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You cannot buy innovation

In a previous series of articles we discussed the capital Apple expends on equipment, real estate, leasehold improvements and data centers. Cost structure analysis reveals subtle shifts in strategy and the CapEx analysis demonstrates Apple’s increasing integration into its supplier network and integration into the distribution and service infrastructure that sustains its ecosystems.

Another form of investing (spending now, reaping benefits later) is the spending on research and development (R&D). Let’s have a look at Apple’s R&D expenses by quarter since Q1/2006.

Apples R&D expenses as percentage of sales have been declining from almost 4% to close to 2% in the last six years as shown in the following chart:

While Apple’s absolute R&D expenses have grown at an annual rate of 33% they have not kept up with the far higher sales growth rate. Apple’s current rate of R&D expenditure is compared to a peer group [1] below.

Apple’s R&D/sales ratio is between Dell and HP, companies which do not develop their own software or hardware.

Beside the absolute, relative to sales and relative to peers, another perspective is to measure relative growth. The following chart represents shows the 5 year average growth of R&D expenses and on the y-axis the size of last 12 months R&D expenses as a multiple of Apple’s R&D costs [2].

Acer’s R&D expenses for example are almost non-existent compared to Apple, but have grown almost 100% per year while Microsoft’s last 12 months R&D expenses are almost 4x that of Apple’s and have only grown slightly over the past five years. Google’s R&D costs have grown at a similar rate compared to Apple, but remained double those of Apple’s throughout the last five years.

Finally, we should look at the payoff from R&D spending over the last five years.  R&D growth should result in margin improvement, but does it? The following chart shows the relationship between spending (size of bubble), margin improvement (x-axis) and sales growth (y-axis).

Of our sample, only three companies have achieved sales growth AND simultaneous margin improvement over the last five years. But while Microsoft and Dell have achieved sales growth and margin improvement slightly above zero, Apple has improved its bottom line by 13 percentage points and its top line by an average rate of 45%.

In spite of Microsoft’s, Google and Nokia’s massive R&D growth, their returns from that investment have been meagre to negative in terms of margin and only Google showed appreciable sales growth.

Discussion

R&D expenditures on a stand-alone basis, in absolute or relative terms, do not correlate with disruptive growth. Essentially, you cannot buy innovation.

In fact, sometimes it’s nearly free. Most startups spend less on R&D than large companies do on stationery and yet the bulk of wealth creation has come from these tiny companies. The challenge is, in fact, that if you have resources you find ways of spending them (the quaint American cliche of ‘cash burning a hole in your pocket’). The temptation is always there to fund a new initiative which bright people can always envision.

Leadership in innovation is not the courage to spend but the courage to focus.

“Focus is about saying ‘No’. And the result of that focus is going to be some really great products where the total is much greater than the sum of the parts.”, Steve Jobs (1997)

[1] Our set of peer companies as shown in previous posts but excluding LG, Lenovo and Motorola Mobility due to lack of data, but including Sony Ericsson and Nokia’s mobile phone division Devices & Services.

[2] In this post “year” and “last 12 months” refers to the time frame from Q4/(year-1) year to Q3/year due to lack of published data regarding Q4/2011. Five year data runs from Q3/2006-Q3/2011.

[3] A note on capitalized R&D: Most of the companies analyzed do not have capitalized R&D costs. Some have small capitalization, but so small that the inclusion would not change the decimal points of percentages. The only significant amount of capitalized R&D appeared in Amazon’s earnings releases: capitalized R&D cost were USD 100 million in Q3/2011. The amortization of theses costs in included in Amazon’s EBIT (Operating imcome).


  • http://cestpasmonidee.blogspot.com/ Patrice B

    This analysis is interesting but misses one important fact: R&D IS NOT innovation.

    • http://www.asymco.com Horace Dediu

      I was hoping to make that very point.

      • Anonymous

        You did. Patrice just didn”t get it.

    • http://twitter.com/zzbar Joe Zou

      real innovation is manifested through improving margin! the graph clear shows there is a negative correlation between increasing R&D and margin except for aapl. 

