Apple and the Cost of Innovation.

Posted by: Bruce Nussbaum on March 21, 2006

If you haven’t checked out Noise Between Stations, do it right away. It’s one of my favorite blogs on innovation and design—a thoughtful aggregator and originator. Noise Between Stations has a serious analysis of the Street.com’s critique of Apple’s spending on innovation.

Here is the take”

“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.
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.
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?
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.
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. “

This is good stuff. What do you think? Does Wall Street “get it” when it comes to innovation?

Reader Comments

Vivek Kochikar

March 24, 2006 12:07 PM

This is another example of how Wall street is hopelessly amiss in the knowledge economy. It has been widely accepted for some time now that quarterly earnings watches force an excessively myopic view on the part of corporations, and lead them to sacrifice the future in favor of the present.

Measuring success in innovation by looking at the size of the R&D budget is like figuring out how successful a song (or a film or a book) will be by measuring how long the creator took to write it.

Admittedly, analysts need yardsticks to evaluate companies, but a "something is better than nothing" approach simply does not work!

Stefan Engeseth

March 28, 2006 10:05 AM

It is a bit sad that Apple don’t get more out of their brand and work. Why not use their fans?

Dave Z

April 11, 2006 5:47 PM

I read this article and found it so off target that I was surprised Newsweek published it. The over simplification of the R&D spending premise completely the brilliance of Apple's positioning as a niche company a tiny market share and (comparitively) limited resources.

As examples of this look at the Mac OSX operating system compared to the iPod.

OS X has rapidly matured into a very advanced operating system. Apple has succesfully migrated it's entire user base from the old System 9 architecture and is in the process of another migration, to the Intel cpu. Apple has chosen to tightly tie its hardware and software together to control the user experience and limit the variables that would slow development and compromise quality. The development of OS X proceeds steadily with no missed deadlines and with a consistently improving feature set and significant resulting user experience improvements. To achive this, OS X leverages significant amounts of open source technology for both reasons of standards as well as development effectiveness. From an R&D perspective the development costs of OS X are tiny compared to Vista, some have estimated Microsoft QA team is larger than the entire OS X development team. By some judgements Microsoft spends between 20 and 25 times more on Vista than Apple spends on OS X, a staggering amount, yet OS X is maturing rapidly and Vista experiences constant setbacks.

Clearly, judging R&D spending by metrics derived by both revenue methods or relative product development models is foolhardy and grossly primitive.

Apple has succeeded because they start with user experience and then determine the most effective means to execute the technology (i.e. the underlying use of open souce technology such BSD unix, open GL, apache, php, mysql, ajax, browser engine and printing technology, etc.). The user experience extends to packaging, software installlation, product design, integrated applications, interface design etc. even to include clever product naming.

Clearly, it is not the amount Apple spends that is important but the much more complex and interesting way Apple is strategic about allocating its resources. Apple is, after all a tiny company with a tiny market share compared to Sony or Microsoft. It would be all to easy for them to justify the use cheaper packaging, less refined development or other cost cutting measures; however, their rationale for spending their development dollars is the interesting story, not the over simplified approach Business Week employed.

The iPod example is as interesting. Apple's flexibility in adapting its culture and approach to a high volume consumer product is once again focused on user experience consisting of a seamless eco system of iTunes and the music store.

Much more interesting stuff to think about than comparing percentages.

Rob

September 28, 2007 8:01 PM

Apple is currently (sept 28th 2007) taking a big hit for their latest firmware update to the iPhone. It (version 1.1.1) has effectively locked down any phones that were hacked to run on other networks and also it has shut out the third party applications that were previously available. The tech community is really upset about this one. They are a minority but they are the same early adopters that were pushed around by the rapid price drop. I think Apple is alienating some of their core customers with this device.

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Want to stop talking about innovation and learn how to make it work for you? Bruce Nussbaum takes you deep into the latest thinking about innovation and design with daily scoops, provocative perspectives and case studies. Nussbaum is at the center of a global conversation on the growing discipline of innovation and the deepening field of design thinking. Read him to discover what social networking works—and what doesn’t. Discover where service innovation is going and how experience design is shaping up. Learn which schools are graduating the most creative talent and which consulting firms are the hottest. And get his take on what the smartest companies are doing in the U.S., Asia and Europe, far ahead of the pack.

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