For the year ending October Apple’s R&D costs were $4.475 billion. These costs have been rising. Though, as the company explains, not faster than net sales:
The growth in R&D expense was driven by an increase in headcount and related expenses to support expanded R&D activities. Although total R&D expense increased 32% and 39% in 2013 and 2012, respectively, it remained fairly consistent as a percentage of net sales.
We can see this in the following graph:
R&D has remained very nearly 3% of sales since at least 2005.
SG&A Expenses barely grew however:
The growth in SG&A during 2013 was primarily due to the Company’s continued expansion of its Retail segment and increased headcount and related expenses, partially offset by decreased spending on professional services.
The change in R&D and SG&A on a full-year basis is shown below.
I emphasized the mention of increases in headcount. We cannot know with any precision what portion of last year’s $15 billion in operating expenses went toward wage expenses since there are other costs such as advertising commissions and public relations in the case of SG&A and outside services, equipment leases, in the case of R&D. However, it’s more likely that wage expenses are a far larger proportion of total R&D than they are of SG&A.
My estimate, based on wage rates, is that there are approximately 15,000 R&D staff at Apple.
If we divide sales by this number we get $11.4 million in sales per engineer.
In fiscal 2013 there were 395 million visits to Apple retail stores. In 2012 there were 372 million.
The difference is approximately the population of Australia. This was in addition to the population of the US and Canada already passing through. Although this is a fun way to think about total traffic, it does not reflect performance of the stores themselves since new stores are always being opened. 21 new stores in 2013, to be precise.
The better benchmark should be the number of visitors per store.
This shows that, except for seasonal peaks, the visitors per store per quarter has been a fairly steady 240k since mid-2010. What’s more, this rate was also remarkably steady at around 160k/store/quarter from 2007 to 2010.
So what caused this quantum jump in traffic?
Apple’s capital expenditures for product tooling, manufacturing process equipment, corporate facilities and infrastructure has followed very closely their production of iOS devices. The pattern is shown in the graph below.
Note that although reported expenditures did not match forecasts for 2012 and 2013, the differences nearly cancel each other. The company’s forecast for fiscal 2014 is shown as well.
The orange line shows iOS unit production with the scale on the right-side axis. Note the correlation with forecasts on CapEx. The relationship can be seen more clearly in the following scatter plot.
I added the 2014 Forecast ($10.5 billion from the latest 10-K filing). If the relationship holds into next year then the iOS unit shipments should be between 250 million and 285 million..
Episode #62 – Rocket Science | 350 Third.
Horace Dediu joins us for a discussion about the history of the space industry and its more recent commercial direction. We touch on the history of governmental and private investments in space as well as possible asymmetric strategies for the future including a railgun and the ever elusive space elevator. Does the commercial exploitation of space fit within a timescale business is able to accept?
In the wake of Apple’s final announcement event of the year, Horace and Moisés discuss the cost of free software, the unification of file formats, and the cost/benefit of interoperability.
via 5by5 | The Critical Path #99: Grand Unified Theory.
During the first quarter of fiscal year 2014, we changed our organizational structure as part of our transformation to a devices and services company. As a result of these changes, information that our chief operating decision maker regularly reviews for purposes of allocating resources and assessing performance changed. Therefore, beginning in fiscal year 2014, we are reporting our financial performance based on our new segments; Devices and Consumer (“D&C”) Licensing, D&C Hardware, D&C Other, Commercial Licensing, and Commercial Other.
The previous reporting segments were:
- Windows & Windows Live
- Server and Tools
- Online Services
- Microsoft Business
- Entertainment and Devices
- Unallocated and other
The new are:
- D&C Licensing: Windows OEM licensing, Consumer Windows, Consumer Office, Windows Phone (including related patent licensing)
- D&C Hardware: Xbox 360, second-party and third-party video games, and Xbox LIVE subscriptions; Surface; PC accessories
- D&C Other: Resale, including Windows Store, Xbox LIVE transactions, Windows Phone Marketplace; search advertising; display advertising; Subscriptions including Office 365 Home Premium; Studios including first-party video games; retail stores.
