor, which Samsung sent me to demonstrate the performance of its 2.5-inch NAND flash storage drive. Though the laptop itself didn’t have a slim design to take advantage of the flash, I did notice that it went about its business silently, even as I launched and shut down programs. As a longtime laptop user, I’ve gotten used to hearing the pesky whir of a hard drive when I switch tasks, so the peace and quiet was a weird thrill.

Those kinds of benefits have led some high-tech observers to think Apple will add flash storage to its Mac recipe sooner than later. Richard Doherty, director of research at the Envisioneering Group consulting firm, thinks Apple is likely developing a flash-based touch-screen laptop reminiscent of the iPhone, which people in the graphics and publishing industries could use to share ideas. “The multi-touch technology is too good for just a 3.5-inch phone,” Doherty says. “If it’s not at Macworld, I think it’s something in the cards for the next year.”

Doherty also pointed out that because Apple controls both its hardware and its operating system, it could probably squeeze better performance out of a flash-based Mac than competitors would get out of Windows laptops. And it could be slimmer and more durable; a flash-based laptop would run significantly cooler than a machine with a hard drive, so engineers would not have to worry as much about adding design elements to help dissipate heat. If Apple doesn’t want to build a laptop with an all-flash hard drive, the company could take a gradual approach as well, and employ a new breed of “hybrid drives” that use a combination of flash storage and a traditional hard drive.

Whatever the solution, Steve Jobs will need to summon heavy doses of both engineering and marketing magic to turn an inevitably pricy flash-based laptop into a must-have item. Still, those who dream of seeing one on the Macworld stage next month can take heart; for Apple fans, January is when dreams sometimes come true.

Inside HP's plan to get more bang for its research buck

Prith Banerjee, former dean of the engineering school at the University of Illinois at Chicago, brings new ideas to his role as director of HP Labs. Image: HP

It’s a tale nearly as old as Silicon Valley itself. Nearly 30 years ago, a young Steve Jobs visited the scientists at Xerox’s Palo Alto Research Center and spied the first computer that had a mouse and desktop icons. Jobs soon commercialized similar ideas at Apple’s (AAPL), but Xerox couldn't seem to take the brilliant concepts from its own labs and turn them into marketable products.

Today Hewlett-Packard (HPQ), the valley’s largest tech company, wrestles with a similar problem. Though HP’s advanced research group once invented wonders such as the scientific calculator, the thermal inkjet printer and commercial LED lighting, these days executives feel HP Labs and its $150 million annual budget could do more to boost the company’s bottom line.

This issue has fresh urgency now that HP has topped $100 billion in annual sales. The company will need big, marketable ideas to fuel future growth. Can HP Labs deliver?

The challenge falls to Prith Banerjee, a noted scientist and startup veteran who joined HP last May as director of HP Labs. Banerjee, 47, was previously dean of the College of Engineering at University of Illinois at Chicago; he has also founded two electronic design software startups. AccelChip was sold to Xilinx early last year, and he still serves as chairman and chief scientist of Binachip.

At HP, Banerjee wants to transform the labs from an idea farm into a hit factory. Rather than send the 600 HP Labs scientists out to pursue dozens of personal-interest projects, Banerjee will encourage them to pool their talents and tackle big problems that are likely to yield money-making discoveries. Shane Robison, HP's chief strategy and technology officer, says the retooled organization ideally should help add hundreds of millions of dollars in revenue to HP's core businesses of personal computing, imaging and printing, enterprise systems and software.

A Different Focus

“HP Labs today does a lot of cool things — about 150 research projects – but it does so many things that none of the projects get enough resources to have a high impact,” says Banerjee. “My message was, let’s try to narrow the focus” to about 30.

Banerjee’s vision borrows heavily from the culture of Silicon Valley venture capital firms, which fund fresh new ideas and try to nurture them into the next Intel (INTC) or Google (GOOG). Traditionally, HP Labs scientists have had little incentive to transform concepts into products. But in the future, research efforts that fail to meet benchmarks won’t get more funding, according to HP executives; instead, more resources will go to larger projects that are meeting goals and are likely to mature into profitable new businesses.

Much like in a VC firm, once a project is ready to begin the process of becoming a product, researchers who worked on it will move to the product team. "When a startup company gets formed, you don't just bring in the technology," Banerjee says. "You convince the people who created the technology go along, and you bring in people who are experts in building products. That's the same thing we plan to do at HP Labs."

