I.T.’s Top 81 R&D Spenders

The biggest technology companies have been pouring resources into product development, but don’t look for a burst of innovative new business applications anytime soon.

A lot of the industry’s recent R&D spending has been on consumer products—things such as games and Internet services. To the extent that companies are developing business applications, their focus is more on enhancing existing products than introducing new ones.

Adobe is a good example. The software maker typically spends 90% of its R&D budget enhancing products like Acrobat, Photoshop and Illustrator that have been around for a decade or more.

“Some of our products are Version 12 or whatever,” says Leslie Bixel, director of technology programs at Adobe, which spent $540 million on R&D last year. “It really requires that we challenge ourselves to innovate and make sure we’re close to the customer to deliver new value.” Overall, R&D spending in the technology industry jumped 17% last year, according to a Baselinesurvey. The survey looked at 81 U.S. companies, more than half of them in the software business (see chart below). In a sign of how concentrated R&D is, the top 10 companies on our list invested $32.5 billion in product development in their 2006 fiscal years. That was almost seven in every 10 R&D dollars spent among the companies.

The biggest spender was Microsoft, with $6.58 billion. The software giant was an exception in that a lot of its R&D spending was devoted to new products aimed at businesses, including Office 2007 and the Vista operating system. But Redmond, Washington-based Microsoft also plowed significant sums into its Xbox 360 gaming console and Internet search.

That field is still dominated by Google, which more than doubled its R&D spending in 2006. Google’s $1.23 billion investment made it No. 9 on Baseline’s list, far ahead of competitors like No. 13 Yahoo ($833 million) and No. 21 EBay ($495 million). But even with its rapid growth in R&D last year, Google was able to devote just 11.6% of its revenue to R&D. The median R&D expenditure among all the companies we looked at was 15%.

When they’re growing quickly, companies usually have to invest development dollars just to fine-tune the products their customers are using. To some extent, this is a matter of protecting the cash cow—the iPod at Apple, printers at Hewlett-Packard, desktop applications at Microsoft. “If you’re a technology innovator, the moment you get ahead of the pack you have no option but to do research,” says Arvind, a professor at the Massachusetts Institute of Technology who goes by that single name and is an expert in research. That’s how “you make sure nobody can catch up to you.”

Technology products that become popular often require investments unrelated to the improvement of core features. For instance, years ago it was common for software companies to invest money in “platform extensions”—taking programs originally written for the Macintosh, say, and re-writing them for Windows or Unix. Nowadays, R&D dollars are flowing into other aspects of the technology “plumbing,” including stress tests of how an online service will perform when it’s being accessed by thousands or millions of users.

Even if companies wanted to risk all their R&D dollars on potential breakthrough products, or on developing enhancements to the most popular products they already have, they probably couldn’t do it, R&D executives say. For one thing, they couldn’t hire enough engineers.

“I don’t believe you can just throw a bunch of people at a single code line,” says Parker Harris, executive vice president of technology and products at Salesforce.com. “Oracle is not adding thousands of people to work on their core database; Google is not adding thousands of people to work on their core search technology. We’re not doing that either.” Instead, Salesforce—-a fast-growing vendor that about doubled its R&D spending in its last fiscal year—-is adding technicians to test the performance of new features as engineers create them.

The San Francisco-based company uses the Internet to deliver its customer relationship management software as a service, and is also using the Web to keep its expanding R&D program on-target. Last October, Salesforce launched something called the Idea Exchange, a variation on the consumer site Digg.com, that lets Salesforce’s customers vote on new features the company is considering developing.

Other companies have their own approaches to making sure the best ideas have a shot of getting funded. Much of the R&D effort at San Jose, California-based Adobe, for instance, is built around the familiar “stage-gate” discipline of reviewing early-stage products at regular intervals, with some getting killed and others continuing to get funded. But Adobe, now a $2.6 billion company, didn’t want to take the chance that some good ideas weren’t getting a hearing. So it created a position for an “idea mentor,” whose job is to make sure the creative sparks that fly around the company’s software labs don’t get extinguished prematurely.

The idea mentor is very popular, says Adobe executive Bixel. “He has a good sense of business—but that doesn’t really matter. His assignment is to encourage the engineers no matter what, and to make sure they get heard. As the company has grown in size, that’s one of the biggest challenges.”

Technology’s Top R&D Spenders

*For fiscal years ended in January 2007
Sources: Yahoo Finance, company reports