    • Anonymous

      Those of you who are outside of industry and academic R&D do not fully understand the difference between Apple’s expenditures and other companies’ expenditures. Apple, being a secretive company, does not publish or reveal any of its internal R&D results with the rest of the technology industry. On the other hand, look at companies like Microsoft, Google, HP, IBM, and others that have public-facing R&D labs whose work  results in research papers and demonstrations; these are the companies that are pushing industry and academic research forward by following in the legacy of older companies like Bell Labs. These are the companies that are the home of ACM Turing award winners and other innovators. These guys do their job pushing the state-of-the-art forward, and it isn’t cheap to keep a staff of them on board. Now back to Apple: they do not publish papers, they do not report results, and they do not contribute back to the research community even though a large portion of their success comes from research done from earlier generations. They are able to be secretive exactly because there are other companies who are willing to take on these costs. This is a fact.  

      • http://www.asymco.com Horace Dediu

        You are conflating published research with R&D. Industrial “pure research” has been in decline for decades–at least it was even when I was in that type of work in the late 80s, early 90s. I don’t see a good argument for that type of research to take place in a for-profit organization, or to put it another way, if it did take place, I don’t think it would behoove the company to release those results to its competitors.

      • Anonymous

        “I don’t think it would behoove the company to release those results to its competitors.” Tell that to Google, IBM, Facebook, Intel, HP, Ebay, Nvidia, Yahoo, and Amazon who all publish their work (at varying frequencies) at ACM and IEEE conferences. (Disclaimer: I am a researcher at an industry lab.) What you are missing is that for each paper, there is always  a one-to-one correspondence with a filed patent, so intellectual property is protected. I know of researchers at Microsoft Research who have 100 published papers — and 100 filed patents. And by publishing research and results, these companies are pushing the rest of the technology world forward, Another thing you are missing is that these companies quite often provide grant funding for university research projects, which is important given that traditional funding from NSF is now extremely tight and competitive. 

        “Industrial “pure research” has been in decline for decades”. This is true yet false. Paper publications have been increasing even for industry labs. Again, this is tied to the fact that papers are typically one-to-one mapped to a patent application, and researchers love writing papers — and getting a nice $bonus for each filed patent. However, it is true that industry research has moved toward a focus of pushing more research ideas into products. This was not the case 20 years ago.

        Again, let me reiterate my point: these other companies are doing their fair part, and Apple contributes nothing to industry/academic research at all. Their one public-facing research group (Apple ATG) was closed by Mr. Jobs himself when he returned in 1996. Many Apple components were built from research work in previous generations. MacOS X is built on CMU’s Mach. The iOS user experience may or may not have been influenced by the hundreds of papers and results from HCI work over the last 10 years. In my opinion, Apple is being selfish here, particularly when they have the patents to protect any work they would want to publish.

  • Anonymous

    In that last graph (“EBIT margin improvement”), the slope of the line running through the primary cluster almost screams out “ZERO SUM GAME!”

  • Anonymous

    That last chart should be hung up in every boardroom.

    No, R&D is not innovation and that’s precisely the point that is being made. A great deal of the R&D spending going on is being wasted since it is not adding value. You could argue, as I am sure Google would, that benefit will accrue in the longer term but these companies are all pretty established now. The differences in culture and the results of those differences are laid bare in these charts.

    • Anonymous

      I’d add that a lot of this R&D is inside the old paradigm. What does it matter how much you spend if you’re spending it on a dead end?

  • Anonymous

    Also:

    – Apple have a much narrower product line than most other companies listed here, and have shown a great willingness to drop under-performing products, even in spite of previous commitments (servers…). Having a ratio of R&D vs number of product lines would be informative.

    – Do purchases (iTunes, Siri, their CPU team…) appear in that R&D ratio ? Maybe one aspect of the equation is that Apple doesn’t innovate internally, but buys innovation ?

    – Do subsidies to and locked investments by suppliers appear in the R&D ratio ? Apple is known to fund suppliers’ factories (and probably R&D at least tangentially at the same time)

    – Again, I’m not sure about innovation. There was a big Apple innovation a while back, which was to combine nice design and ease of use to make PCs and derivatives (smartphones, tablets) desirable to everyone (as opposed to just geeks), and make content (media and after market pressure, curated apps) easily accessible too. That single innovation has been extended to smartphones and tablets. I’m not sure which other innovations can be credited to Apple ? You’re assuming growth = innovation, maybe growth = marketing and design ? Let’s put it this way: if Apple were to disappear overnight, wouldn’t we still do the exact same things, with gizmos and services from other vendors ?

