Angry shareholders say Microsoft squanders billions on pointless R&D projects

[zridling]

I missed this story:

"During 2007, Apple spent $782 million on R&D, Oracle spent $85 million while Microsoft spent about $7.5 billion. In 2007, Apple annual revenue amounted to $24 billion and net income totaled $3.5 billion," says Montgomery. "According to 2008 annual report, Apple increased revenue to $32 billion and net income to $4.8 billion. During the same period Microsoft spent $8 billion on R&D and increased revenue from $51 billion to $60 billion. Therefore, Apple has a R&D budget that equates to approximately 10% of Microsoft’s; however, during this period Apple increased revenue by $8 billion and Microsoft increased revenue by $9 billion."
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Tech stocks are rarely profitable on the long side. Don't they know this?

[justice]

Would like to hear someone's opinion on this, I never know how to take just the figures.
Common sense: To be fair Microsoft is many more markets than these competitors, therefore it has to stay in the forefront of R&D in all these fields.

[Dormouse]

The major MS income streams (Windows on desktop computers and Office and other apps on desktop computers) are under short-medium term threat so they need to reposition themselves. Not true for Apple or Oracle.

Apple's main USP is about design and much of the basic hardware R&D is done by other people. Oracle has a semi-monopoly in a specific niche and it is just a question of keeping it going and extracting the maximum $$$.

But MS has probably also got complacent and spendthrift from so many years of extracting the $$$ from their monopoly.

The other question I'd have is 'How much of the R&D spend is actually about buying our potential competitors or funding competitors to their competitors?'.

[40hz]

The numbers being thrown around are impressive...the righteously indignant tone comes through loud and clear...and check out all those the hot-button topics: corporate waste...mismanagement...robbing the shareholders...it goes on and on.

I can see it now:

TV Newsdirector to her staff somewhere - Oooh kiddies - sure looks like this one's gonna hit a spike on the 6 o'clock slot tonight! We can milk this non-story for at least a week! Start lining up the experts for commentary and find out what Geraldo's got on his plate. And somebody please call Ballmer and ask him how Microsoft intends to address this "new crisis." Be aggressive when you call. I hear he's got a short fuse. Maybe he'll loose it and give us a really good soundbyte!

 

Actually, the  bulk of this "story" seems to be the result of noises being made by a Mr. Craig Montgomery and something called The Crandrea Group. Supposedly this group is made up of shareholders, but details on Montgomery or this group are few.

So I'm going to say the blogosphere and media are once again running (and giving credence to) a bogus analysis put out by a crybaby.


A couple of things:

1. There is not a 1 to 1 relationship between R&D spending and revenues. If you increase or decrease R&D spending, you do not automatically get a proportionate  increase or decrease in revenues. If that were the case, savvy companies would either be spending everything they could on R&D - or eliminating it from the budget completely.

One observation that does seem to be true, is that tech companies that don't spend enough on R&D don't stay in business. The big problem is nobody can accurately predict just how much "enough" is.

2.  Some technologies cost much more to develop than others. For the most part, Apple produces what amounts to sophisticated consumer appliances. Most of Apple's "research" is in consumer marketing and design. They do little or no basic research. Microsoft does invest in research that furthers the state of the art. I don't think it's wholly accurate to compare the two companies in this area.

3. Revenues do not scale in a linear fashion. There are revenue peaks in dips in most industries. It is relatively easy to hit the $1 million mark. Economies of scale and more efficient marketing begin to cut in at a certain point after that. That's usually when you'll see the growth spurts a lot of tech companies experience.

But going from $20 or $100 million to $1 billion is a much more difficult proposition. Large revenue business have breaks put on them due to legal constraints, increased organizational complexities, shareholder interference (i.e. funds & institutional investors), and government regulatory agencies.

Once you're big enough, everybody wants a piece of your action.

And continued revenue growth always becomes more and more difficult as markets mature and reach saturation.

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My basic take on this story is that some investor, or group of investors, is disappointed with Microsoft's revenue and stock projections. And as is usually the case with these people, they're quick to apply stock market-style "technical analysis" to account for what is happening. But even though technical analysis is widely used (and garners much respect) in the investment community, it's still a pseudo-science. Beneath all the formulas,  charts, and esoteric terminology, it's just another horoscope.

And just making a statement doesn't prove anything, no matter how many numbers get cited to go along with it.
 

[Ehtyar]

God forbid a publicly floated company actually researches ways to improve their products to benefit the consumer, whilst providing additional revenue streams that will in turn benefit shareholders....morons.

Ehtyar.

[Eóin]

Expenditure on R&D is about the only way to ensure longevity. It would surprise me greatly if long-term investors were truely complaining. If you want to try and gain a quick profit invest in high risk and not the guy who holds the monopoly. He isn't going to risk it over some investors short term gamble.

[zridling]

Good points. Shareholders want one thing after putting in money: their money back and doubled! Spend any time listening to the business channels and those people have no clue about tech. They see only one side: how much money did you make for me today?

[Dormouse]

Expenditure on R&D is about the only way to ensure longevity.

-Eóin (February 11, 2009, 07:10 PM)

To the extent that this is true, investors are still left with the problem of deciding whether the R&D is going into a bottomless pit that will never produce anything worthwhile or whether it will pay off in the end. History shows a lot of big and very profitable (at the time) companies developing vanity R&D progs that seemed to add to their prestige within the community but never developed business gains in the end - and those companies eventually shrinking as their cash streams dried up. Investors are very aware of this and alarm bells ring if they see a company of this sort with high R&D - their problem is that they very rarely have the info or expertise to know if the R&D being done is really targetted at the medium/long-term interests of the business.

In practice, one of MS's most common strategies has been to buy in new companies and technologies rather than develop its own, and most of its profits have come from establishing and exploiting monopolies. And a fair bit of the development in its own products has come from copying ideas from competitors.

[cranioscopical]

They see only one side: how much money did you make for me today?

-zridling (February 15, 2009, 04:09 AM)

I take exception to the 'only'.
As for the rest, damn right, we're shareholders not philanthropists!
If there is a concern, shareholders must speak out.
It's then up to management to make its case for investment.
Profit today, or profit tomorrow (even short-term loss)... make a good case and shareholders listen.

[40hz]

They see only one side: how much money did you make for me today?

-zridling (February 15, 2009, 04:09 AM)

As for the rest, damn right, we're shareholders not philanthropists!

-cranioscopical (February 15, 2009, 11:32 AM)

Sounds more like you're a speculator rather than investor with a comment like that.

It's very dangerous to make the old 19th-century capitalist argument that a business's activities must be divorced from any consideration of social responsibility beyond what furthers it's own profitability.

That path always leads to war.

(BTW: I'm a shareholder, but I have no problem with philanthropic endeavors on the part of the companies I invest in. I view it as a reflection on character and integrity of its management.)

[cranioscopical]

BTW: I'm a shareholder, but I have no problem with philanthropic endeavors on the part of the companies I invest in.

-40hz (February 15, 2009, 02:13 PM)

Nor I, done intelligently it's all part of a sensible management strategy.

Sounds more like you're a speculator rather than investor with a comment like that.

Some of each.  In neither case do I invest in order to make a loss.

My point is that shareholders have a responsibility to curb management when it becomes necessary as well as the right to question management when they see fit.

[40hz]

My point is that shareholders have a responsibility to curb management when it becomes necessary as well as the right to question management when they see fit.

-cranioscopical (February 15, 2009, 03:01 PM)

That's an excellent point you're making. I am 100% with you on that.