Apple’s Innovator Myth

Many pundits have competed to offer superlatives regarding Apple. The innovation, the snazziness, the incredible success story…

As Apple grew in its dominance both on the consumer electronics market and the financial stock exchange, reasonable analysts started asking themselves when the hype would evaporate and the Apple bubble would finally burst. I’ve seen too many flame wars online between die-hard Apple fanboys and their equally relentless opponents from the Fandroid camp. Instead of adding fuel to the fire by going for the countless time through the same arguments that you can find on other sites, I thought I’d contribute by offering a slightly different perspective.

This post is part 1 in a trilogy that I have been meaning to write for a long time. In the ensuing paragraphs below, I use financial analysis — something that has been blatantly missing from most tech blogs’ posts and mainstream media articles about Apple lately — to dispel the myth that Apple is the great innovator in the smart phone space.

The other two posts in my trilogy focus on related topics:

  • Apple — Most Valuable but Also Most Vulnerable
  • Nokia — The Unsung Hero of Modern-Day Technology
  • I hope you’ll read the other two posts, as well. Meanwhile, if you want to find out why Apple is a marketing machine, not the incubator of innovation that it would like you to believe it is, first read my insights below.

    A few days before Apple released its newest iPhone 5, I read a very thought-provoking article by Dan Lyons, published on BBC News. Dan gained cyber fame a few years ago by running a “Fake Steve” blog where he pretended to be Apple’s late co-founder and former CEO, Steve Jobs. In his September 12 2012 BBC article, Dan brought up a very interesting point — that Apple’s spend on R&D (a widely used measure of innovation for most tech companies) looks surprisingly small.

    Inspired by Dan’s findings, I studied the income statements of Apple, Nokia, Samsung Electronics and RiM (the maker of BlackBerry). The insights from that follow below. Please note that all financial numbers in this post come from Morning Star’s free investor online service. Historical exchange rates for Korean Won to US Dollar were calculated using data from OANDA.com.

    Fact #1: Apple’s R&D Budget is Low, Very Low.
    Contrary to what most people would believe, Apple does not find it important to spend too much on innovation. Its R&D spend as percent of total revenue has averaged 4.35% over the past 10 years. Compare that to Nokia’s 12.19%, RiM’s 8.55%, and Samsung’s 6.07%.

    Before someone rushes to offer a hypothesis that Apple does not need to spend too much on R&D because it is ahead of the competition, please look at the company’s year-over-year record in the past 10 years. The Cupertino, CA giant has been consistently spending less than the competition — even if you go back to 2002. And that was many years before Apple released the first-generation iPhone and got an edge over Nokia or any of the other competitors.

    Below is a chart for those who like to visualize things:

    Fanboys may try to diffuse this attack on their beloved Apple by pointing out that the company’s sheer size dwarfs the competition, therefore rendering the R&D spend percentage of revenue minuscule. The hypothetical argument may center on the premise that while looking small in percentage terms, Apple’s R&D spend is large enough to outspend Nokia and the others.

    The bad news for those who may believe this argument is that the gap between Apple and the others is even more pronounced when expressed in absolute (dollar) numbers — only that it goes in the opposite direction to what they would expect. Apple’s 5-year average annual R&D spend is $1.49 billion, which is predictably greater than RiM’s $0.98 billion, but significantly below Nokia’s $5.80 billion or Samsung’s $5.23 billion.

    Let’s take a look at the chart below.

    In other words, Nokia has been outspending Apple on R&D on average 3.9 times over the past 5 years. And in 2007 (immediately after Apple released its iPhone and at a time when Nokia was still the “big whale” in the mobile world), that outspending peaked at 7.2 times!

    Fact #2: It’s All About Marketing, Baby!
    The following revelation should not be a surprise for most people, even those blindly believing in Apple’s innovator mantra. For most of its existence, Apple has been lauded by business experts for its marketing savvy. Therefore, it should not come as a shocker that Apple has spent on average 13.11% of revenue on Sales, General & Administrative (SG&A) costs over the past 10 years — compared to 11.14% for Nokia and 8.90% for Samsung. The only potential surprise comes from RiM — somehow I never pictured the BlackBerry maker as a marketing machine. But that company has managed to spend on average 16.76% of its revenue on SG&A.