    – What does the combined R&D + marketing ratio look like ?

    • poke

      I think you’re packing way too much into the expression “nice design and ease of use.” The “ease of use” of the iPhone is the product of hundreds of innovations. In the case of iOS, Apple invented an entirely new “design language” for touch-based user interfaces. Besides basic things like inertial scrolling, swiping, pinch to zoom, etc, almost all of the UI components in iOS are new or importantly different from their WIMP counterparts. There’s new ways of interacting with text, selecting, copy and paste, etc, all adapted for touch. Not to mention the logic behind it all that allows the UI to interpret button presses from small swipes, etc. Added to that are numerous hardware innovations, the App Store model, etc. These weren’t all released at once but have been spaced out over the lifetime of Apple’s iOS devices. Importantly, all of these things, almost without exception, have been copied by their competitors and have become the industry standard way of doing things and very few of them were anticipated by previous products.

    • Anonymous

      “Innovation” in the disruptive sense has nothing to do with inventing exotic new electronics, it’s primarily about exploiting the business models latent in boring old electronics.

      The fundamental business plans for Amazon and Netflix run on decade-old technology, but they’re both textbook cases of disruptive.

    • http://twitter.com/disc1979 Dirk Schmidt

      I see your points. Here some additions to the discussion:
      1) the narrow product line is accompanied by a higher degree of integration.
      2) those purchases show up in the CapEx that have been discussed in several posts on this site. In most cases these purchases dwarf R&D spending. Exception was the patent portfolio purchased last year. Also shown in the cash flow statement as investments. Based on what we (Horace and I) have researched, one could not come to the conclusion that Apple’s R&D/sales ratio is so low because they offset R&D expenses with acquisitions.
      3) subsidies show up as income. The equipment purchases for production sites show up as CapEx. I believe contracted R&D shows up in R&D expenses (Here I am not sure).
      4) poke below has already looked at your point here. Adding to his post, I would say that we are looking at growth through the lens of disruption. Disruption theory is predicting growth due to disruptive innovations. Naturally one would search the R&D departments to find these innovations. Not to say that other factors do not influence sales growth.
      5) I assume similar as Apple’s sales are growing so fast and EBIT is expanding rapidly.

      • http://www.facebook.com/christian.peel Christian Peel

        i’m confused; for item 2), did you mean that ‘in most cases acquisitions are dwarfed by R&D spending’?

      • http://twitter.com/disc1979 Dirk Schmidt

        yes. LTM R&D expenses amounted to 2.4 USD bn, Anobit was a larger purchase coming in between 400 – 500 USD million, Siri price was rumored at 200, Lala price was rumored at 80. The share of the consortium to purchase the patents from Nortel was above 2 USD bn.

        But, I agree that certainly a technology/talent/innovation acquisition strategy is at play here – supplementing internal efforts.

      • Anonymous

        I was going to say the same thing about aquisitions, apple is unlike its tech indusrty peers, with its purchases seemingly designed to buy certain technology/software capabilites & patents (like Intrinsity, PA Semi, Siri, Anobit, Lala, the various mapping companies it has acquired), rather than simply making purchasers for instant marketshare growth (like HP has, and google buying Web ad firms).

        I think at least a portion of Apples aquisitions should be attributed to being R&D purchasers – despite them of course not fitting the classical accounting interpretation of R&D spending.

    • Tim F.

      “- Do purchases (iTunes, Siri, their CPU team…) appear in that R&D ratio ? Maybe one aspect of the equation is that Apple doesn’t innovate internally, but buys innovation ?”
      I’d suspect that charting M&A, instead of R&D, would be comparable. I don’t think either would demonstrate a causation between growth and M&A/R&D.

  • http://twitter.com/WaltFrench Walt French

    A consultant who builds an XYZ system for a client is simply designing and writing software, while a firm that builds an XYZ system with the intent of licensing it to others is doing R&D, no?

    For those of readers who are NOT experienced financial analysts, it’d seem helpful to draw the line between R&D and other types of product expenses. I imagine that at some organizations, say IBM, the culture encourages work to be classified as R&D; Apple seems to tightly restrict R&D and focus on deliverable software that goes into ordinary product costs.

  • http://twitter.com/JohnRMoran John R. Moran

    Great analysis, although I think looking at absolute R&D dollars is more revealing – showing it as a percent of revenue is a bit confusing with Apple’s insane revenue growth.

