The wireless industry doesn't seem to have been slowed much by the recent economic downturn. CTIA calculated the U.S. wireless industry invested around $310 billion in 2010. Further, industry watchers in 2010 saw the introduction of Apple's iPad and a wave of other tablets, widespread LTE deployment by Verizon, and 300 percent growth in the use of Android.
And wireless companies' research and development spending also appeared to continue unabated--not surprising given the cut-throat nature of competition in the industry.
Thus, we've taken a look at the research and development habits of some of the wireless industry's top vendors, in terms of spending. The chart below breaks down key self-reported data on these vendors: Alcatel-Lucent (NYSE:ALU), Apple (NASDAQ:AAPL), Ericsson (NASDAQ:ERIC), Motorola, Nokia (NYSE:NOK), Qualcomm (NASDAQ:QCOM) and Research In Motion (NASDAQ:RIMM).
|$3,125,319,000||$3,510,379,400||5.50%||15.6% of revenue||$12,722,817,600|
|Apple||$1,333,000,000||$1,782,000,000||34%||2.7% of net sales||$22,730,316,000|
|Ericsson||$4,998,955,698||$4,998,698,399||0%||15% of total sales||$32,196,800,000*|
|Motorola||$1,591,000,000||$1,479,000,000||-7%||12.9% of revenue||$11,500,000,000|
|Nokia||$7,792,198,300||$7,731 ,538,100||-1%||13.8% of net sales||$42,400,000,000*|
|Qualcomm||$2,440,000,000||$2,549,000,000||4.46%||23% of revenues||$11,000,000,000|
|RIM||$684,702,000||$964,841,000||29.03%||6.5% of net sales||$14,953,224,000|
|* reported as net sales|
Simply comparing each of these vendors, however, isn't useful. Apple, a device maker, clearly has different spending habits and resources than Alcatel-Lucent or Qualcomm. And Ericsson, for example, employs 20,000 people solely to work on research and development. Thus, it's best to compare companies with similar goals. Charles Golvin, an analyst with Forrester Research, emphasized this point.
"First of all. it is important to stress that the types of R&D that Ericsson and Alcatel-Lucent invest in is different than RIM or Apple, a device maker," Golvin said in an interview with Fierce.
Peter Jarich, an analyst from Current Analysis, concurs. "[R&D spending will] vary by each of these companies, but obviously we are talking about mobility here. Alcatel-Lucent and Apple compared, they are going to be interested in very different things. Beyond design, Apple focuses a lot on software compared to Alcatel-Lucent. That said, one thing that is probably a thread across the space is software and applications," Jarich said.
Here's a breakdown of each major player and how analysts see their R&D spending. Not surprisingly, no company provides many details into exactly what it's spending its R&D dollars on:
Alcatel-Lucent reported R&D expenses of over $3.5 billion dollars in 2010, after a net impact of capitalization of $1.6 million dollars of development expenses. Alcatel-Lucent also reported that its increase in R&D expenses is due to an increase in pushing new product development and the "unfavorable currency impact of the strengthening of the U.S. dollar on our U.S. dollar denominated expenses."
Fernando Donoso, senior analyst with Maravedis, sees Alcatel-Lucent as going in the right direction. "My feeling is that the investment in end-to-end solutions is appropriate. Both companies [Ericsson and Alcatel-Lucent] are preparing for the time when wireless infrastructure becomes commoditized and mobile broadband coverage is truly ubiquitous. That could take five, 10, or more years, but as infrastructure providers these are companies that think in the long term. In terms of their R&D on base stations, Alcatel's cube seems to be a very advanced device which is probably the state of the art in transceiver/antenna technology."
In addition, Donoso said: "In terms of R&D spending, I think both of them are spending a lot of money on developing the end-to-end solutions they offer their operator customers. This strategy does offer opportunities to increase the value the operators can derive from a quality-enabled, application aware end-to-end IP network, but it also serves to keep as much as possible of the project dollars in the end-to-end vendor's hands as well. Examples of their solutions include Ericsson's recent announcement that it has developed a content delivery solution in partnership with Akamai, or Alcatel-Lucent's single platform for element management across their mobile network."
In 2010, Ericsson invested 15 percent of its total sales into R&D, and 80 percent of its product development is software related. Fiscally speaking, Ericsson leads the pack with almost $5 billion invested in R&D in 2010, $2 billion more than competitor Alcatel-Lucent. Ericsson, however, did not increase its R&D investment from 2009 to 2010, spending approximately $5 billion both years.
"Given their long histories in the telecoms arena, it's not surprising to find that both Ericsson and Alcatel-Lucent also carry out more fundamental R&D activities closely tied to the radio base stations, which is where the rubber meets the road so to speak, in the wireless world. Ericsson develops their own ASICs for their base stations, which they believe gives them a performance and cost edge over their competitors. Ericsson also holds the biggest portion (25 percent) of the essential patents related to LTE," Donoso said.
