Apple: Frugal to a Fault?

Last year, Apple spent 3.8% of sales on development, and it spent just 3.2% in its most recent fiscal quarter.

Apple hasn't cut R&D spending. The company spent $534 million on development in fiscal 2005, which was 24% more than it spent in fiscal 2001. But the company has clearly been constraining the growth of development spending.

While sales have grown at a compounded annual rate of 27% over the last four years, R&D spending has grown at an average rate of just 5.6% per year over that period.

"At some point, that reaches stasis," says Crawford Del Prete, an analyst with industry research firm IDC. "They can't take it down to 1.5% or 2% of revenue."

Part of the reason that Apple can't let its research spending decline much further is that the company has to bear costs that many of its PC industry competitors don't.

If it wants a new operating system for its Macintosh computers, for instance, Apple itself has to develop it; it can't rely on Microsoft(MSFT Quote).

Likewise, with so much of its brand reputation centered on developing distinct products, the company can't just rely on the latest reference designs from Intel (INTC Quote).

But even more than that, Apple is already being vastly outspent by its rivals. Both in dollar terms and as a portion of its revenue, Apple's R&D budget is a fraction of that of competitors Hewlett-Packard (HPQ Quote), Sony (SNE Quote) and Microsoft.

The vast amount of money that those companies spend allows them to introduce multiple product lines and spread their risks around, analysts say. Though the companies may have a lower portion of hit products, they're less likely to be hurt if a product fails, analysts say.

Apple's Squeezing R&D
	FY '05	FY '01
Sales	$13.93 billion	$5.36 billion
R&D	$534 million	$430 million
as % of sales	3.8%	8.0%
Net income	$1.34 billion	($25 million)
Compounded annual growth rate
(Fiscal 2001 to Fiscal 2005)
Sales	27.0%
R&D	5.6%
Note: Apple's fiscal year ends in September Source: Apple's annual reports, TheStreet.com's research

Low-Hanging Fruit
	Sales (in billions)	R&D in billions	R&D as % of sales
Apple	$13.93	$0.53	3.8%
Dell	55.91	0.46	0.8
Hewlett-Packard	68.95	3.49	5.1
Sony	63.66	4.28	6.7
IBM	91.13	5.84	6.4
Microsoft	39.79	6.18	15.5
Cisco	24.80	3.33	13.4
Research In Motion	1.35	0.10	7.5
Google	6.14	0.48	7.9
Adobe	1.97	0.37	18.5
Note: Sony's figures were converted to dollars at the March 14 exchange rate. Source: Companies' most recent annual reports.