Amazon and Google Change the R&D Race
The numbers for another quarter are in, and it's becoming ever clearer that Amazon.com and Google's parent company, Alphabet, are pulling away from their U.S. peers in research and development spending:
As noted in the chart, though, there is something a little bit different about Amazon's (huge) number. There's no requirement that corporations report what they spend on R&D, and Amazon doesn't, exactly. Instead, it has a line item in its income statement for spending on "technology and content." It's been that way since the company's 1999 annual report (before that it was called "product development"), and in the 2010 annual report Chief Executive Officer Jeff Bezos offered something of an explanation for why:
All the effort we put into technology might not matter that much if we kept technology off to the side in some sort of R&D department, but we don’t take that approach. Technology infuses all of our teams, all of our processes, our decision-making, and our approach to innovation in each of our businesses. It is deeply integrated into everything we do.
I think that's more than just rhetoric. But I also wondered if it was starting to significantly distort the company's "R&D" numbers, given that Amazon is spending tons of money (more than $3 billion last year, by one estimate) on music and video content for its Prime streaming service. It turns out, though, that the "content" in "technology and content" doesn't actually mean content. That's what it says right there in Amazon's 2015 annual report: 1
Content costs consist principally of payroll and related expenses for employees involved in category expansion, editorial content, buying, and merchandising selection. Digital media content costs related to revenue recorded gross, including Prime Video, are included in cost of sales.
So that "content" spending is surely a lot less than the $3-plus billion spent on actual content -- although it does seem a little weird that, for example, the salary of Amazon Studios chief Roy Price may get counted as R&D. Also, while Amazon says in the annual report that its "technology" expenditures do "consist principally of research and development activities," that means they aren't all going to R&D, either. So Amazon isn't really spending $14.2 billion a year on R&D, but we don't know how much less than that it is spending.
With all that out of the way, here are the top 10 R&D spenders among publicly traded corporations worldwide:
The "publicly traded" caveat matters because Huawei, the employee-owned Chinese communications-equipment giant, reported spending $9.2 billion on R&D last year, which would have put it just ahead of Toyota on the list. (If readers know of any other privately held companies that might be in this range, let me know.)
At the rate they're going, Amazon and Alphabet -- neither of which was even in the global top 10 just four years ago -- will surpass Volkswagen soon to become the world's R&D leaders. Caveats about how much Amazon is actually spending on R&D aside, this is a remarkable development.
But it's analyst Michael Pachter of Wedbush Securities who kept me from making a fool out of myself. I only found the line in the annual report after he told me that "content" didn't actually mean content.
To contact the author of this story:
Justin Fox at email@example.com
To contact the editor responsible for this story:
Stacey Shick at firstname.lastname@example.org
To continue reading this article you must be a Bloomberg Professional Service Subscriber.
If you believe that you may have received this message in error please let us know.