Apple Inc.’s (NASDAQ:AAPL) bread and butter is innovation. The company earned itself a spot in the pantheon of great technology companies with the launch of the iPhone and has maintained its commanding position in the market because of its ability to launch new and improved devices at a fairly frightening pace.
But innovation, as many long-term watchers of the tech market know, is hard to do consistently and continuously. Apple managed to leap ahead of the competition with the launch of the iPod, iPhone, and iPad, rare back-to-back-to-back successes that launched the company into the stratosphere. But now, some fear that the company has run out of mojo.
The problem (imagine air quotes around that word) is that Apple established its identity as a company that did not simply exceed expectations: It smashed them. During its ramp up — ostensibly beginning about 2005 but perhaps really beginning with the launch of the first iPhone in 2007 — Apple’s product releases repeatedly and reliably redefined the gold standard for must-have devices, and the enormous demand for the technology (plus the pursuant earnings growth) continually shocked investors.
Apple’s enormous growth was a result of innovation, but without the launch of another category-defining product, the afterburners have run out of fuel.
But while there is no real guarantee that a company will find the spark of innovation, a healthy budget for research and development can help foster the environment in which that spark can occur.
According to Apple’s fiscal 2013 year-end 10-K report to the U.S. Securities and Exchange Commission, the company grew its research and development budget by 32 percent to $4.47 billion this year. That’s about 3 percent of total net sales. In 2012, Apple’s R&D budget was about $3.38 billion, or 2 percent of total net sales. The year before, it was $2.43 billion, also 2 percent of sales.
“The Company continues to believe that focused investments in R&D are critical to its future growth and competitive position in the marketplace and are directly related to timely development of new and enhanced products that are central to the Company’s core business strategy,” the firm said in the report. “As such, the Company expects to make further investments in R&D to remain competitive.”
This may seem like an absurd amount of money to invest in R&D, but it is critical to do so in the tech industry. Google Inc. (NASDAQ:GOOG), for example, spent $6.8 billion on R&D in fiscal 2012 (about 13.5 percent of revenue), up from $5.2 billion in 2011 (13.6 percent of revenue) and $3.8 billion in 2010 (12.8 percent of revenue). In 2012, Google said, “We expect that research and development expenses will increase in dollar amount and may increase as a percentage of total revenues in 2013 and future periods because we expect to continue to invest in building the necessary employee and system infrastructure required to support the development of new, and improve existing, products and services.”
Is Apple likely to increase its R&D budget to the size of Google’s? In absolute dollars, it could happen in the future. As a share of revenue, it is more unlikely, given Apple’s enormous revenue stream.