In addition, he said that "Ericsson's answer (the AIR -- Antenna Integrated Radio) does not appear as strong from a straightforward technological perspective, although Ericsson knows an awful lot about what operators really want to do with this stuff, and may have concluded that a more conservative approach was appropriate. In addition, Ericsson's decision to develop their own in-house ASICS for their base stations is something that might raise a few eyebrows. Although it's believable that it gives them an edge in cost, they acknowledge that it's a slower process than using commercial chipsets and/or DSP-based approaches. Also, I think a lot of people would say that as the power of commercial chipsets and DSPs increases, any advantage gained in terms of performance or cost is likely to shrink over time."
Rob Enderle of the Enderle Group sees Apple as the only industry player spending enough on R&D. From 2009 to 2010, Apple increased its R&D spend by 34 percent to $1.78 billion dollars.
"With the exception of Apple and possibly Qualcomm, the rest of these companies are dramatically under-spending in marketing and don't have that much to show for their R&D efforts. I think most should have shifted more of this money to demand generation because it matters little what you build if no one wants to buy it," Enderle said.
Jarich postulated that Apple may be spending more money than its competitors on software development. Enderle agreed: "Generally, companies focus R&D on next-generation products and key technologies that they hope will make them more competitive. For instance, Apple [focuses] on advancements in core technologies to next-generation iPads, iPhones and iPods."
Golvin said Apple's moves might not be as easy to predict. "As far as Apple goes, Apple is such a black box it's hard to ascertain. When you look at the range of patents that Apple tends to apply for, a lot of them tend to rely on user interface and ways of interacting. It continues to be a big investment for Apple," he said.
Both Jarich and Golvin said Nokia should spend less R&D on Symbian in future years as the company transitions to Microsoft's Windows Phone 7 as Nokia's primary smartphone platform. Indeed, Antti Rinne of Pro, Finland's biggest private-sector office-worker union, recently told Bloomberg that up to 6,000 research jobs at Nokia could be cut in the midst of this transition.
"It's kind of tough to say what the [R&D] payoffs are until we realize what becomes of this stuff," Jarich said. "Nokia's platform, Symbian, is one of the best examples of a setback, an over-investment that hasn't paid off. A better question now is how [will] some of these [investments] really pay off in the future."
The problem, however, is ascertaining when, if ever, investments will pay off for companies. Items currently being researched could take three to five years or more to hit the market.
Golvin predicted that Nokia will work to dramatically draw down its R&D spending--the company is essentially turning over much of its R&D work to Microsoft. He said that "a lot of that investment will just turn into savings, in terms of less manpower."
Research In Motion
Analysts generally said RIM, another device maker, faces the same issues as Nokia and Apple. RIM had the second largest increase in R&D funds from 2009 to 2010, yet significantly trails the overall R&D spending of Nokia and Apple.
"Personally I think across the device markers, I wouldn't be surprised to see a lot of R&D investment in MEMS technology [Microelectromechanical systems]. When you look at phones today, they have a lot of sensors in them to interact with the real world--camera, microphone, barometer, gyroscope," Golvin said.
RIM likely is spending much of its R&D money in the coming year on its QNX platform, which powers its PlayBook tablet. The company has said it plans to retire its current BlackBerry operating system and use QNX to power its smartphones in the future.
In its annual report for 2010, Qualcomm reported that its R&D has been focused on the development of OFDMA-based wireless communication technologies.
"Parts guys like Qualcomm typically invest in ways to excel in a hot area, in this case mobile wireless, and likely are focused on speed, security and energy conservation," Enderle said.
"Qualcomm has invested a lot of money on the BREW platform--a platform for entry-level phones--and I'm not sure if that's going to pay the dividends, just with the proliferation of low-end Android devices," Golvin said.
While Qualcomm is generally viewed as a hardware company, it also produces software, which Golvin noted may be important in the future.
In January, Motorola split into two different companies, Motorola Mobility and Motorola Solutions. However, in 2009 and 2010 the company reported a combined R&D figure.
Motorola's R&D expenses have been decreasing significantly over the past three years. It decreased spending 33 percent from 2008 to 2009 and 7 percent from 2009 to 2010. In 2010, Motorola's spending dropped to $1.48 billion.
In 2009 and 2010, Motorola made a huge shift to begin aggressively marketing smartphones over feature phones. Motorola's mistake, as Enderle explained, was wasting time using other companies' operating systems for its phones.
Motorola is "clearly now regretting their move to Android, and are now making their own operating system which is what worked with Apple," Enderle said, referencing rumors that Motorola is working on its own smartphone OS.
Enderle also suspects a large chunk of Motorola's R&D budget went into entering the tablet market. Motorola "made a huge development in tablets with the Xoom tablet," he said.