The Cost of Innovation in Virtualization and Cloud?

September 14, 2010

I was pointed the other day to a chart on the Business Insider ‘Chart of the Day’ (@chartoftheday) showing the R&D expenditures for a handful of tech companies, evidence of Apple’s supposedly superior ‘innovation’ compared to four apparently randomly chosen tech companies.

On the surface, I thought it was an interesting idea, so I looked at R&D spending in companies that are actually related, in the virtualization and cloud computing space. With a little research on Google Finance, I put together the following chart:

R&D - All

Source: Google Finance/SEC

While it is interesting to look at these numbers, and individual comparisons can be somewhat revealing, I don’t see a reliable correlation between technology innovation and R&D spending – either as a percentage of revenues, or an absolute amount.

I’ll just leave it here though. Feel free to comment on what you think this means.

Appendix: For the Inquisitive

If you are geek like me, you are probably wondering exactly what R&D means in context of publicly filed SEC documents. For the Generally Accepted Accounting Principles (GAAP), R&D is defined as follows

a. Research is planned search or critical investigation aimed at discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service (hereinafter “product”) or a new process or technique (hereinafter “process”) or in bringing about a significant improvement to an existing product or process.

b. Development is the translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use. It includes the conceptual formulation, design, and testing of product alternatives, construction of prototypes, and operation of pilot plants. It does not include routine or periodic alterations to existing products, production lines, manufacturing processes, and other on-going operations even though those alterations may represent improvements and it does not include market research or market testing activities.

Financial Accounting Standards Board, Statement of Financial Accounting Standards No. 2–Accounting for Research and Development Costs, October 1974, p5

The source also has a number of useful examples of what is and is not, considered R&D. Of particular note, the following are not included in R&D costs:

  • On-going efforts to refine, enrich, or otherwise improve upon the qualities of an existing product
  • Adaptation of an existing capability to a particular requirement or customer’s need
  • Legal work in connection with patent applications or litigation
  • Intangibles that are purchased from others … that have alternative future uses

You may also want to check the data for yourself too. It all comes from the most recent annual reports, as recorded in Google Finance. I have included the data below, with links to the original Google Finance pages. Hopefully I have transcribed it correctly. Enjoy!

Company Symbol Total Revenue ($m) Total R&D ($m) R&D (% of Revenue)
Microsoft MSFT 62,484 8,714 14%
IBM IBM 95,759 5,820 6%
Cisco CSCO 40,040 5,273 13%
Oracle ORCL 26,820 3,254 12%
Google GOOG 23,651 2,843 12%
HP HPQ 114,175 2,819 2%
EMC EMC 14,026 1,628 12%
Amazon AMZN 24,509 1,240 5%
Dell DELL 52,902 617 1%
VMware VMW 2,024 497 25%
CA Technologies CA 4,353 476 11%
Apple AAPL 15,700 464 3%
Citrix CTXS 1,614 282 17%
BMC BMC 1,911 196 10%
Novell NOVL 862 181 21%
Red Hat RHT 748 148 20%
Quest QSFT 695 144 21%
Salesforce.com CRM 1,306 132 10%
Unisys UIS 4,598 102 2%
Terremark TMRK 292 0 0%
Rackspace RAX 629 0 0%
Savvis SVVS 874 0 0%

Tags: , , , , , , , , , , , , , , ,

3 Responses to The Cost of Innovation in Virtualization and Cloud?

  1. September 14, 2010 at 10:54

    Thanks for compiling these numbers, Andi. My first reaction was, “VMware’s at the top of the list; they’re doing a lot of new, interesting stuff, so that makes sense.” But then I started thinking: a lot of VMware’s innovation/expansion has come from acquisitions and partnerships, not just R&D. These numbers are definitely interesting, but it’s too bad there’s no clear way to quantify “spending on innovation” and how it correlates with “actual innovation.”

    One trend I can spot here is that a lot of hardware vendors are low on the list; I wonder if that’s because of virtualization commoditizing the market?