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:
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.