Posted by: jhamon | June 14, 2009

Microsoft R&D: Much Spent, Little To Show

Hedge Fund Tracker asks what Microsoft has to show for years of high R&D expenditures:

Microsoft spent 46% more than the $6.5 billion IBM invested in R&D last year, 252% more than Oracle (ORCL) ($2.7 billion), 763% more than Apple (AAPL) ($1.1 billion), and 390% more than Google (GOOG) ($2.8 billion). Yet, most would conclude that Microsoft isn’t 9 times as innovative as Apple, despite the discrepancy in how much money it is pouring into its research activities. Beyond its Office, Client, and Server core franchises, it’s difficult to name innovations associated with Microsoft.

R&D spending can lead to blockbuster returns. And Microsoft has a big advantage relative to its competitors in that it can invest enormous sums for future product development. But Microsoft, in being proud of the fact that it can spend almost $10 billion a year on R&D, is like a driller of oil and gas being proud of the fact that it can drill thousands of dry holes. It doesn’t matter what you spend on R&D; it only matters what return you make from that investment for your investors. So far, Microsoft hasn’t delivered on its promises.

It’s a common problem of aging companies.  In Chapter 20 of Staying Ahead of the Curve, Michael Mauboussin observes that:

“Most of an entrant’s excess shareholder returns versus its industry come in the first five years.  In the subsequent fifteen years, the entrant delivers total shareholder returns that are roughly in line with the industry.  Twenty years after entry, a company’s stock tends to underperform its peers.”

For what it’s worth, Microsoft’s IPO took place on March 14, 1986That makes the stock 23 years old.


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