    Interestingly, while Nokia has been fairly constant in its SG&A allocations over the years, Apple has drastically reduced its SG&A spend as percentage of revenue. I suppose this can be attributed to the luxury of being considered the “hypest” brand these days. When so many people blindly buy your products, you don’t really need to spend that much money on advertising.

    Even that, however, is only relative. Apple is more efficient in its advertising due to the positive externalities of its hip brand image, but is still one of the two heavy spenders. At $7.6 billion, it came very close to Samsung’s SG&A in 2011.

    Fact #3: Marketing Trumps Innovation at Apple — by a Large Margin.
    I hope that by now most of you have become convinced of the main premise in my post. However, if doubt still lingers in some of you, please take a look at the chart below. On average, for every $1 in R&D, Apple spends $3.14 on SG&A. In contrast, Nokia spends only $0.92 on SG&A for every $1 spent on R&D.

    Did these facts surprise you? Do you still perceive Apple as the great innovator? Or, rather, does Apple look more like the great master of marketing? Let me know your thoughts in the Comments section.

    Quick Disclosure: At the time of writing this post, I do not own stock in any of the four featured companies. However, after having followed the trends around Nokia, I am strongly considering buying stock in the Finnish tech giant, hoping to benefit from its much anticipated revival.

    This entry was posted in Business, Opinion, Technology and tagged , , , . Bookmark the permalink.

    6 Responses to Apple’s Innovator Myth

    1. Yiwei Lo says:

      Emil, what do you think of buying RIM in the hope that someone would come in and acquire it? =P

      • Emil_M says:

        Hi Yiwei! Good to hear from you!

        I’ve been thinking about RiM. And there were rumors before about Microsoft and Nokia buying RiM jointly. The problem is RiM employs its own OS, which would make it the fourth OS — counting iOS, Android and Windows Phone. I’m not sure there is scope for a fourth OS frankly speaking. WP’s main forte is its full integration with the upcoming new Windows 8. What will RiM’s value-add / point of differentiation be?

        • Yiwei Lo says:

          Agree! The prerequisite of the deal would be for RiM to give up its OS as seriously very few Apps are based on RiM OS… =.=a

        • Emil_M says:

          Very true. The question is how RIM can differentiate itself in the Android or Windows Phone worlds.

          Emil

    2. Mitko says:

      The analysis is not surprising to me at all. Actually all the comapnies can learn from Apple how marketing well 3 realatively simillar products iPod, iPhone, and iPad (or may be even 2 products since the iPhone is basically an iPod with a phone call capability) can bring more money than investing in many different models like Nokia did and still does. It is just easier and cheaper to focus your marketing and even your R&D on 3 simillar products than to invest in many different ones none of which to become a clear market leader. Also, don’t forget what makes the Apple products unique – it is not their processor power or capabilities – it is the unique design (most people like cool designs) and the relative ease of use.
      My oppionion about RIM – it soon will be renamed to RIP.

      • Emil_M says:

        Yes, you make good points. However, I’m not so sure the quasi-single-product line strategy would work for most companies. It didn’t work for Apple in the 1980s and 1990s anyway. They struck gold with the iPod and managed to capitalize it into the iPhone and iPad incarnations. The chance of this happening are low. But Steve Jobs took the gamble and won.

        Nokia does not have too many products. It has always operated with the mentality of 1 cheap, 1 mid-range, 1 high-end. That is a sound strategy. I’m willing to bet that once Apple’s hype starts decreasing, Nokia will return to one of the leaders’ spots. The fundamentals are there. Nokia and Microsoft just need to build momentum.

        RiM will be depressed for a while but will not go bankrupt. It may get bought by Microsoft and Nokia though. Primarily for the patents and email knowhow.

    Leave a Reply

    Fill in your details below or click an icon to log in:

    WordPress.com Logo

    You are commenting using your WordPress.com account. Log Out / Change )

    Twitter picture

    You are commenting using your Twitter account. Log Out / Change )

    Facebook photo

    You are commenting using your Facebook account. Log Out / Change )

    Google+ photo

    You are commenting using your Google+ account. Log Out / Change )

    Connecting to %s