Apple’s R&D investment – too low or too high?

“Innovation has nothing to do with how many R&D dollars you have. When Apple came up with the Mac, IBM was spending at least 100 times more on R&D. It’s not about money. It’s about the people you have, how you’re led, and how much you get it.”
— Steve Jobs, Fortune, Nov. 9, 1998

This Street.com story on Apple’s under-investment in R&D has been making the rounds with the exclamation that more money does not equal more innovation. As a principle, I agree with that, and in fact it’s one of MIG’s axioms that “innovation is not expensive”. But by this we mean you can’t simply throw money at the problem, you have to tap into the capabilities of people. That said, money — especially to a hardware company with proprietary software — doesn’t hurt, and it’s worth looking more deeply into Apple’s situation to understand what’s going on.

  1. The Street article compares the most recent R&D spending as a percentage of sales (“While sales have grown at a compounded annual rate of 27% over the last four years, R&D spending has grown at an average rate of just 5.6% per year over that period.“). This masks the exponential increase in recent sales (65% net sales in Q4 2005). Since innovation is a function of how people work, scaling R&D simply to match sales could be futile and possibly harmful as an organizational development change. Just because accounting usually measures R&D as a percentage of sales doesn’t mean it should be managed that way.
  2. In absolute terms, Apple’s R&D investment is up $59 million in Q4 2005 over Q4 2004. For all we know this might be a good, sustainable R&D investment rate for them.
  3. The IDC analyst quoted in The Street article of course doesn’t know the reasons for the drop in R&D investment (nor do I). The article does mention an equally plausible theory is that Apple is learning how to be more innovative with less money, e.g. through management innovation that ultimately leads to other kinds of innovation. And isn’t doing more (sales) with less (R&D investment) a good thing?
  4. The comparison to other companies in Apple’s industry is a good idea, but the comparison is restricted to R&D as a percentage of sales. It ignores the effectiveness of that R&D investment vs. other factors and the directionality of the R&D-to-sales relationship. Just consider where, with regard to new markets, Apple is heading and where Sony is heading.
  5. Where the article really misses the point, IMHO, is by saying, “But even with all of Apple’s market and business prowess, the company is still, fundamentally, a technology company.” It may not be in the IT analysts’ interest to say so, but the nature of R&D investment is changing (at least in Apple’s industry) from solving tough technical problems to solving tough design problems.
  6. Finally, it’s ironic that analysts who have historically criticized Apple’s returns now criticize their frugality! I tend to think the traditional IT analysts will always find a way to not love warm, fuzzy Apple.

When everyone realizes Apple faces more design than technology issues, analysts will start to ask how much companies are spending on R&D of people rather than R&D of technology.