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How Apple gets away with lower R&D spending

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Updated. For a company that manages to debut a new product line every few years that seizes the public’s attention worldwide, it is rather amazing to see how little it spends on research and development compared to its peers.

Update: On Monday Apple number cruncher extraordinaire Horace Dediu at Asymco put together some charts showing how Apple’s (s AAPL) R&D spending trends. While Apple spent $758 million on R&D during the first fiscal quarter of 2012, it’s a very tiny sliver of the company’s overall sales, which were $46.3 billion. What’s most interesting to me is how Apple’s R&D spending as a percentage of overall sales ranks among the industry heavyweights. While $758 million is a lot of money, it’s lags behind the $2.3 billion Microsoft spent on research and development during the same quarter, and Google’s(s GOOG) $1.3 billion.

Here’s a chart showing how Apple ranks among its tech industry peers:

Credit: Asymco

Apple sits right below Hewlett-Packard (s HPQ) and just above Dell(s DELL) — two companies that haven’t produced anything truly interesting in the consumer realm in years. And it is far below the often innovation-challenged behemoths Microsoft(s MSFT), Nokia(s NOK), RIM(s RIMM) and others.

The takeaway is this: Bloated bureaucracies spend a lot of money on innovation and occasionally make something new and interesting. Steve Jobs’ insistence on maintaining a startup mentality within Apple (even with 30,000+ corporate employees) and the company’s ability to only focus on a few things at a time mean Apple can spend less and get much more for its investment.

Thumbnail image courtesy of Flickr user kenteegardin

28 Responses to “How Apple gets away with lower R&D spending”

  1. Ken Heins

    Well for one thing, when you have a sharp focus on what you want, you don’t have to spend a ton of money on analysis. Ever heard of PARALYSIS BY ANALYSIS? Microsoft has no real vision, so they have to spend huge money on this and that, both in terms of market analysis and technological research and TIME, only to find that there was either no customer interest, not technogically feasible, and the big one; The market passed them by. The money got spent, with little or no return. “He got on his horse and rode off in all directions at once”

  2. Jason Cook

    Interesting, but a bit misleading. These figures show cost of Research & Development as a percentage of gross sales volume. Increased sales (i.e. success) will make that percentage go down (i.e. make it look like you’re spending less on research). Apple’s absolute R&D expenses actually GREW at an annual rate of 33% during the research period. However, their spike in sales during the same time dwarfed the additional spending (source:×367.jpg ).

  3. mjtomlin

    Sorry, but most of you are wrong… it doesn’t matter what the actual amounts were, the percentages tell us how much they spent versus how much they made.

    In fact, to display the actual amounts would be meaningless unless they also told us how much each made, thus giving us a percentage.

    If Apple spends 1 billion and Google spends 1 billion, so what? What does that tell us, nothing except they both spent the same on R&D. Well the point of the article is to examine which made more money from that 1 billion? Having the amounts only is useless. Knowing also that Apple made 20 billion and Google made 10 billion, we know Apple’s R&D is 5% and Goggle’s is 10%. So we’re right back to percentages again and can see which made better use of the their 1 billion investment.

  4. markhahn

    Huh? What would Apple perform R&D on? New technology for prettier laptop bottoms? Their _insides_ of their hardware is extremely mainstream – not far from Intel/ARM reference designs.

    Apple’s main innovation is in getting a really good design team (Design-type, not R&D-type) putting them in charge of a very small product line, while squeezing the ODM and supply chains unmercifully. Well, also framing the product as a Talisman of Coolness.

  5. Steffen Jobbs

    Microsoft spends that much money on R&D to come out with the Zune and the Kin. You’ve got to be kidding. At least the Kinect is a pretty good device if you’ve got an Xbox 360. I Sure hope Microsoft isn’t spending all that R&D money on Windows 8 only for it to flop.

  6. Tom Devey

    Obviously Apple leverages is R&D spending into profitable products to a far greater degree than any other company. This is because they develop products based on what marketing (aka Steve Jobs in the past) determines will sell. And for a long time, they have been absolutely right.

    They are able to focus and direct their efforts to a far greater degree than any other company out there.

  7. Did the author or anyone else look to see if any of these companies including Apple capitalize some of their R&D costs? That’s a great way to deflated your R&D expenses on your income statement.

  8. Michael W. Perry

    I’m wondering if Apple defines R&D a bit differently from the others. Apple doesn’t ‘do’ manufacturing any more. It has three basic arms:

    1. Marketing and sales, including store staff getting lower retail wages. Clearly not R&D. Lots of people all over but low wages. Very profitable.

