Could a lack of R&D spending threaten Apple's innovative run?

Posted:
in General Discussion edited January 2014
Even while Apple's revenue has skyrocketed in recent years -- and even as expectations for future products and success have exploded -- what the company has spent on R&D has risen only modestly, Troy Wolverton reports for TheStreet.com.



The financial journalist questions whether the company's skimpy research spending could ultimately jeopardize its unprecedented run of innovative product hits, and wonders how much longer the company can squeeze juicier near-term profits out of its R&D line.



As a portion of overall sales, such expenses have actually fallen by more than half, Wolverton wrote. Based on an analysis of recent SEC filings, last year Apple spent 3.8 percent of sales on development, and just 3.2 percent in its most recent fiscal quarter.



Still, Apple hasn't really cut R&D spending. According to Wolverton, the company spent $534 million on development in fiscal 2005, which was 24 percent more than it spent in fiscal 2001. However, he says the company has clearly been constraining the growth of development spending.



While sales have grown at a compounded annual rate of 27 percent over the last four years, R&D spending has grown at an average rate of just 5.6 percent per year over that period, the journalist notes.



"At some point, that reaches stasis," Crawford Del Prete, an analyst with industry research firm IDC, told TheStreet.com "They can't take it down to 1.5 percent or 2 percent of revenue."



Already, Apple is reportedly being vastly outspent by its rivals. Both in dollar terms and as a portion of its revenue, Apple's R&D budget is said to be a fraction of that of competitors Hewlett-Packard, Sony and Microsoft. And unlike its rivals, Apple has to bear costs that many of its competitors don't, such as operating system development.



On the other hand, many analyst point out what's important is not how much a company spends on R&D but how well it spends it. "And for most of those analysts, Apple is a good example of a company that gets a lot of bang for its R&D buck," Wolverton wrote.



"You look at what Microsoft is spending on R&D and I guarantee there's wasted money there," said Roger Kay, founder of consulting firm Endpoint Technologies. "Look at what they've produced. It's not controversial that they haven't turned out 10 times as many great products as Apple."



A detailed breakdown of Apple's R&D spending, and comparisons to its competitors spending, are offered in the lengthy TheStreet.com piece.
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Comments

  • Reply 1 of 63
    Apple is in no danger of losing its innovation run if history is any indicator. Check out

    this recent graph - increase in R&D spending has no correlation to sales growth.



    It's the people and how the company is run from the ground up that makes the difference.
  • Reply 2 of 63
    bigmigbigmig Posts: 77member
    I wouldn't really call it a "detailed breakdown." What would be interesting would be if they gave the R&D costs of OS X (and maybe iLife). Given the ~$500 million figure they cite, I'm guessing the OS X costs alone must be $250 million or less, which implies it's basically under $50/Mac (5 million Macs shipped per year right now). This is similar in cost to a Windows XP Home/Vista Home Basic OEM license, and significantly less than a Vista Home Premium license will cost. The "Windows tax" is going to become a progressively larger portion of Wintel PC costs going forward.
  • Reply 3 of 63
    toweltowel Posts: 1,479member
    Like the article says, R&D is growing healthily in absolute terms, it's just that sales have exploded in the last three years, so as a % of sales it looks lower. The fact that costs haven't scaled with sales doesn't surprise me, and most analysts should consider it a GoodThing(tm). SJ runs a tight ship. The first thing he did when he became iCEO was to rein in costs and return Apple to a regular (albeit tiny) profit. He's not going to party-like-its-1999 when sales pick up.



    The 900-lb gorilla hiding in the closet, though, is that fact that most of Apple's recent sales growth is due to the iPod. The iPod has been as close to a printing press as any non-monopolist could dream of. And the iPod doesn't require an enormous continuing investment in R&D. They probably spend less R&D on the iPod than on any one of their Mac lines.
  • Reply 4 of 63
    toweltowel Posts: 1,479member
    Quote:

    Originally posted by bigmig

    What would be interesting would be if they gave the R&D costs of OS X (and maybe iLife). Given the ~$500 million figure they cite, I'm guessing the OS X costs alone must be $250 million or less



    The only number I've seen was back around Tiger's release, when an analyst estimated its development costs at $100-200M. I wonder if it's an understatement, though, since so much R&D must go into core technologies that aren't necessarily release-specific, and it probably doesn't include iLife, etc. Since software development isn't capital-intensive (in the old-fashioned sense) I wonder if there's any way to find out how many software people Apple employs?
  • Reply 5 of 63
    andersanders Posts: 6,523member
    Mac OS X probably doesn´t cost as much to develop as it did three years ago, so my guess is some funds have shifted.



