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By Robert Hertzberg
Big technology companies are spending about $9.70 on research and development for every $100 they take in, with the spending being especially heavy in areas like virtualization and Internet-delivered software.
In total, the industry's top R&D spenders poured almost $51 billion into product development in 2007, according to a survey by CIOZone. But the spending was concentrated at the top, with Microsoft, IBM and Intel accounting for 38% of all research outlays.
Microsoft's spending topped $7 billion as the company poured hundreds of millions of new development dollars into its money-losing online services business. It also expanded its R&D operation in some foreign countries, including Israel, where newly hired engineers will focus on communications software.
Microsoft spent 12.8% of its 2007 revenue on R&D, well above the average of the companies on our list but not surprising given the many product areas in which it competes. Besides its core business of software, Microsoft is trying to improve its position in digital music players and Internet search. It trails the leaders in those markets, Apple and Google, by wide margins.
On an absolute dollar basis, no technology company in 2007 increased its R&D spending as much as Google. The company invested $890 million more in R&D as it expanded beyond Internet search into products like Google apps, which some people are using as an alternative to Microsoft's word processing, spreadsheet and presentation programs.
A lot of Google's increased spending was on new hires. The company added 2,093 engineers last year, a pace of more than 40 per week.
"Google is absolutely tops in the quality of people it's hiring," says Arvind, a professor at the Massachusetts Institute of Technology who goes by that single name and says that some of his best students are now working at Google. Both Google and Microsoft—another company that does a lot of recruiting at MIT—"still pay extreme attention to the quality of people they hire," Arvind says.
Other companies making big increases in R&D spending last year included the virtualization leader VMware ($285.9 million, up 93%), the open source vendor Red Hat ($91.1 million, up 47%), and the software-as-a-service pioneer Salesforce.com ($63.8 million, up 43%).
Yahoo's R&D spending rose 30%, passing the $1 billion mark as the company tried to narrow the gap in Internet search with its rival Google. It didn't work; during 2007, Yahoo's share of Internet searches fell five percentage points, to 23% from 28%, according to ComScore. Google's share of Internet searches jumped to 58% from 52%.
Indeed, the correlation between R&D spending and innovation isn't clear. In terms of proportional research spending, Apple ranked last on our list of top R&D spenders, with a 3.2% research and development outlay ($844 million altogether). Yet nobody would accuse Apple-creator of the iPod and iPhone-of not being innovative, or of not being able to transform its successes into bottom-line results. Apple's profit has grown an average of 62% over its last two fiscal years.
And a few of the companies on our list even lowered their level of R&D spending in 2007. One was Intel, which dropped spending on its Penryn family of semiconductors after introducing the new chips in November. The Santa Clara, Calif.-based company's R&D spending dipped 2% for the year.
A mile and a half away, another Silicon Valley company, the Java inventor Sun Microsystems, also lowered its R&D spending. Sun's spending fell 5.3%, to $1.94 billion last year from $2.05 billion in 2006.
In the last two years, Sun has ended its practice of avoiding layoffs, and its engineering department hasn't been spared.
But one sign that the company has held onto its most promising research initiatives has been a resurgence of its gross margins-the profit figure that shows how much pricing power a company has in its product portfolio. Helped by enhancements in areas like virtualization and energy-efficient computing, Sun's gross margins have risen to a six-year high.
Next: The List of 50 Biggest R&D Spenders