MSFT Spent a Wopping $10.41B on R&D in FY 2013, But Does it Help?

by Radu Tyrsina
Radu Tyrsina
Radu Tyrsina
CEO & Founder
Radu Tyrsina has been a Windows fan ever since he got his first PC, a Pentium III (a monster at that time). For most of the kids of... read more
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Almost every week, we get to hear about some new project coming out of the Microsoft Research division, but almost never do we get to see an innovative and successful commercial product. At its latest earnings conference call for 2013, Microsoft has also made public fiscal results for the year 2013 which include the amount of money they spent on Research and Development. And it’s quite a number – 10.41 billion dollars.

The amount of money involved in Microsoft’s R&D division has increased year by year, as follows:

  • Fiscal year 2013 – $10.41 billion, represents 13% of revenue
  • Fiscal year 2012 – $9.8 billion, represents 13% of revenue
  • Fiscal year 2011 – $9.0 billion, represents 13% of revenue
  • Fiscal year 2010 –  $8.7 billion, represents 14% of revenue

We can actually see that Microsoft has lowered the percentage from 2010 to 13% instead of 14%, but the company has continued to report steady growth, therefore, the expense on Research and Development has been constant. Just to give you an example of a company that’s a master of earnings, Apple – the Cupertino company spends per annum only 3 percent of its revenue for R&D, which represents less than 5 billion dollars and two times less than Microsoft’s spending.

microsoft r&d spending

Huge spending on R&D and advertising with poor results

Probably one of the first projects that were meant to become successful commercial products is the Surface tablet. While the product itself can’t be called a total failure, as Microsoft stubbornly keeps on advertising it versus the iPad. Microsoft isn’t exactly a devices company, but it surely has experience in the field, thanks to its gaming console division. But it hasn’t managed to release a tablet that would impress consumers and subsequently, it had to write off $900 million of Surface RT tablets, caused by weak demand and a forced discounted price.

One would think that the marketing and advertising of the Surface tablets weren’t done properly, but if you have a look at numbers, you realize that Microsoft might be looking for a crown in this field, as well. According to Nielsen, the Redmond company has been the number one spender on advertising among tech companies in the latest quarter. The result? A struggling, almost inexistent Windows Phone and six million unsold Surface tablets.

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Maybe I’m missing something (and please, do correct me if I’m wrong) but why spend such a huge amount of money on something that doesn’t convert into a viable product? Or, you want to tell me that, as Alex Wilhelm with TNW puts it

Microsoft has an enormous appetite to hire brilliant minds, and let them tinker, play, experiment, and just maybe, produce something that it can turn into a one billion dollar business.

We don’t have yet fiscal results for other companies that might rival Microsoft on the top spot in R&D, such as Intel or Toyota, but Microsoft has always been among the first and now it can actually be the top dog.

It’s pretty hard to count all the “real” product effects of Microsoft’s R&D division, as most of them are small to medium software innovations. A laborious researcher on Quora has compiled a list (dates from summer, 2010) with such breakthroughs coming from Microsoft Research. We are not talking about the whole R&D here, only what we managed to find. We’ve tried to extract the most significant ones from the list:

  • Windows: Text-to-speech and speech recognition, IPv6 support
  • Xbox: Kinect motion capture and body part recognition, TrueSkill, a player ranking and matching algorithm for Xbox Live
  • Bing: Photosynth, a system for reconstructing 3D scenery from photographs used in Bing Maps Streetside, Clearflow/JamBayes, a traffic jam forecasting and avoidance algorithm used in Bing Maps directions, Twigg, a platform for real-time information processing used for live Twitter results in Bing search [16]
  • Microsoft Translator: a translation backend used in Bing Translator
  • Street Slide: a new way to browse street level imagery included in Bing Maps as Streetside [18, 19] (thanks to Mackenzie Price)
  • Office: SmartScreen spam filtering, Answering machine detection
  • SQL Server: Decision trees, Stacked indexed views
  • Windows Live Essentials: Group Shot, a way to merge multiple group photos to get the best one, Panoramic stitches,
  • Tablet PC: Digital Ink handwriting recognition technology
  • Hardware: Surface, started and jointly developed by Andy Wilson, Mouse 2.0, a series of gesture-based mouse prototypes,
  • RoundTable, a 360-degree videoconferencing device that detects who’s speaking
  • MSN: Comic Chat
  • Other: Songsmith, a musical accompaniment generator, AutoCollage, a photo collage generator sold as AutoCollage 2008

What I can add to the above are all those countless projects that have to do with screens, 3D screens, touch screens, interfaces, and so on. And to spend 11 billion dollars on Research and Development, when your business is mainly derived from software seems inexplicable to me.

What do you think, is this amount of money way too big or it’s just about right for Microsoft to maintain its leading position in software, to protect its patents, and try to penetrate the hardware field?

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