    If interested, here’s a short piece I wrote on Apple’s success focusing, as compared to others (RIM, Yahoo… Google?) who fail through spreading themselves over too many opportunities: http://rampantinnovation.com/2011/07/05/why-apple-had-to-choose/

    • http://twitter.com/disc1979 Dirk Schmidt

      Agree, especially in recent quarters sales growth is clearly outpacing R&D expense increases. But also during 2005 and 2006 Apple’s R&D/sales was around 4%.

      Thanks for link.

  • http://dberkholz.com Donnie Berkholz

    Have you seen my colleague Stephen O’Grady’s post on R&D/revenue ratios in tech companies? He saw pretty similar results a few months back. If not, you really should start reading his blog. =) http://redmonk.com/sogrady/2011/09/09/rd-is-important-but-for-whom/

    • http://twitter.com/disc1979 Dirk Schmidt

      Did not notice it back then. Thanks for bringing it up.

  • Larkost

    I have always wondered: what constitutes R&D for a tech company? Really I in this case I am asking whether the numbers for various companies show above are really comparable, or if they are are more arbitrary buckets that the accountants have decided to use. Obviously as a hardware company more of Apple’s revenue is going to go into the physical product than Microsoft. But I have a hard time beliving that all of the engineers whose work goes into  MacOS and iOS cost just 2.8% of costs. Something seems wrong to me with that.

    • jawbroken

      It’s not 2.8% of costs, it’s of sales.

    • http://twitter.com/disc1979 Dirk Schmidt

      As jawbroken mentioned, it is % of revenue.

      Most companies follow the international or US GAAP and within those standards, the rules are quite clear. The degree of accounting freedom is rather limited.

      I agree that the comparability gap regarding business model and product focus remain, but it does not seem to hurt Apple.

  • Steve Weller

    You also cannot hire innovation.

    Hiring innovative people fails, because the same environment that killed home-grown innovation also kills recently-hired innovation. Innovation is an output of the company culture, not an input.

  • poke

    “The challenge is, in fact, that if you have resources you find ways of spending them (the quaint American cliche of ‘cash burning a hole in your pocket’). The temptation is always there to fund a new initiative which bright people can always envision.”

    So, in a way, Apple’s  $97.6 billion cash is the cumulative $-value of being able to say “no”?

    • http://twitter.com/disc1979 Dirk Schmidt

      yes

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  • http://fahrenheit98.wordpress.com/ VrDrew

    A lot of tech R&D spending appears to be of the “million monkeys with a million typewriters” stripe: “Interesting” developments that have no, or very little, chance of turning into economic-result producing products.

    I think of Photosynth, a Microsoft application that analyzes photographs and creates a 3-dimensional model. Fascinating, ground-breaking stuff. But virtually impossible to turn into a salable product. In very simple terms, its too complicated for most consumers; but not powerful enough for professionals to do anything useful with it.

    The key to Apple’s success seems to be that they find the exact right spot on the technological development curve to spend their money. They didn’t fund a lab where, for years, academic researchers tried out a thousand different ways of doing AI-flavored speech recognition. Instead, they waited until the perfect moment: When Siri was almost – but not quite – ready for prime time. They bought the nascent tech, and spent the last ten or fifty million dollars necessary to turn true innovation into a product that could yield economic results.

  • Notsj

    Innovations can also come from outside a firm,
    such as by taking over a company with a new product, e.g. Siri.

    • http://twitter.com/disc1979 Dirk Schmidt

      R&D expenses are far greater than spending on acquisitions. See also my reply to “obarthelemy”.

      • Anonymous

        Commercialising the technology purchased in an aquisition, and developing it on a yearly refresh cycle, is a greater cost than the initial acquisition cost itself – but the innovative technology was still initially purchased rather than created internally.

        In apples case, after buying a couple of chip design companies comparitively cheaply, it now spends huge amounts each year developing the next generation iOS processors and associated hardware that were derived from designs/patents/staff from those inital acquistions.

