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  • The Apple R&D Tea Leaf

    May 13th, 2016

    In wondering what Apple is doing to jump start the company after the March quarter debacle, some commentators have pointed to clues from the R&D budget. Apple’s estimated investment now stands at $10 billion for the year. It has steadily risen in recent years, so clearly something huge is afoot.

    One industry analyst, Neil Cybart, wrote some perfectly sensible comments in a widely quoted column in Above Avalon, a blog covering Apple’s business trends.

    Here’s the relevant paragraph: “Apple is not spending $10 billion on R&D just to come up with new watch bands, larger iPads, or a video streaming service. Instead, Apple is planning on something much bigger: a pivot into the automobile industry.”

    Now Apple has obviously not confirmed what products are being developed; some are obvious. Clearly there are many projects underway. The company is clearly looking for new revenue streams now that it seems the smartphone market is topping out in developed countries. While Apple may sell lets of gear in India and other countries, the era of overall double-digit growth appears to be over.

    So Apple would need to boost other revenue streams, such as iPads and Macs or make a breakthrough with the Apple Watch? With one billion activated devices, getting customers to pay for more services, such as Apple Music, or a video streaming service, only enhances their value. Services achieved double-digit growth in the last quarter, and the trend is apt to improve as Apple adds and improves them.

    Past the new generation iPhones, iPads, Macs and Apple Watches, is it all about a car? Probably not, even if Apple decides, in the end, to bring the rumored Project Titan to a production motor vehicle. Virtual reality may, as rumored, play a part on it.

    Now Apple has historically spent less of its revenue on R&D than other companies, but that shouldn’t reflect on the results. But when it comes to a new car, it’s going to be a costly proposition, even if it’s eventually built at someone else’s factory.

    I did a little research, and it appears that the starting price to develop a new vehicle is $1 billion according to autoblog. But that’s usually just for a model refresh. When it comes to designing a new car from scratch, with a new platform, new components, and a new engine, the estimate soars to $6 billion or thereabouts.

    But those numbers are for existing car companies, not to establish an all new company or division and setting up the design, manufacturing, support and dealer networks from scratch. I’ve little doubt the figures can grow to several times that top number. Thus the higher investment from Apple seems reasonable.

    The hefty cost of admission is one of many reasons why there have been so few new car makers in recent decades. Tesla Motors shows the potential of being the most successful new car venture in a long time. If you’ve been around for a while, you’ll remember the DeLorean Motor Company, which was founded in 1975. The company went out of business in 1982, in part because of problems with founder John DeLorean that ultimately resulted in drug smuggling charges. He was found not guilty in a 1984 trial, but that didn’t help save the company beyond the legend around it created by the “Back to the Future” movies.

    In any case, if any company can pull this off, Apple is first in line. The record shows how the company has confounded the critics in the past with major new products.

    Consider the iPod, something few took seriously as anything more than a Steve Jobs indulgence, such as the Power Mac G4 Cube. I know I didn’t pay it much mind at first, largely because I’d reviewed some digital music players for ZDNet in the years before the iPod arrived, and I found none of them to be remotely useful. The iPod did many things right that those products did wrong, and soon became a sensation.

    The iPhone was dismissed as another indulgence. Isn’t that nice? The Internet in your pocket, but don’t proper smartphones have physical keyboards? It was a serious argument at the time, but less serious when all the other companies decided to come out with gear using touchscreens that had more than a passing resemblance to the iPhone.

    Every single year since then, the critics have predicted that the iPhone will fail, with Samsung taking over. It hasn’t quite worked out that way. A key reason for flagging iPhone sales is market saturation, and the economic headwinds in China. So perhaps they’ll stabilize. But the product had a great run despite the all those dire predictions.

    Even though iPad sales have declined, so have sales of other tablets. Apple is still number one, and this product, this swollen iPod touch or whatever some thought it to be, will continue to survive.

    True, automobiles are way beyond anything Apple has ever done. CarPlay is just an interface for the infotainment system, and the Apple Car would be the first product that cannot be sold in an Apple Store.

    I am not making predictions about when it will come to pass, or if it will come to pass. But it sure explains that growing R&D budget.

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