It's a colossal shift in the way innovation happens inside a Silicon Valley giant, and competitors will be watching. If Banerjee succeeds at leading the reinvention of HP’s research culture, it could both drive earnings and provide a blueprint for other tech behemoths that struggle with growth. But this is also not the first time a mature enterprise has tried to change its culture and adopt the creativity of a nimble startup. Perhaps because big companies are run by managers and not by entrepreneurs, these kinds of efforts typically fail.

Still, HP can find inspiration in stories like Chandrakant Patel's. As a Fellow in HP Labs, Patel began experimenting a decade ago with large-scale cooling technologies, based on a gut sense that the Internet would give rise to energy-guzzling data centers full of computers that would run too hot. Though HP managers didn’t grasp the importance of his research at first, Patel soldiered on. Using social skills he honed during college when he took a job selling encyclopedias door to door, Patel found allies within the company who helped him find a market for a new kind of software-driven thermostat system designed for server farms.

Today, Patel’s project has bloomed into a product called Dynamic Smart Cooling. And since electricity costs have become the most expensive part of running a data center, demand for the invention is obvious in the global warming era; HP expects it to generate hundreds of millions of dollars in sales.

Another project called BRAIN, a system for predicting the future through betting patterns, also offers an example of the type of work HP Labs wants to encourage. HP economists and engineers worked together to design a system that analyzes a group of people's bets in a given market, factors in each person's appetite for risk, and uses that information to predict what will actually happen. Though the project began as an academic exercise, Bernardo Huberman, an HP Labs manager, was determined to put it to profitable use. The financial division suggested using it at the beginning of a quarter to predict what revenues would be at the end; when that experiment went well, HP began using it to predict component prices, helping the company to buy the critical building blocks of its products at the lowest cost and thus increase profitability.

Uncertainty Ahead

HP is not alone in its ambition to improve the profitability of its advanced research efforts. At Cisco (CSCO), the company has also been working on system to get more bang for its R&D buck. “Innovation typically is when you take a number of inventions and you put them together to create something that is disruptive,” says Cisco senior vice president Marthin De Beer, who leads the company's Emerging Technologies Group. “We really focus now on the latter part — on innovation.” That focus means Cisco more widely solicits ideas, chooses the best to develop, and creates new startup-like business units to incubate them. The jury is still out on how well the system will work for Cisco, though one of the first products to emerge, TelePresence video conferencing, has generated buzz.

Likewise, it will take years before investors can be sure whether HP’s revamp of its labs is bearing fruit. Many of the research areas that the company identifies in 2008 won’t yield products until 2013, though the new model could produce some benefits sooner. For instance, HP’s personal computing group has set up a team called the Innovation Program Office that seeks to grab good ideas from inside and outside the company and turn them into products more quickly.

Along the way, there are many things that could go wrong as companies try to improve the batting average of advanced research. Chuck Geschke, who left Xerox PARC with his friend John Warnock and 25 years ago co-founded Adobe Systems, notes that no one has yet cracked the unique code for making advanced research consistently pay off. “There must be something special, because not everyone’s able to do it as well as they anticipate,” Geschke says. And perhaps there is no perfect formula at all. “You have to accept the fact that if you’re really pushing the envelope, some of what you do won’t work out.”

HP executives are conscious of the balance between focusing the research and leaving room for the unexpected. Phil McKinney, chief technology officer for the PC group, said Banerjee and the company’s chief technology officers have been working to make sure that under the new structure there’s room to pursue ideas that at first blush don’t seem like home runs.

“You want to be careful that you don’t become so restrictive in your strategic direction that you end up with blind spots,” he says. “How do we give enough flexibility in the model to let the researchers work on something that they’re personally interested in, and they think it might be something, but it’s very early-stage?”

It will be important for executives to get this right. The researchers who work in the top advanced technology labs are highly sought after, and will have no trouble finding work if they become unhappy at HP.

As Patel talks about his work with data center cooling, a similar theme emerges. He was free to pursue his research even before the company saw its value, and that freedom is one of the primary reasons he has remained with the company for more than 20 years.

“My boss could have said, ‘Why are you wasting time on this?’ But to his credit, I can’t remember anybody in HP Labs questioning me about all of this modeling that I was getting into,” Patel says. “What remained constant was autonomy. Nobody really questioned me.”

As HP Labs undergoes a transformation, there certainly will be more questions. But executives hope they’re the type that spark innovation rather than stifle it.