Gauging the return on R&D: Do tech giants spend too much?

Gauging the return on R&D: Do tech giants spend too much?

Summary: Tech giants are spending heavily on research and development, but it's difficult to follow the bouncing return on investment ball.The research and development return topic was brought up by my ZDNet UK colleague Rupert Goodwins earlier this week.

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Tech giants are spending heavily on research and development, but it's difficult to follow the bouncing return on investment ball.

The research and development return topic was brought up by my ZDNet UK colleague Rupert Goodwins earlier this week. Rupert went on a tour of Microsoft Research in Cambridge and questioned whether R&D was the best use of the software giant's cash. The post also spurred a rebuttal. And in February Microsoft CEO Steve Ballmer defended Microsoft's R&D spending and outlined the company's big bets. 

Ballmer said the time to invest is during a downturn. "We certainly invest in research and the incubation of new technologies, and new ideas, and then unfortunately every company has got a corporate overhead and G&A associated with it that we invest in," said Ballmer.  

Rupert isn't so sure. He writes:

At a Microsoft Research's open day at Cambridge recently, this line was promoted heavily in the keynote speech: fundamental research helps generate brand new technologies that give companies competitive advantages. In some cases, that's unarguable. If Intel shut down its research, it would die overnight. But what would happen if Microsoft stopped doing research? Based on the researchers' demonstrations, the answer is 'not very much'.

The ideas on show in Cambridge, while good and interesting, did not address Microsoft's core problems, nor even any of their minor ones. There was research into ecological systems, into displaying networks of influence, into low-power network hardware, into capturing people's lives as a timeline. Try matching those with any known Microsoft strategy — or any conceivable one — in a way that makes compelling sense.

Rupert was looking for something tangible. His big idea: Microsoft should scrimp on R&D and maybe even kill the research unit. While that may be a fine short-term move it would be a mistake. You can argue that Microsoft should refine its R&D approach to become more efficient. Perhaps Microsoft should focus more on commercialization. But dropping R&D completely would be a miscue. 

Gallery (right): What's brewing inside Microsoft Research?

Why? Every company on the planet is trying to reposition itself on this curve (graphic courtesy of Leaderpoint) below. Notice that branch at the middle of that graphic, which I scanned from course materials so apologies for the appearance. That branch---market development---is future business. Those future businesses are what R&D is all about.

You can certainly question Microsoft's approach. According to IBM research presented at its investor analyst meeting Microsoft has spent $36 billion on R&D over the last five years. IBM has spent $30 billion. Here's the chart:

Is there a return on research amid those billions of dollars or is it just about patent bragging rights?

Intel was left off IBM's R&D spending chart, but according to SEC filings the chip giant spent roughly $27 billion on R&D over the last five years. Much of that R&D has translated into Intel's manufacturing prowess, but what's the real return? 

Rupert mentions that Intel has delivered value from its R&D efforts, but that point can be debated. 

Following Intel's analyst meeting this week, JP Morgan analyst Christopher Danely made a few interesting points. First he pooh poohed Intel's talk of growth initiatives and remained decidedly skeptical. 

The company also spoke on its growth initiatives, largely centered around leveraging its Atom processor into the Netbook, handheld, consumer, and embedded markets. Intel stated its advantages are in process technology, scale, and platforms. The company also indicated it could command a premium in certain markets due to the desire for Intel architecture. We would note Intel’s revenue growth has only averaged 4-5% over the past 10, 7, and 5 years despite a multitude of growth initiatives and has been below the average growth of both US and world wide GDP.

Then Danely broke out this chart (click to enlarge):

In a nutshell, Intel's revenue growth lags GDP on average. Danely also notes:

We believe Intel’s disappointing revenue and earnings growth has been due to the disappointing returns on growth initiatives such as Itanium, Xscale, communications ICs, and Wimax over the past ten years.

Some of those aforementioned items used to be lumped into R&D spending. 

Tracking returns

Following the bouncing revenue ball is also difficult for other companies. IBM has really stepped up the commercialization of its research unit. Some of these advancements could be game changers. Others may just be a conversation starter that turns into a global services deal. Simply put, research is a fuzzy item. IBM has turned to more of a commercialization machine. Note the focus areas here:

IBM certainly seems to be better at commercializing its R&D---at least recently, but there are some duds there to be sure. R&D is often about failures too.

Simply put, it's difficult to draw a straight line from R&D to revenue. Innovation is sprinkled between multiple business units and its effect is often indirect. The IEEE Spectrum has a handy calculator that shows the top R&D spenders as a percentage of sales. The top of the list doesn't feature a lot of stock market all-stars. AMD, Micron Technology, Nortel, Lucent and Sun Microsystems were some of the top spenders as a percentage of sales. All of those stock charts---assuming they still exist---are disasters. 

