Microsoft’s Anti-Google R&D Argument

At yesterday’s Microsoft analyst day in Redmond the company’s Craig Mundie put up a figure comparing cumulative R&D investment by major tech companies since 2000. Assuming the figures are correct (I haven’t checked them), it shows a huge gap, with Microsoft outspending most of its competitors, including IBM, and massively out-spending arch-nemesis Google.

Cumulative R&D investments since 2000

Compelling, right? Microsoft’s spending heavily on the Next Big Thing, while its layabout competitors, you know, aren’t.

Well, I’m not so sure. Google has added over a $100-billion in market capitalization during the period, while Microsoft has shed around $30-billion in market cap. Similarly, Apple has added around 30-billion in market cap, while IBM has shed around $20-billion.

If you were of a grouchy frame of mind as a long-suffering shareholder, you could use this slide to argue that Microsoft overspends on R&D and investors would be better off off if it spent way, way less.

Related posts:

  1. Microsoft’s Real Anti-Google Strategy
  2. Microsoft Girds for Google
  3. Google to Launch Web-based Spreadsheet App
  4. Microsoft & Google Go Mano-a-Mano
  5. “What’s to Prevent Google From Doing That?”

Comments

  1. John K says:

    Yes. Another way to look at that graph is the area under the curve is the “weight” of those 70,000 MSFT employees – 10x of Google.
    Cumulatively, it puts Microsoft in the dinosaur class. Right up there with IBM and Sony! Woo-hoo.
    At least IBM and Google has something to show for their research spend. What did Microsoft Research (perhaps 1/10th the total R&D spend) EVER create that paid for itself?

  2. Chris says:

    Exactly. Comparing themselves with google here is not a good thing — MS spending is not helping them win the advertising/search war.

  3. duncans says:

    Just curious…why wasn’t the slide titled “Look how incredibly inefficent we are at R&D spending?”

  4. Nitin Gandhi says:

    To be fair to Microsoft, they have $20 billion of R&D releasing in the Vista timeframe. This will translate into software sales over years. At PE of around 60 the market is valuing Google three times Microsoft.

  5. Rob says:

    Isn’t this a great example of diseconomies of scale and the agency problem – sorry to be such an economist.

  6. Charles says:

    Why not equate R&D spending with something a bit less emotionally-driven than market cap; say patent wins? IBM spends a lot on R&D, but the company has also topped lists of patent wnners for the past 13 years. In 2005, IBM had 2,972 patents approved, the first time the company fell below 3000 patent approvals since 2001. By comparison, IBM garnered over 1000 more patents than second place Canon (1837 total) and nearly four times as many as 18th place Microsoft (746 total).

  7. ian says:

    take it one step further and look at FCF generated off patents–some of the largest patent producers don’t do anything with all that (valuable) IP except use to to help determine salary increases with the R&D group. Of course IBM has been a poster boy for making use of these non-core/under $1b market size assets.

  8. mj says:

    msft is doing a large amount of BASIC research.
    stuff that won’t pay off for years or even
    decades. I don’t think the kids at google are
    doing this. here is a piece of free advice. if
    your don’t own msft buy it. if you own goog
    sell it. couldn’t be simpler.

  9. Part of the problem here is the naming of parts. Non-Google companies have clear R&D groups whereas Google has its 20% of all staff doing ‘research’ with a tiny number of actual research-staff-by-name. By blurring the lines I bet they can claim lower expense and higher yield.

  10. The comment that Microsoft invests in long-term research underlines one of the key factors here. What is the definition of R&D?
    If it is simply accounting speak, that tells us little about the stuff that actually goes on.
    http://www.sciencebusiness.net

  11. BW had a story recently on telcos and how Verizon SBC etc had lost Ma Bell’s R&D culture (Lucent et al). And why that has allowed Cisco and Juniper to exist and thrive. Markets are too dynamic and do not wait for companies to invest in R&D or not do it well. I think investors do tech companies a huge disservice by saying do not invest more than 10-15% of revs in R&D. The advice should be do whatever you need to – but do it well. We realize there are times you need a spurt. Like Intel recently has.
    From a buyer’s persective I would rather investors beat up on SG&A spend in tech – as high ar 45% in some s/w companies. What product innovation comes out of that? Or if a compnay has lost its ability to deliver new product (like MS may have) give me the money back in price cuts. Let me spend it on my own innovation budget with younger or companies that use R&D dollars efficiently…

  12. mabian says:

    NB: You can turn the chart upside down to reveal fertility of ideas during the pat six years.
    And remember, much of MSFT spending has been to fix the episodic Vista disasters. In case you missed this one:
    http://googlesystem.blogspot.com/2006/07/vistas-speech-recognition-demo-video.html

  13. sadagopan says:

    The best way to look at innovation activity is the rates of productivity improvement in value add inside enterprises measured against the number of employees Its clearly organizational interest, result orientation, quality of leadership and the latitude the research team has and the integration that business and research has within the enterprise that matters a lot. Clearly these are the factors that get severely affected when organization grows. It’s time to look at assessment of new product /new revenue streams coming out of enterprises(Microsoft in this case) lot more closely as they begin to grow.

  14. jam says:

    I paid part of this money,I have lots of (now useless)
    DOS Windows … boxes,R&D,They research a lot better they spend a lot but what they developed?
    IBM:we have carbone nano tube for the next generation of computers( microserves need it? has to pay for the license.

  15. Danno says:

    While this is not a defense of the expenditures of the *dinosaurs*, those companies are invested in a larger number of Marketshares than both Apple and Google.
    I would believe that they would still be spending a much larger amount if they were similarly invested, but I think the multiplier might be larger because of that.