    Besides how do you think the iPod would have looked like if the R&D had been twice as much? Probably something like the Origami project. Each person wants his own button...
  • Reply 6 of 63
    mdriftmeyermdriftmeyer Posts: 7,322member
    Financial analyst warning of R&D lag? Get real. One of the strengths of the development tools, frameworks, etc., is that a small team of talented programmers can create innovative products.



    Apple has no shortage of brainstorming, no shortage of architects, no shortage of engineers, etc. The talent is there.



    What it reveals is that most company don't have the talents, tools and ideas; and no matter how much money you throw at it you won't get insanely great products.
  • Reply 7 of 63
    irelandireland Posts: 17,685member
    Any R&D done about 2-3 years ago will only be coming into fruition now or maybe next year!





    I'm not worried in the slightest about what this article says, the journalist who wrote this will have a different article next year when the shares double again!



    I just bought more shares today on the lows.

    I'm gathering a nice little collection.
  • Reply 8 of 63
    aplnubaplnub Posts: 2,596member
    Quote:

    Originally posted by Anders

    Mac OS X probably doesn´t cost as much to develop as it did three years ago, so my guess is some funds have shifted.



    Besides how do you think the iPod would have looked like if the R&D had been twice as much? Probably something like the Origami project. Each person wants his own button...




    Even with the shift to Intel you don't believe that OS cost have risen?



    I would have assumed it would be more now than ever but I don't know much.
  • Reply 9 of 63
    lhvidelhvide Posts: 68member
    Quote:

    Originally posted by Ireland

    Any R&D done about 2-3 years ago will only be coming into fruition now or maybe next year!





    I'm not worried in the slightest about what this article says, the journalist who wrote this will have a different article next year when the shares double again!



    I just bought more shares today on the lows.

    I'm gathering a nice little collection.




    I love how analysts are paid to come up with something, ANYTHING, to drive the price lower agin to create buy/sell opportunities for those who know that Apple's marke share growth will continue....
  • Reply 10 of 63
    andersanders Posts: 6,523member
    Quote:

    Originally posted by lhvide

    I love how analysts are paid to come up with something, ANYTHING, to drive the price lower agin to create buy/sell opportunities for those who know that Apple's marke share growth will continue....



    BULL!!!!!!



    If anything these analysts have been fanbois #1 for the last year. Any sensible valuation of the Apple stocks will tell you they are overpriced but nonetheless they all have the stock on hold or buy.
  • Reply 11 of 63
    irelandireland Posts: 17,685member
    Quote:

    Originally posted by lhvide

    I love how analysts are paid to come up with something, ANYTHING, to drive the price lower agin to create buy/sell opportunities for those who know that Apple's marke share growth will continue....





    So true!
  • Reply 12 of 63
    nofear1aznofear1az Posts: 209member
    These journalists have nothing better to do than come up with some "made up" belief with NO FACTUAL grounds so that they can get into the news as sounding somewhat intelligible. These guys are always just trying to pick the Apple downfall. Everytime these guys write up a scare tactic article on Apple then the stock takes a drop because of some un-intelligible investor gets scared and pulls out after an unfounded written article based upon what someone conjoured up in their own head so that they can be nearly-famous by stirring the pot again.



    I can't stand journalists like this... They make this crap up with none or little basis for it. I just wish investors were smarter than this than to listen to every bad written article.



    I assure you, Apple is doing very well for themselves and they are going to continue to grow. If you prefer a more stagnant company (MS) then be my guest and invest in a company that has not grown for 3yrs or more.