Tracking returns on Microsoft's research is also fuzzy. A programming language, F#, has gone commercial after it was cooked up by Microsoft Research. Vista includes numerous Microsoft Research items. Surface may turn into something. Azure will definitely turn into something. You can find Microsoft Research's technology transfers on its site.

Meanwhile, Ballmer indicated that a lot of the R&D team is working on servers, a very profitable business for Microsoft. He said:

On the investment side, we just chose to take Windows and mobility, client operating systems all up, so that we could get a real comparison with Apple.  We think we're the big R&D spender in this area, but you should remember or R&D group is also doing shared technology for the server.  I didn't try to tear that apart, so some of those 8.2 thousand people in our case are actually working on server operating system technologies.  

How much has Microsoft Research produced in terms of revenue? Who knows. But it's clearly not something that should be jettisoned. The R&D call should be for more efficiency not wholesale cutting.

Reading list:

Topics: Intel, Enterprise Software, Microsoft

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43 comments
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  • Microsoft spend too much on R&D for the return, IBM spend right amount

    IBM has always been a set of collective businesses with a management that is without technology bias. This is a powerful formula for long term success.

    Microsoft by comparison is pretty much a one trick pony to date, with the Desktop being their jelly bean product, a success that they've failed to replicate in other markets to date.
    This is similar to Xerox.

    On the face of it, IBM's management is hardly ever in the news, predicting the future, and railing against competitors, whereas this is common in Microsoft.

    You could say that Microsoft's one off success was driven by the personal vision and drive of the individuals in charge. However, history pretty much predicts that this means there will be no follow up business. Xerox had Desktop technology, but failed to realise it. IBM had Desktop technology, but was outcompeted by microsoft.

    And in many ways, this was one big project: IBM funded microsoft's development, microsoft took on the team from Xerox.

    Microsoft won that by vision and drive. IBM will never have this vision and drive for one individual target.

    But then once the vision and drive for the single product is done, IBM keeps motoring on other projects, whereas Microsoft will probably continue to fail to succeed in other projects (but spend a fortune trying to replicate their success, which incidentally was largely achieved without massive R&D $$$).

    This is very much tortoise and hare. IBM's tortoise keeps rolling and lives to 100, the hare blasts along for a bit, maybe finishes one or two races first, but then drops dead.

    There is no right and wrong here. Our world is enriched by both development models, and would be worse without either of them.

    Microsoft could try to become an IBM, but I think Microsoft just isn't built right, and at the end of the day, how many IBMs do you need?
    stevey_d
    • That's not actually right you know

      MS is more than a one trick pony. Besides the desktop they're doing extremely well in the server market, the database market, the gaming console market, and they've diversified into a lot of different markets.

      Some markets they're pretty bad at (web search :)) but that shouldn't be taken as a sign they're bad in all markets.

      Besides, desktop isn't exactly a single trick you know. There's the OS, development tools, and office productivity suites to name three.
      wolf_z
      • i just wish

        that they'd have put more money towards Solid State disk file system research. They are doing it now, but didn't do it early enough to come out with Windows 7. And that makes me a sad panda...
        gnesterenko
      • They are loosing money on the Xbox...

        game console, it maybe popular but that does not mean they are making a profit from it.
        mrlinux
        • Actually, I believe they're at least breaking even on hardware

          Which means they're profitable. As of Jan 24 of 2008. Sorry to disillusion you... :)

          http://www.engadget.com/2008/01/24/xbox-goes-profitable-almost-like-a-grown-up-business/

          http://news.teamxbox.com/xbox/17952/Xbox-Division-Profit-Grows-Boosts-Microsofts-Financials/
          wolf_z
      • RE: Gauging the return on R&D: Do tech giants spend too much?

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  • RE: Gauging the return on R&D: Do tech giants spend too much?

    Lets see here:
    Microsoft = Successful business giant for 30 years, knows the numbers, and produces great products and quality software at an affordable price, has a whole R&D department, and releases a lot of their developmental R&D code

    Rupert Goodwin = blogger, no experience with R&D

    I'm going to side with Microsoft on this one and say if anything tech giants aren't spending enough on R&D. We need some new concepts to come out, change the landscape of computing all together.
    Loverock Davidson
    • zip [ x | x <- [1 .. 4] ], ["Research","Develop","???","Profit"]

      I think that's a false juxtaposition and a variation on "if you're so
      smart why aren't you rich." Not to say that your conclusion is
      incorrect.

      I really respect the work of the language guys at Microsoft Research
      and I think it's wonderful that the company has talent-spotted and let
      them go where they may. While their work has brought forth F# and
      added functional programming semantics into C#, these advances are
      prefigured by the advances in the Haskell language which is available
      cross-platform.