  • TB

    Horace,

    There is a great little book by the author Adrian Slywotzky, “The Art of Profitability,” where in the book using a story format he explains certain profit models that businesses use.  Your article reminded me of his story in Chapter 6 about “Blockbuster Profit.”  The main character, the teacher Zhao, relays to his pupil a story of a colleague who transforms a chemical company that is spending money ineffectively on R&D.  Zhao relays to his pupil that “most R&D is anti-profit.”R&D is antiprofit when it has no clear target, the wrong target—for example, a market where customers won’t pay for what you’ve developed—or a trivial target, where the total profit return is a fraction of the total investment.”

    This to me was extremely informative and is evident in the numbers that you are publishing.  Very few other companies do focus their R&D on profitable areas.  Most people have a tough time making choices and focusing on a few things that they can do really well.  Apple has turned this into an art form.

    By the way, Slywotzky’s other books, including “Profit Patterns,” “Value Migration,” and “The Profit Zone” are all really interesting as well.

    Slywotzky, Adrian (2002-09-26). The Art of Profitability (Kindle Locations 1034-1036). Business Plus. Kindle Edition. 

    Thanks,

    TB

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  • Neil Taylor

    I agree with the points below that r&d/sales is a poor metric.
    I used to work for a pharma company and we were trying to move investors away from that metric towards
    (R&D + CAPEX + acquisitions) / Operating Cash flow (exc r&d) as a sign of how much we were reinvesting in the business

    • http://twitter.com/disc1979 Dirk Schmidt

      That makes a lot of sense, especially in pharma.

  • MOD

    I took a class with a professor who taught at University of  Santa Clara’s MBA program. Being in Silicon Valley, many Apple employees take classes there.

    They (Apple employees) shared the company’s capital project goals with him and analyzed it as a class.

    This was some 5-10 years ago.

    I did not make much of it until I realized that Oppenheimer (the CFO) has his MBA from Santa Clara University.

    So the professor told us:
    Apple has multiple required rates of return (based on risk):

    Office buildings: 14%
    Factories: 24%
    Launch of new product: 40%

    This might explain Apple’s high margins: they are required by the Company “culture”.

    It would also explain the low percentages of R&D.

    None of this makes much sense, as companies have different rationales for setting these numbers. I could ask the professor how those numbers were set. I doubt Jobs knew enough to understand what this even means, (never mind to think of the iPhone as a “capital project”), so someone else likely set their capital budgeting polices and they are just following them blindly.

  • http://twitter.com/handleym99 Maynard Handley

    “R&D expenditures on a stand-alone basis, in absolute or relative terms, do not correlate with disruptive growth. Essentially, you cannot buy innovation.”

    Let me suggest two alternative (but similar) ways to look at this: 
    (a) R&D in this context are, I am guessing, essentially based on taxation and what a company can claim as an R&D tax credit. This means, in some sense, that it is a backward looking measure. When Intel hires an engineer to run simulations of a few different branch predictors, the IRS is willing to acknowledge this as R&D. When Apple hires a graphic designer to mock up a few different possibilities for a new notifications scheme, the IRS is not willing to acknowledge that as R&D.
    Likewise is it possible that when Apple engages in research with Foxconn about how to build Unibody Macs, the combination of that work being done in China and with a Taiwanese partner means it is ineligible for R&D tax credit?

    (b) Apple realizes their skill is at the system level, just like Qualcomm realizes their skill is at the chip level. Thus Apple is willing to accept that they are not going to come up with a better video codec than ITU/ISO, or a better instruction set design than ARM, or a better compiler infrastructure than LLVM — Apple competes at the system level, not at the “reproduce what already exists” level. Compare with MS which DOES want to invent its own codecs, write its own languages and compilers, etc. 

    Obviously Apple does not always refuse to innovate in these sorts of spaces, eg they’re willing to add extensions to Objective C++, or to build their own SOCs (but based mainly on existing parts); but they seem to have a much more nuanced view of the issue than most companies — much more interested in what makes long term strategic success, and much less susceptible to NIHism and empire building. 
    It is, of course, possible, that this mindset was mostly Steve Jobs and with his departure the nonsense will start — a retreat from building on open source projects, vastly more money spent on custom chips rather than buying pre-existing cells, a tolerance for middle managers that engage in pointless acquisitions as long as they’re not too expensive, etc. One hopes Tim Cook et al are aware of just how well Jobs’ rejection of  NIHism has served them, but we shall see.

  • Anonymous

    Apple cheats well at R&D. For example, the first 5 years of Mac OS X were R&D for the Intel Mac, and the first 7 years of Mac OS X were R&D for iOS.

