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Telecom R&D Spending Drops, Software Industry Up

IEEE Spectrum has just published their R&D 100 list.  They’re measuring the intensity of R&D spending in various sectors of the economy.  As they note, the telecoms sector continues to gut their R&D budgets, while the software sector continues to ramp. It’s been common knowledge for some time that carriers aren’t spending money to develop their own services.  This is just one more indicator of the extent to which that outsourcing of innovation is occurring.

On the other end of the spectrum, the software and services sector had the highest R&D intensity, 14.7 percent. The sector had only three firms in the Top 100—Microsoft, Oracle, and SAP—all packaged-software firms. Microsoft dominates the sector, accounting for 69 percent of its R&D, up from 59 percent five years ago. However, Microsoft dropped to No. 7 on the overall leaderboard after capturing the top spot for the first time in 2003.

Microsoft’s R&D spending decreased 20.5 percent in 2004 despite an increase in R&D employees. According to its U.S. Securities and Exchange Commission filings, the decrease was "due to lower stock-based compensation expense." As we discussed in detail last year, in 2003 the company began offering its employees stock-based compensation in lieu of options. This affected its R&D accounting significantly, because almost half of Microsoft’s employees work on R&D.

Unlike software and services, telecom services’ R&D has not kept up with sales growth. The sector has just three firms in the Top 100—Deutsche Telekom, Nippon Telegraph & Telephone, and DoCoMo. R&D spending dropped year over year for the sector in 2004. Although spending fared better from 2000 to 2004, growing 16 percent, it didn’t keep up with sales growth of more than 50 percent. As a result, the sector has the lowest R&D intensity, at 2.1 percent. Also worth noting is that, with the exception of Deutsche Telekom, no U.S. or European local telephone service providers, long-distance carriers, or cellular firms rank in the Top 100.

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