What did Apple spend over $ 4 billion this quarter on its $ 4 billion Apple Park?
While R&D can often be considered secret expenses for a new blockbuster product, the reported figure refers to all investments related to unreleased products. It includes all of the software Apple builds, including this year's iOS 13 and macOS Catalina, advances in new iPadOS and watchOS, and Apple's development tool for Xcode 11.
Software investments also include Apple's work in developing the world's largest Augmented Reality platform, including this year's release of new Reality Composer shipping with ARKit 3. Apple is also expanding its investment in Machine Learning, along with other new development initiatives, including SwiftUI, Combine and Project Catalyst.
Catalinas Reality Composer makes it easy to build AR worlds for iOS users
Apple also uses its own development tools to build new and improved apps, including the new reminders and Find My Apps for both iOS and Macs, as well as rebuilding iTunes into custom apps for Podcasts, Books, TV and Music that will now work consistently across platforms. Apple also continuously enhances free apps, including photos, messages, FaceTime, Pages, Numbers and Keynote that work across platforms to enhance the experience of users investing in Apple hardware.
Hardware and Silicon R&D
R&D also includes product development of brand new machines such as the revamped Mac Pro, the advanced Pro Display XDR, and the brand new architecture including Onboard Infinity Fabric Link, support for new MPX expansion modules, and the new Afterburner card with a custom field programmable Gate Array for fast accelerating tedious workflows in the media.
Afterburner installed in a Mac Pro
The reported R&D figures also fund the development of custom Apple silicon-powered advancements for iPhones and iPads, as well as the new T2 chips that bring iOS security , encryption, media management and camera processing features for new Macs. Apple's advanced custom silicon work also promotes the development of Apple Watch and AirPods with advanced, ultra-efficient wireless and high-performance processor packages that competitors can't access.
Apple separately purchased Intel's wireless baseband processor team, enabling the company to expand its custom chipset to include a specially developed integrated mobile modem for its mobile devices, ranging from iPhone and iPad to Apple Watch, and conceptually to and with mobile Macs the future. This work will complement existing work on building custom SoC subsystems ranging from ML accelerating Neural Engine to the relatively new Apple GPU and other custom controller sub-processors that handle storage, encryption and image processing logic.
R&D for Services
Along with relentless hardware and software improvements, R&D is also funding the software that drives Apple's Services push, something many tech media personalities failed to understand the purpose of earlier this year.
The development of Apple's new cross-platform TV app with support for individual subscription channels, as well as efforts to support new Apple Arcade titles on iOS, TVOS and Macs, both required considerable work. Both are examples of areas that Apple's competitors do not invest similarly in TV boxes, tablets, and desktop computer platforms.
Apple Arcade is a major ecosystem extension for Apple platforms
Apple is also unique in its ambitious efforts to expand to subscription content with AppleTV +. It finances its own alternative to Netflix, Amazon Prime Video, and the offerings of various studios that produce original content. It's a costly proposition, but Apple's huge cash portfolio means it could invest liberally in funding new content development, even though it has a global position to have created a tight ecosystem of wealthy buyers who now involve well over a billion active entities .
Registering and retaining subscribers is one of the biggest problems for companies like Netflix. But Apple already sells a portfolio of services to its huge installed base, ranging from Apple Music to iCloud storage and the new News +.
R&D also includes the money invested in developing the Apple Card as an app-centric service that leverages the global work the company has already invested to make Apple Pay the most popular way to make secure online purchases. With Apple Card and Apple Pay Cash, the company will have an even closer relationship with customers, making it much easier to offer paid upgrades, hardware replacement software, entertainment and information services.
Apple Card required R&D to deliver
Apple also spends significantly on free-to-use initiatives that enhance the value of hardware products. This includes the updated street-level "Look Around" maps, which it expects to expand across the United States this year and eventually bring to other countries. The company is also aggressively expanding its vast global leadership in supporting Siri in most languages. iOS 13 brings new language support to India, where Apple reported new growth in the quarter. Much work remains to be done to extend free services including news, maps and Siri to other countries and languages, but Apple is now running a series of R&D centers around the world to work on these language locations and regional customizations.  Apple's service segment now raises over $ 11 billion per quarter, largely from managing third-party subscriptions through the App Store. As Apple's platforms become increasingly important, this growing service revenue will allow the company to leverage its work to create secure, privacy-centric platforms that do not rely on surveillance advertising. All of Apple's competitors – especially Samsung, Huawei and other Google and Microsoft platforms licenses – currently ship phones, tablets, PCs and TVs priced so cheaply that they are forced to rely on spyware and tracking revenue by users to make money from their hardware and software.
A significant change from Apple in the 90s, or Google today
While Apple is now spending more than it has ever had on R&D, the rapid pace of new introductions to hardware products, new silicon, new development tools, new apps and new services are also happening much faster than ever before. In particular, Apple does not develop a series of conceptual products or whimsical public initiatives that go under development for years before being abandoned or let down in the market.
Apple's R&D expenditure. Source: Ycharts
In the 1990s, Apple's Advanced Technology Group burned through money developing concepts and working on prototypes that went largely nowhere. Apple invented email protocols and search systems and mobile ideas, creating the precursor to RSS and consumer hypermedia and VR surround video and advanced typography, only to lose out on faster innovators or others who got their work done and finally brought products to market.
The failure of ATG's R&D to generate sustainable revenue capable of supporting future research made it a money pit of the size of Xerox PARC or Bell Labs before it, where advanced technologies were developed at extraordinary costs but effectively made money elsewhere. Apple's past era of inefficient spending is now being repeated on Google, where today's tech media is cheering on impractical concepts like the modular Project Ara phone or wildly experimental Google Glass, and many other expensive moonlighting projects that either fail to take off or burn off tons of money that doesn't actually come to the moon.
And while Apple's current R&D budget is the highest ever – at about five times the pace of consumption when Steve Jobs was alive – it is relatively low compared to other high-spending colleagues. This includes Amazon, Alphabet, Samsung and Intel, which all spent significantly more money on R&D than Apple last year, while delivering less valuable technology that is unable to keep up with Apple's valuable innovations.
Apple's R&D Capability for Immediately Practical Applications — From paid hardware and services to free apps, OS upgrades, and development tools that enhance its ecosystem and attract and retain buyers — the company earns so much money that its effective R&D budget continues is an extremely small percentage of revenue.
Analysts have critically criticized both the amount Apple is spending on R&D and the fact that colleagues are spending more. This spring, Wedbush analyst Dan Ives said that despite all its R&D spending, "we've seen minimal fruits of that labor," indicating that Wedbush doesn't really understand what R&D is, nor what Apple is developing. And in parallel, Bernstein analyst Toni Sacconaghi announced that there is a "somewhat strong correlation between R&D as a percentage of revenue and gross margin," concluding that "Apple could double R&D and be relatively in line with peers," again confusing spending money with to make valuable products.