    Also, part of the energy that other companies put into R&D goes into design for Apple, and design also pays off in sales.

  • MOD

    A fair analysis should also show the gross total amounts spent on R&D, by these companies, not just a percent of sales.

    Because Apple is so large, it can afford to spend a smaller percentage, because it still comprises an enormous amount.

    It is not fair to compare it to RIM, Sony-Ericsson. Those are minnows in company size.

    But, yes I agree with the premise. Apple is mostly popularizing proven technologies, not doing cutting-edge technological research.

    • http://twitter.com/disc1979 Dirk Schmidt

      I tried to adress the absolute R&D spending in the 4th chart, where you can see that Nokia’s device unit spends roughly the same on R&D as Apple. You can also see from this chart that they have spend this amount much longer than Apple.

      • MOD

        I see. So Apple’s ratio to itself is 1.0. Companies above 1.0 spend more than it spends, companies below 1.0 spend less.

        Well, Apple is in the middle of the pack. Apple only makes a few products, whereas some of those companies make dozens.

  • Adrian Constantin

    The numbers confirm what Apple has said all the time publicly: they spend a lot of management energy on staying focused. One more confirmation coming from Steve Jobs’ interview at D8 in 2012, http://youtu.be/2hs2E3KHRxQ. Here is my transcript of one of his answers (question starts ~7:12).

    “I’ll actually tell you a kind of a secret. I actually started on the tablet
    first. And I had this idea of being able to get rid of the keyboard,
    type on a multitouch glass display. And I asked our folks could we come
    up with this multitouch display that I could type on, I could actually
    rest my hands on it and type on it. About 6 months later they called me
    in and showed me this prototype display and it was amazing. And I gave
    it to one of our guys. This was in the early 2000s. I gave it to one of
    our other really brilliant UI folks. He called me back few weeks later
    and had inertial scrolling working and a few other things. Now, we were
    thinking about building a phone at that time and when I saw the rubber
    band inertial scrolling and a few of the other things I thought ‘My God,
    we can build a phone out of this!’.”

    The part that is really amazing comes right after:

    “And I put the tablet project on the shelf because the phone was more
    important. And we took the next several years and built the iPhone. And
    when we got our wind back and thought we could take on something next,
    pulled the tablet out of shelf, took everything we learned from the
    phone and went back to work on the tablet.”

    This is the greatest lesson in enterprise focus and discipline that anybody could teach.

    • Darwinphish

      This also highlights how long it takes to go from R&D to innovation and new products. Apple is now benefitting from work done many years ago and it suggests that comparing current R&D to current sales might not be the best approach.

    • Anonymous

      What’s amazing to me is Jobs saw the inertial scrolling and instinctively knew that this would be great for a phone.  How many people would think that way?

      • Adrian Constantin

        It is difficult to tell from this short story if he knew it immediately or it took some time and discussions to realize what they had in hand. For me the interesting part was to get an rough idea about the R&D process and the ruthless prioritization in place at Apple.

  • Anonymous

    Love the last chart. I thought Dell’s R&D/sales ratio was small, but Acer’s looks like Pluto next to Jupiter!

    Everyone, but Apple, seems to be suffering pricing pressure, shrinking margins. The few who resist, like Microsoft, Dell and HP can’t seem to grow sales much. The chart can’t be any more stark. I’m wondering if the bubbles couldn’t represent something else, as the bubbles seem to mostly be in the 1x-2x range. 

    Lastly, I’m glad you threw in Amazon into the group. Like the others with good sales growth, RIM, HTC and Google, they can’t seem to expand margins. Definitely seems to be an inverse relationship in the chart between sales growth and margin improvement. Apple is an outlier and Nokia and Sony are in the worst of all worlds, dropping sales and dropping margins. Look out below!

  • http://wmilliken.livejournal.com/ Walter Milliken

    I worked in R&D for 30+ years, including seeing the early days of the Internet, and I think it’s fairly clear that R&D spending doesn’t have any kind of linear relationship to innovation and disruption as an output. However, I think it is a pre-requisite to *enable* innovation and disruption to surface and mature.

    Some observations:

    – You can’t throw money into R&D and expect reliable output of true innovation or disruptive ideas; these things will happen somewhat randomly, as long as the conditions are right. You have to spread the fertilizer on the field, but most of what will grow are weeds….

