R&D Investment: Wasted Billions?

Is Apple better at spending R&D money than everyone else?

On one side, we have Matt Asay of The Register. He thinks Microsoft, Nokia, and RIM are wasting their R&D money. Forbes blogger Adam Hartung sees it as a failure of Microsoft to look forward to the future. And then we have Martin Sosnoff, also of Forbes, who likes General Motors better than Apple.

All spending on R&D and future products is a crap shoot. No one knows when some new technology is going to wipe out their industry. A horse-drawn carriage business owner may have thought expanding his business was a great idea utnil the automobile came along.

Keep Your Eyes on the Horizon

The trick is to expand and keep your eyes on the horizon.

If the first example is too old, how about netbook manufacturers trying to cope with loss of market share to the iPad? How could that have happened? The iPad is "just a giant iPhone". That shouldn't have been innovative enough to affect them!

If the netbook decline is due to the iPad (and other tablets), then the industry failed to be prepared.

Could more innovation have helped the netbook business? Did they not spend enough on R&D, or was all the money they spent wasted because Apple came in and "ate their lunch"?

It wasn't a waste, because in business, you have to constantly innovate to defend your products. It was a failure to keep an eye to the horizon. The iPhone was out years before the iPad arrived.

Innovate or Buy Innovation

I strongly agree with Matt Asay that large corporations like Microsoft are better at buying innovation than thinking it up themselves, yet I can't agree that its billions spent on R&D ($8.7 billion in 2010) are a total waste. Microsoft cannot ignore its cash-cow products and go chasing after the fantasy "next big thing" all the time.

Large businesses like Microsoft, Google, and Nokia have to constantly innovate their cash-cow products. The reason is that many startup companies aren't about innovating, but matching the innovator with a less expensive version.*

The startup doesn't have the same overhead costs as the established business, and once the innovative work is done, it's pennies to the dollars to copy the product. This is a great business model for a small company, but it infuriates the hell out of the big guys - they always see the little guys as stealing their ideas.

What If....

Imagine if, after releasing the first successful version of Microsoft Office (for the Mac in 1989 - and a year later for Windows), Microsoft stopped making any improvements. The feature set would not grow, and the document format would not change.

In less than a year, everything would have been reversed engineered. Cheaper alternatives would quickly replace Office. Office sales would soon plummet, and all value would be lost.

Microsoft has survived by constantly innovating and making its product more complicated. If you have ever tried using OpenOffice to open a document created in Microsoft Office, you will find that most things work fine. It will be the more complicated stuff like tables, formatting, charts, etc. that don't look exactly the same - and in some situations the information is completely lost.

Creating and maintaining that kind of incompatibility took a lot of development work by Microsoft. Every year or two, new features and formatting are developed to provide both marketing buzz and incompatibility with older versions and competing products alike.

As far as Microsoft is concerned, people running Office 97 or 2004 are almost as bad as people running OpenOffice. Microsoft needs annual sales to keep its investors happy, and that requires constant product development.

Be Different

Apple has to spend money just like Microsoft to maintain its existing products. What has been different is that Apple has done the work with a smaller percentage of their sales. Apple can do it for less because Apple uses a different strategy to protect its products from being copied.

Apple has gone to a multiple defense approach to reduce the complexity that Microsoft uses to defense itself. Apple uses a combination of legal defense (DMCA, CDA, etc.), proprietary hardware, short release cycles, and innovation.

As we saw when Psystar tried to sell Mac clones, Apple used legal means to prevent another vendor from using Apple's operating system on Psystar's hardware. This is expensive, and it doesn't show up as an R&D expense. After making an example of Psystar, Apple has little worry that it will be challenged by HP or Dell.

Apple is saving money that Microsoft spends on copy protection and product registration to fight piracy. Apple has invested virtually no R&D money to fight piracy of the Mac OS. Even without buying the family pack, I could have installed the latest single-user version of Mac OS X on as many computers as I wanted to. Apple doesn't waste money innovating against piracy like Microsoft does.

Hardware/Software Integration

Proprietary hardware linked to custom software - between the iPod and iTunes, for instance - is an incredible advantage for Apple. It allows it to grow both its iTunes Store and iPod sales while at the same time fending off competitors. A competing MP3 player can't use the iTunes Store to buy music. Neither could you easily manage music on your iPod without iTunes. Again, Apple's strategy saved it money and made for a simpler system to maintain.

With the link between hardware and software, Apple has employed frequent updates to keep its advantage. You can see this happening in the cat-and-mouse game that Apple plays with the iPhone "jailbreaking" community. Each time Apple updates iTunes, it patches the holes that allow the phone to be hacked. Then the jailbreakers try to figure new ways to break into the iPhone.

The constant battle makes it a hassle for people to rely on a jailbreak to provide functions that Apple releases for free. There is also a risk that a future update may break your jailbroken iPhone. In a market where Apple sells itself as "it just works", it's hard to see that Apple has to worry about the die-hard jailbreak crowd. Apple has to innovate just enough to make jailbreaking a hassle. Pouring money into developing a phone that can't be jailbroken would be a waste of money.

Clearly comparing other big companies to Apple isn't a fair match up. Apple has control of things its competitors don't. This has been used to stretch Apple's R&D spending far beyond what its competitors can achieve due to worry about imitators and piracy.

Still, you have to say that Apple has had an impressive return on its R&D investment. You see a company like HP wanting to use WebOS to create that same synergy and value. I wish HP well, but it also take the vision of a CEO like Steve Jobs to focus the work into a product that people will buy. Design by committee is usually a terrible plan.

Innovation Plus Quality

More than the fact that Apple has saved billions by ignoring imitators and piracy is the efficiency of its R&D to produce innovative products.

Some thought the iPad wasn't innovative enough, but no one else came out with a successful competing product before Apple. Everyone had time to develop a competitive table after the iPhone was introduced, but no one did.

While we can argue the merits of how much innovation goes into an Apple product, clearly Apple has produced successful products with the amount of innovation it uses, however large or small. This is simply a combination of vision and design at its best.

What makes a luxury car better than an economy car? It isn't the size of the engine, the type of fuel, or a better cooling system. It is the quality of materials used when implementing the design to produce a beautiful product over simply a functional one.

It is quite possible that great design combined with off-the-shelf components can produce a better product than a product that was in development for years but never was cost effective enough to produce. These are tradeoffs that Apple has made to better advantage than its peers because of Apple's reliance on design over functionality.

* Publisher's note: That is precisely how Microsoft got its start. It didn't create BASIC, but it created the first personal computer version of the open source language in 1976 and versions of Microsoft BASIC were licensed to almost all computer makers in the 8-bit era. It didn't invent DOS, which was an unauthorized adaptation of Digital Research's 8-bit CP/M for Intel's 16-bit 8086 and 8088 CPUs. It didn't invent the graphical user interface - Xerox did, and Apple brought it to the public with its Lisa and perfected it on the Mac. It didn't invent the word processor or the electronic spreadsheet either, nor was it the first with an Office suite (Valdocs, Framework, and Microsoft Works all beat Microsoft Office to market), yet in all of these cases it became the de facto industry standard by "innovating" on the shoulders of giants. dk