- Commercial Licensing: Windows Server, Microsoft SQL Server, Visual Studio, System Center; Windows Embedded; volume licensing of Windows; Microsoft Office for business (Office, Exchange, SharePoint, and Lync); Client Access Licenses; Dynamics, Skype.
- Commercial Other: Enterprise Services, including Premier product support services and Microsoft Consulting Services; Cloud Services, comprising O365, other Microsoft Office online offerings, Dynamics CRM Online, and Windows Azure.
From Microsoft’s FY14 Q1 10Q via Microsoft Investor Relations – Press Releases
The mapping between the old and new is not straight forward. There is overlap between D&C Licensing and the old Windows and perhaps between Entertainment and Devices and D&C Hardware but there are many gaps. There is also some overlap between the old “Business”/”Server” segments and the new “Commercial” but, again, they cannot be matched.
I show the difference between the two structures in the way revenues are allocated below, using color to try to show similarities.
Given the re-stated quarters it’s possible to compare one year’s historic performance at a segment level. For example,
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Apple’s latest product launch (new OSX, iPads, Macs and iWork/iLife) came with a change in pricing for software. OS X and iWork and iLife and updates are now made available free on new Macs and, in the case of the suites, on iOS devices as well.
Recall also that iOS updates are now free as well and that OS X had been reduced in price from about $129 to $29 with Snow Leopard in August 2009 and to $19 with Mountain Lion in July 2012. The iSuites have also dropped in price over time so the pattern of evaporating software prices is long-running.
But how fast and what is the impact? The historic performance Apple’s Software business is not easily determined since it was always blended with additional businesses. Until September of last year, Software was reported as part of “Software and Services” and since then as part of “iTunes, Software and Services.” Some assumptions allow the following picture to be drawn:
One additional wrinkle to the Apple software story is that OS X and iWork/iLife are not all the software titles available. Apple’s software includes Pro apps as well as the non-free OS X server. The non-free software US prices are:
Using logistic curves to measure diffusion of innovations is a powerful method of analysis. However there are limits to what can be learned. The methodology helps in understanding how quickly a pervasive technology is adopted. It assumes that the technology “fills all available space” within a market. It therefore also assumes that whatever problems the technology solves are universal problems.
Put another way, if a technology is not universally useful, it tends to peak before a market saturates. This “universality” condition is in evidence when observing that pervasive technologies are adopted not only by all members of one national market but also all nations and through all means of government and regulation. In other words that the jobs that the technologies are hired to do are so important that they bulldoze any and all obstacles placed in the path of adoption.
The only difference is one of timing. Some regions are quicker than others. Institutionalized obstacles essentially defer rather than deter adoption. They impede rather than block.
And I am pretty sure that smartphones solve universal needs and their adoption will be nearly 100%. They also have fairly low impedance given the speed of adoption (50% penetration in most large markets seems to come in less than 5 years.)
That’s the story for the technology, but how value is captured is another story.
Who captures and how it’s captured are questions of commerce not economics. They are informed by competitive advantage and business models. The puzzle seems to be that individual companies don’t capture value in the patterns of Logistic curves. Or at least I don’t think they do.
Consider the graph below.
Asymcar 6: Peak Horse | Asymcar.
Steve Crandall brings a new perspective as a guest. Steve’s analysis of complex systems has given him a huge pool of wisdom into which we dip our dainty spoons.
We survey the interlopers seeking to replace many jobs that cars have traditionally done, from horses to bicycles, planes, trains and buses.
We dive deeper into a few earlier Asymcar topics including energy, regulation, infrastructure, power train evolution, societal changes, distribution networks, urbanization and consider the promise of electric bicycles.
Several innovation timing lessons temper our expectations for immediate improvements.
Finally, we revisit the emerging transportation information layers and how such services may change public behavior and the auto-ecosystem.
Asymcar 6: Peak Horse | Asymcar.
(Honorable mention to anyone who can identify the vehicle shown above.)