    Thank you and have a great day,

    RRP
  • Reply 13 of 63
    andersanders Posts: 6,523member
    Quote:

    Originally posted by nofear1az

    These guys are always just trying to pick the Apple downfall.



    Is that you, Karl Rove?



    Its simply not true. If anything the analysts have a very pro-Apple leaning. For gods sake, they have a target price of $100 at a time when the stock is falling.
  • Reply 14 of 63
    The whole Intel switch is about containing R&D budgets on hardware. With Intel picking up MOBO design costs, that means AAPL can spend less and still devote more resources to software and external design. In years past, Apple spent fortunes on technologies and gadgets that never made it to market. M$ still does, or if they make it to market, flop.



    A non-starter of an article.
  • Reply 15 of 63
    nagrommenagromme Posts: 2,834member
    So Apple R&D has increased, just not AS much as revenue? And that's a problem?



    You don't have to keep R&D in pace with revenue if you... drum roll please... sell higher quantities to more people!



    Apple's R&D has been massive for a long time: an OS, dozens of apps, plus hardware. So it didn't necessarily NEED to grow that much.
  • Reply 16 of 63
    xoolxool Posts: 2,460member
    This article is crap and is just jumping on the Apple bandwagon.



    Apple's R&D is still going strong they've just been able to do two things recently: increased sales and reduced in-house R&D costs due to the intel transition.



    Normally the street would laud a company for keeping costs down but in Apple's case they want it both ways.
  • Reply 17 of 63
    jimdreamworxjimdreamworx Posts: 1,064member
    Wasn't Apple spending crazy amounts in R&D before the return of Jobs? On everything from Copeland/Gershwin/Rhapsody to Newton to the manufacture of dozens of models of the Mac.



    I would've thought this article would've come out when Tiger was released when Tevanian stated not to expect OS X revision cycles to keep the pace they did.



    Considering Apple had a "black hole" of OS X on Intel R&D for five years, they will now see some revenue from it. Who knows what else has been in the works for that long that might be coming out.



    You can't just be an R&D company and sell high-ticket items, otherwise you'll end up like Luxell.



    "We'll see you real soon!"
  • Reply 18 of 63
    mr. hmr. h Posts: 4,740member
    Another completely useless "analyst" "analysis" of Apple.



    Let's see: Apple's R&D spending (that gave us, what was it? Oh yeah - the iPod, iMac, OS X, mac mini, etc. etc.) has increased above inflation for the past five years, and that's a bad thing?



    Yet another focus on quantity rather than quality.



    Also, he has completely failed to account for the fact that once the Intel switch is over, Apple's spending on electronics R&D (on motherboard chipsets, layouts etc.) will be vastly reduced (because Intel will be doing most of the work) leaving Apple a lot more money to spend elsewhere.



    Quote:

    Originally posted by aplnub

    Even with the shift to Intel you don't believe that OS cost have risen?



    I would have assumed it would be more now than ever but I don't know much.




    Well, Steve Jobs at last year's WWDC confirmed the rumours that Apple has been developing OS X to run on Intel from the very beginning. It's probably true to say that now it's out in the field it requires a bit more work, but I doubt costs have risen that much.
  • Reply 19 of 63
    walshbjwalshbj Posts: 864member
    Troy is like a lot of writers on the financial beat. They write sensational headlines to get clicks. The Motley Fool is the king of this practice.

    I'm surprised he bashes apple so much, he kind of looks like a 12 year old fanboy.
  • Reply 20 of 63
    melgrossmelgross Posts: 31,982member
    Some of you guys just don't understand the concept of R&D growth. There is inflation to account for here as well. R&D becomes more expensive relative the the overall economy over time.



    You can compare this to the cost of health care. A major reason for its explosive growth in cost is that as it gets more sophisticated, the costs rise. More expensive tools, larger teams, etc.



    It's not two guys in a garage anymore. As Apple moves into more areas, its R&D must increase. Apple has been cutting back on projects for some time. We've been reading about that in these very pages.



    Basic research is very important. Apple has been cutting back on that.



    One of the reasons why Sony has lost its edge is because for the last six or seven years, they too, have been cutting back.



    Don't think that small increases in the percentage means much. It doesn't.
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