      One specifically looks at F# and one sees OCaml with hooks into .net.
      Now it seems to me that the inclusion of C# objects subverts the
      strong type system of OCaml, but perhaps that is a necessary
      engineering/economics compromise.

      It raises the question, though, why not just put OCaml into the
      Windows distribution as well. When the command line turned into a
      power user selling point, why not put in bash and develop powershell?
      How much of Microsoft R&D is spent on me-too concepts which have
      no justification beyond licensing politics and NIH vanities.

      I do believe in R&D expenditures. The obvious, inescapable
      observation is that there is no linear correlation between dollars
      invested and dollars of income increased. 40 years on and we still see
      the influence of Xerox PARC. Dollars returned to Xerox? Not so much.
      GDP generated from the research? Hundreds of Billions.

      I also wonder about big companies having difficulties recognizing the
      interesting ideas. (This is a variation on concepts found in "The
      Innovators' Dilemma") Inside the heart of a big business, the
      imperative is to find the next big revenue generator and partly in
      recognition of the graph provided above. Can IBM get excited
      about a 8 years down the road $50,000,000 revenue idea? I think the
      lawyers will advise you to patent the idea and sit back and wait for
      someone else to develop it and then sweep up licensing revenues.
      Clearly, for this latter business model, R&D is key. As are the lawyers.
      Can I get "Win Win" somebody? Can I get one with feeling?


      DannyO_0x98
  • It's not just how much you spend, but how you spend it

    R&D is crucial to tech companies, however spending on the wrong areas will yield poor results. When spending is directed in the areas where the company is strong in, the chances of a good return will be greater. Everything else is a gamble and unfortunately in the world of business you must gamble from time to time.
    T1Oracle
  • FOSS improves ROI on R&D

    What this article did not mention is how OSS leverages the R&D and spurs new products and technoogies.
    M$ can't justify its big R&D expenses since they've produced nothing.
    Their 'new products' are all from aquired companies and destined to die in the M$ graveyard.
    Linux Geek
    • Troll alert...

      ..didn`t i "pwn" your ass on a similar article, just yesterday, with a small list of MS innovations?
      Oh yeah...want me to do it again, with a different list?
      Soulstorm
      • Let's see the list. (nt)

        (nt)
        bjbrock
      • get writing

        Several others have produced lists. So far, they are not doing well. You
        could actually make a contribution to the conversation. But I'm guessing
        you are just bluster.
        shis-ka-bob
    • O'RLY?

      All of the big name OSS projects are attempts to copy and steal market share from Microsoft.
      -Firefox (I love BTW)
      -Open Office
      -Samba
      -WINE
      -Lindows

      Where is the innovation in OSS?
      mikefarinha
      • Technically Firefox was around before Internet ....

        exploder. It is a derivative of netscape.
        mrlinux
        • Mosaic

          Firefox was a derivative of Netscape which was a derivative of Mosaic. Do you know what else was a derivative of Mosaic?

          Here is a hint, it doesn't explode.
          mikefarinha
      • Samba antedates IIS

        And Ubuntu with Gnome, once it is set up, gives OS X a run for its money and trounces Windows on ease of use. My 87 year old mom can use Ubuntu, where Windows just terminally confused her.

        I forecast OO.o will start supplanting Office 'cause Office 2007's user interface is acceptable only if you prefer hieroglyphics to English.

        "Microsoft delenda est!"
        CodeCurmudgeon
      • Firefox 'stealing' from Microsoft !?

        What an odd view of history. The User-Agent string from IE identifies
        itself as Mozilla/4.0.

        If you open the ftp.exe that ships with WIndows, you will see the BSD
        license from BSD Unix.

        I could ask where is the innovation at Microsoft. But the truth is that
        innovation involves a great deal of copying what works. You then
        refine and improve.

        In your other example, you list Samba. Did they steal Microsoft's SMB
        or did Microsoft steal IBM's SMB? Microsoft uses a tweaked Kerberos.
        Did they innovate of just screw with MIT's Kerberos?
        shis-ka-bob
      • OpenOffice.org vs. Office

        OpenOffice.org is the open source version of StarOffice. Star Office
        includes StarWriter, which was originally written for the CP/M. You
        should remember CP/M. It is the OS that was copied in QDOS. MS-DOS
        was originally a QDOS clone.

        StarWriter was written in Germany, so that may explain why you are
        unfamiliar with its history.

        You really are batting 0 on your examples.
        shis-ka-bob
      • Stealing market share?

        "steal market share from Microsoft"

        How does one "steal" market share? My understanding of the market is that customers are entitled to take their business elsewhere if they believe that their interests would be better served with another company.
        Third of Five