Apple results: Tim Cook commits to innovation to beat recession

Sometimes you have to wonder at the futility of it all. Apple [AAPL] returned new record results in its just-gone quarter, exceeding its own guidance, but analysts are grousing not because of company performance but on account of their own flawed projections.

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[ABOVE: Apple's death spiral. Not.]

We're all doomed

If you trust the analysts you'll think the company is doomed, doomed, doomed, but any softness in its results can be easily explained by slowing iPhone sales pending release of the iPhone 5 and an increasingly global economic recession that seems set to make The Great Depression look a little like a holiday.

That this impacts Apple is no surprise, what is surprising is analyst's seeming refusal to consider this point: If Apple is feeling the economic pinch, then so is everyone else.

Take a look at LG. That company has revealed lower quarterly profits as its mobile phone division lost a lot of cash (57 billion won) in face of stiff competition across the Android ecosystem and the constant challenge of the iPhone.

We know Apple has a raft of new products designed to shore up sales in the last calendar quarter of 2012. These might include the iPhone 5, MacBook Retina Display (13-inch), the iPad mini, iPod's touch and nano, the iMac and probably more. (Software highlights could include updates to the Mac and iOS versions of the iLife suite, for example).

The company has sailed through tough economic waters in the past. In 2000 during the dotcom bust, companies across the board trimmed their headcounts and reduced their research and development spending.

That's not what Apple did. It spent more on R&D, giving itself a head start on competitors as that mini-recession came to an end. That's why it surprised us all with the iPod, and laid the ground for its mobile evolution. And now, Apple's going to do the same again.

The importance of R&D

Take a look at what Apple CEO, Tim Cook, told investors last night during the company's financial results conference:

"Our North Star is to remain focused on making the world's best products. Economic turmoil may push us side to side, but we're going to stay on that journey and stay focused on making the best products and not deviate from that."

Cook stressed the effectiveness of this key element to Apple strategy within his conversation with analysts, explaining this has worked "again and again throughout the years."

The effect of the company's commitment to research and development with the goal of product design excellence has been (historically) that Apple has: "..distanced ourselves further from people that don't innovate… [it] increases the gap between us, and so that’s what we’re focused on."

Now consider the importance of the iPhone, iPad and other future mobile devices on Apple's bottom-line. Take a look at the excellent interactive infographic provided by Bare Figures for an example of this: it isn't just about numbers, but about dollars. Mobile is innovation's battleground today.

Apple's most recent financial report reveals an increase in R&D expenditure in real terms. In the nine months prior to June 30, 2012, the company spent $2,475 million on R&D, compared to $1,785 million in the same quarter one year ago.

Apple's unique position as a supplier of both hardware and software also enables the firm to closely integrate each component of its hardware with its software which helps it maintain a high-quality user experience across its supported product range.

The whole widget

So who is innovating in the mobile space? If we skip past the notion of devices, the true innovation sits within the software. This leaves three main players today: Apple, Google, Microsoft and to a lesser extent, RIM. Those are the only real mobile OS innovators of today.

Apple's determination to continue investing in research, product and software design puts Microsoft and Google under even more pressure. Windows 8 isn't even available yet and Google has a huge responsibility -- the need to continue to navigate a litigious competitor while delivering mobile device software that competes with iOS, and can continue to drive the Android device market.

That challenge is compounded by the likely impact of what appears to be an increasingly global recession on Google's chief business: the ads market.

Google's main business hasn't felt this impact yet, at least the impact didn't show up in its most recent quarterly results. However, cast your eyes at the firm's R&D spending and you'll see this remains flat at 13 per cent.

If as I predict the search giant begins to see some decline in its ads sales in the coming quarters, investors, competitors and Android partners will be looking at the company's R&D spend with interest.

If revenues do decline will the company raise this cost as a percentage of revenues as it should do in order to maintain Android development at the same level, or will it reduce that spending to continue to account for 13 per cent of what could be lower revenues?

Research and development spending will help define the future of the smartphone space. Apple is committed to maintaining this investment. Will competing device makers be able to maintain their investments within this fragmented and competitive industry, and will Google and Microsoft be able to maintain their own?

What do you think?

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Copyright © 2012 IDG Communications, Inc.

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