Tuesday, February 10, 2009

Microsoft and R&D Spending

I'm far from being the world's biggest fan of Microsoft, but when shareholders are whining about R&D spending, I tend to sit up and take a bit of notice.

At $8 billion per year, Microsoft's R&D budget is enormous - especially when their revenues are $60 billion - that's about 13% of revenues. A lot by any measurement.

However, the investment community is being a bit silly here. Consider the following logic:

"During 2007, Apple spent $782 million on R&D, Oracle spent $85 million while Microsoft spent about $7.5 billion. In 2007, Apple annual revenue amounted to $24 billion and net income totaled $3.5 billion," says Montgomery. "According to 2008 annual report, Apple increased revenue to $32 billion and net income to $4.8 billion. During the same period Microsoft spent $8 billion on R&D and increased revenue from $51 billion to $60 billion. Therefore, Apple has a R&D budget that equates to approximately 10% of Microsoft’s; however, during this period Apple increased revenue by $8 billion and Microsoft increased revenue by $9 billion."

Let's get a couple of things straight here. R&D produces two things. Ideas, and product. (How much of Microsoft's $8 billion is upkeep on existing software? - who knows) However, neither of those equates to market share gains. R&D groups don't typically do a lot of marketing themselves.

Business growth is the responsibility of the marketing and sales arms of the organization - not R&D. Much of what an R&D organization does (especially in software) may not pay dividends for years - if ever. If Microsoft needs to be criticized by its shareholders, it's not on the subject of R&D spending, it's on the utterly clumsy marketing job they've done since about the mid-point of Windows XP's lifecycle.

Vista was a turkey beyond all turkeys. The packaging for it was awful - I still haven't figured out which version of Vista I would recommend for someone buying a new PC. Whoever came up with that marketing strategy should be fired - what a disaster!

Quite frankly, more recent offerings of the Office platform haven't won them any friends either. Lots of change, but nothing compelling enough to justify the cost of an upgrade; and completely new licenses are abusively expensive. Which leaves people looking at alternatives like OpenOffice.

If Microsoft has a problem, it's not R&D - it's in their marketing and image machine. Whoever's running that show just doesn't get it.

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