Software major Microsoft Inc. presented its annual strategic update to investors on 24 February. Chief executive Steve Ballmer defended the company’s plans to invest $9.5 billion (Rs47,880 crore) in research and development this fiscal year by drawing an analogy to RCA during the Great Depression.
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Ballmer says hard times are no time to cut back spending on research and development. He’s correct to a degree. But claiming RCA’s research in the 1930s led to decades of dominance in television, as Ballmer did at Tuesday’s annual presentation to the software maker’s investors, was a curious choice as an example.
“We’ve had our guys go back and kind of do a little reading, our small little corporate strategy group, on all of the economic downturns in the US that were driven by deleveraging of the economy, how long did they last, what did they look like. We even had some guys go through and read the annual reports of a bunch of companies from 1927 through about 1938 to try to get, well, whatwere those guys saying, what was going on, who did a good job?” he said.
“RCA, God rest them in peace, RCA became our role model. They actually kept investing in R&D (research and development) through the Depression period, and the post-Depression they dominated TV technology because they were really the only guys who had invested.”
Sadly, firms do pare back research budgets when times are tough. The reasons are the same now as they were during the Great Depression. Companies with troubled businesses and constrained balance sheets, such as cell phone maker Motorola Inc., have little choice but to cut costs wherever they can. Even investors in healthy businesses, such as Microsoft or Internet search leader Google Inc., can lose their taste for speculative projects and demand dividends instead.
This has a cost, however. Patent filings fell dramatically during the early 1930s and innovations such as FM radio and jet engines were most likely delayed by years. Investors missed out. Luckily, some firms kept investing in the future. New products find markets regardless of circumstance. By 1937, more than 40% of Dupont’s revenues came from products that did not exist before the start of the decade. And such spending can give companies an edge on rivals. Ballmer’s right—by pouring money into TV, RCA set the table for a 1950s feast.
So companies with a proven track record of innovation—such as networking group Juniper Networks Inc.—are right to resist market pressures and keep on investing. Those with a more chequered history of R&D success, such as Microsoft, may be on shakier ground.
But there’s a second part of the RCA story which Ballmer neglected to mention. The company also owed its television dominance to a massive legal campaign against one of the prime inventors of the medium—Philo Farnsworth and his company.
RCA eventually went on to pay royalties to Farnsworth, but the long fight enabled RCA to squelch the competition. Microsoft has a well-experienced legal team and plenty of rivals. Perhaps Ballmer’s learnt more from the RCA example than he’s letting on.