    2. Web services with huge facilities but very few employees. Again not R&D. Little profit but necessary today.

    3. Product development. These are the people in Cupertino. I’d classify most of them as R&D, but if Apple did that, I can’t see the cost of tens of thousands of very well paid people being a mere 2.8% of the budget.

    That’s why a suspect R&D at Apple is more narrowly defined than at Microsoft. Apple also leverages the fact that OS X and iOS were initially such well designed products, improving them cost less that improving bloated monstrosities such as Windows and the Office suite.

    My own hunch is that in the mid 1990s, Microsoft, then flush with cash, decide to bloat their flagship products to make it hard for competitors to clone them. Apple, limited in resources in the late 1990s, decided to carefully manage resources, hardware and software, resulting in something that’s easier to manage over the long run. A Unix-based OS and a small set of products is easier to manage than a large set of bloated products. Apple then calls that management something other than R&D and reserves R&D for totally new stuff.

  9. Besides actual numbers vs. percentage.
    Don’t know if anybody has done any research how much new data any given organization can handle. Would be interesting to know how size and organization structure impact data handling. But there most likely is a limit, just like any given person has a limit. I believe some organizations produce data without learning anything.

    In other words if Apple has found the sweet spot where adding more data will only result into limited knowledge accumulation from there on, good for them. Doesn’t mater if the data is acquired or created internally,as long as it can processed in a meaningful (knowledge) way. As long as it is not discarded without learning from it.

  10. Agreed with every commentor below. Percents mean absoluely nothing here (to show how ‘little’ Apple spends on R&D) except that Apple products are hugely successful. Real numbers tell a lot more.

    Sometimes I agree with the news organizations that amateur blogs are a joke for real or accurate news. :/

  11. A big factor in Apple’s ability to maximize its return on R&D is they have far fewer products than their competitors. At any given time, they only introduce one new phone – they may have 3 or 4 on the market, but all but one of those are older models. Tablets? one new one, one old one. Desktop computers? Two. Laptops? a couple variations on each of 2 basic models. Compare that with other mobile device and computer mfrs, they can spend more on each product, but less overall.

    I cannot understand why HTC, Samsung, and Motorola (and the company that used to be Nokia) have as many model phones as they do. Well, I can think of one reason. Because they are so desperate for carriers to sell their phones, they will let the carriers define them. As a result, they have to develop way too many different phones. They are seduced by the gross margins that the subsidies, financed by carriers’ illegal bundling of service and equipment creates, enable, but it ultimately does not yield higher profits, as they must constantly develop new models to keep their carrier “partners” happy (all while ignoring the fact that the carriers play the manufacturers against each other for their own benefit). One more reason why bundling should be stopped. Sorry for the tangent.

  12. Alok Saboo

    The chart is misleading and you seem to have fallen for it. Please understand that 2.8% of Apple’s sales can be much higher than 13% of Nokia’s sales.

    Furthermore, it does not tell us that Apple’s strategy is the right one. R&D pays of in long run and hence it is quite possible that Apple lose out to its competitors if it under-invests in R&D.

  13. The takeaway is this: they rely on their manufacturing partners to innovate in the hardware. And they buy other companies to innovate in software (pssst: they didn’t invent Siri). It has absolutely nothing to do with “bloated bureaucracies”. Anyone that thinks Apple isn’t just as bloated as their competitors is living in a pipe dream.

  14. drumrobot

    I think that this is not because Apple spends so little money on R&D, but because they make so much on sales that the proportion of sales:R&D is much higher and more skewed. The percentages are very interesting, but I’d like to see what it would look like when you consider the amount of R&D money and not the ratio of sales to R&D money.

    • mjtomlin

      Well that was the point of the article, ROI (return of investment). This is usually always measured in percentages. It is trying to demonstrate which companies get the most for what they spend.

      If you specify the actual amount, then it would be meaningless without also knowing how much they made. A percentage tells you this without the need of either.

  15. Sam Radford

    You say that it can spend less but it’d be interesting to see what this chart would look like in terms of actually money spent. I suspect that would shoot Apple much further up the chart.

    • Erica Ogg

      You’re right, this is not totally clear without the real numbers. I’ve updated the post to include the actual dollar amounts for the most recent quarter.

      Also note that the 2.8 percent the chart refers to is a percentage averaged over 5 years.