    – Most truly disruptive R&D is 5-10 years ahead of actual commercial value. This puts it *way* out of the minds of most corporate managers. Disruptive stuff is often more R than D, while most companies will put by far the majority of their money into the D side, because they’re looking to make it usable in products.

    – R&D is very similar to the VC startup world, except the break-out success rate is probably a lot lower. Most R&D money will go into dead ends, some projects will be moderately useful, and a few very rare cases will be outstanding successes.

    – The US Defense Advanced Research Projects Agency (DARPA) is probably the canonical attempt at funding disruptive innovation, and their success rate is actually quite low. Some of the successes have been pretty spectacularly disruptive, however, with the Internet being at the top of the list. Studying DARPA is instructive in looking at how deliberate attempts to produce disruptive change might behave. As a government agency, its behavior and goals are a bit different from the corporate world, and its time-frame is often much longer. But it’s still a useful model to examine. In today’s telecom world, two key innovations that came directly out of DARPA work are the Internet itself, and VoIP. Both are over 30 years old now (well, technically not VoIP in its current protocol form, but most of the key pieces).  Apple’s Siri also came out of a DARPA project.

    – A few companies have historically pushed R&D heavily, partly as a defensive measure to avoid being blindsided by new technologies, as well as to have a pool of possibly-useful technologies that they might someday find a use for (and own patents on). The three cases that leap to my mind are the old (pre-breakup) Bell Laboratories, IBM’s research arm, and Xerox PARC. All have produced key innovations, though I don’t think any of them profited greatly from them, as far as I can recall.

  • Bob Moesta

    As much as this is an insightful view, it is looking back vs “looking forward “or “going in”. Most R&D spending is looked at going in and based on potential new revinue. What would be interesting is to look at the data based on apple projections so we can see the internal hurdle rate of projects. I think is would be higher than your projections or actuals. As an R&D professional we spend resources looking forward on insights and market potential. Looking back is a good check, but as clay says “we need to understand the values that make the decisions going in, not just looking back.” Great companies are made not only by the processes the have, the resources they allocate but the values on how they make decisions. Your thoughts?

    • http://twitter.com/disc1979 Dirk Schmidt

      I think this post can not be more than a “good check” in the context of looking at historical data.

      BTW, great podcast!

    • http://www.asymco.com Horace Dediu

      Spot on. R&D are resources. Processes are the ways these resources are applied and these are harder to measure and establish a measure of performance. Values or priorities are what these resources and processes are in service of. These are hardest of all to quantify, if not impossible. The point of the post is that the things we can quantify (R&D spending) don’t give us any help in creating innovation-based value. We must look elsewhere.

  • Brunings Hamsen

    Interesting, but what are the same statistics on a per product basis. Apple has much fewer products than the rest of the bunch….

    • http://twitter.com/disc1979 Dirk Schmidt

      …and most likely proving the point.

  • 2 cents

    For all those Sherlocks out there. Steve Jobs once said: “We have always been shameless about stealing great ideas”. It is obviously cheaper to just steal ideas than use money for R&D.

    • http://www.asymco.com Horace Dediu

      The greatest ideas have always been free for the taking.

    • Anonymous

      It’s only useful to steal an idea if you can make it work for the masses, and legitimize it in the marketplace.  That’s what Apple does better than anyone.

  • http://www.futurebooks.com.sg/ Futurebooks

    We do a lot of industry analysis for startup companies. Especially in consumer electronics industry and we use R+D expenditure as way to predict a company’s future revenues. 
    Apple has defied gravity. They have broken an industry rule and proven that R+D is not necessarily linked to an increase in sales. 

    What we found a different trend. We found that R+D spend is no guarantee sales will rise. However, wiping out R+D can spell disaster for a firm. Blackberry suffered a public relations nightmare with its server outages recently. 

    It is typical of a firm on mass cost-cutting drive, economising every department including R+D. Business cuts R+D in the first quarter, and it almost always spells doom in quarters 4 + 5.
    That’s because in consumer electronics business, patents and R+D are economic drivers. 

    If companies were to reduce R+D, what kind of alternatives are available to them to assure shareholders that they are not putting the company in jeopardy? 

    One CTO we spoke to recently said that 60 percent of what R+D accomplishes will never yield a return and it is simply part of the nature of science and discovery. Please share your thoughts on this :).

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