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Could a lack of R&D spending threaten Apple\'s innovative run?

Even while Apple's revenue has skyrocketed in recent years — and even as expectations for future products and success have exploded — what the company has spent on R&D has risen only modestly, Troy Wolverton reports for TheStreet.com.

The financial journalist questions whether the company's skimpy research spending could ultimately jeopardize its unprecedented run of innovative product hits, and wonders how much longer the company can squeeze juicier near-term profits out of its R&D line.

As a portion of overall sales, such expenses have actually fallen by more than half, Wolverton wrote. Based on an analysis of recent SEC filings, last year Apple spent 3.8 percent of sales on development, and just 3.2 percent in its most recent fiscal quarter.

Still, Apple hasn't really cut R&D spending. According to Wolverton, the company spent $534 million on development in fiscal 2005, which was 24 percent more than it spent in fiscal 2001. However, he says the company has clearly been constraining the growth of development spending.

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

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

Already, Apple is reportedly being vastly outspent by its rivals. Both in dollar terms and as a portion of its revenue, Apple's R&D budget is said to be a fraction of that of competitors Hewlett-Packard, Sony and Microsoft. And unlike its rivals, Apple has to bear costs that many of its competitors don't, such as operating system development.

On the other hand, many analyst point out what's important is not how much a company spends on R&D but how well it spends it. "And for most of those analysts, Apple is a good example of a company that gets a lot of bang for its R&D buck," Wolverton wrote.

"You look at what Microsoft is spending on R&D and I guarantee there's wasted money there," said Roger Kay, founder of consulting firm Endpoint Technologies. "Look at what they've produced. It's not controversial that they haven't turned out 10 times as many great products as Apple."

A detailed breakdown of Apple's R&D spending, and comparisons to its competitors spending, are offered in the lengthy TheStreet.com piece.