Apple Research: An Immodest Proposal

Steve Wildstrom / September 20th, 2013

A recent column by Brian S. Hall and a followup conversation in the comments got me thinking about one of his “wild and crazy” ideas for Apple: That the company should fund a research lab in the tradition of Bell Labs. And the more I think about it, the better an idea it seems. I don’t believe for a minute that Apple would do this; it just doesn’t seem to be their style. But that is a big loss for the company and the world of innovation.

Apple is sitting on well over $100 billion in cash that it has no real ideas about using. It’s giving some back to shareholders a dividends, is using some to buy back its own stock, and is letting the rest sit, doing no one much good. Using, say, $10 billion to endow Apple Research would be a gift of which Apple itself might ultimately be the greatest beneficiary.

The great industrial research labs arose out of special circumstances that made certain companies very rich. Bell Labs was a product of AT&T’s government-sanctioned monopoly. (Anyone who believes that lack of competition is necessarily the enemy of innovation should study the history of research at AT&T from the 1920s through the 60s.) IBM built IBM Research into a powerhouse during a period when it had an effective monopoly in computers. Xerox build its Palo Alto Research Center at a time when its dominance of the office copier business brought in big profits. Apple is nowhere close to being a monopoly, but it does enjoy monopoly-like profit margins.

The great industrial research labs arose out of special circumstances that made certain companies very rich.

Bell Labs in its heyday may be the best model. I have been looking into the history of mathematical research there for a project and have come to an interesting realization. Most of the esoteric math research at Bell Labs was actually closely tied to AT&Ts business needs. AT&T hired Claude E. Shannon, one of its most important scientists, because of his MIT master’s thesis, which created a mathematical model for a telephone switching system (and later became a model for digital computers.) His work on the mathematical theory of communications was very relevant to AT&T’s business as was mathematician Richard Hamming’s work on error-detecting and error-correcting codes.

Bell Labs researchers occasionally wandered far afield. But the Nobel Prize-winning work of physicists Arno Penzias and Robert Wilson on cosmic background radiation was the product of AT&T’s version of Google’s 20% time. Penzias and Wilson were allowed to experiment with an huge unused microwave antenna (photo above) that had been built for an early satellite communications project.1

IBM Research, too, did basic research that ended up making major contributions to the company. It’s groundbreaking breakthroughs include hard-drive storage and solid-state memory, both cornerstones of modern computing. Though IBM had to rein in many of the more freewheeling aspects of Research when the company fell upon hard times in the 1990s and most research projects today are closely tied to business units, IBM Research still manages to do a fair amount of basic science.2

Not all industrial labs are great successes for their sponsors. Xerox PARC famously developed such breakthroughs as the graphical user interface and Ethernet that the company failed to exploit. And Microsoft’s massive research effort remains something of a mystery in its failure to produce successful innovations for the company.

Still, by sponsoring a real lab, Apple could do well by doing good. It’s not that Apple doesn’t do innovative research; its products a patent portfolio attest to that. But the company has a tendency to acquire key technologies, such as low-power semiconductors from PA Semi or biometric sensors from AuthenTec, through strategic investment rather than develop them in-house. And the disadvantage of a too-focused R&D effort is that you are denied the benefits or serendipity that a more wide-ranging effort can produce.

If I were running the U.S. government, I’d offer Apple a deal. Most of its cash represents foreign earnings that avoid U.S. taxes as long as they remain in foreign accounts. I would offer tax-free repatriation of the funds Apple uses to set up a research endowment. The U.S. badly needs to increase research spending. But a federal government on a starvation budget can’t do it and private industry is not picking up the slack.

  1. For an excellent account of the experiment, see Jeremy Bernstein’s Three Degrees Above Zero.  And for a general history of Bell Labs, see Jon Gertner’s The Idea Factory. []
  2. In the interest of full disclosure–and parental pride–my son Jon is a research staff member at IBM’s Thomas J. Watson Research Center. []

Steve Wildstrom

Steve Wildstrom is veteran technology reporter, writer, and analyst based in the Washington, D.C. area. He created and wrote BusinessWeek’s Technology & You column for 15 years. Since leaving BusinessWeek in the fall of 2009, he has written his own blog, Wildstrom on Tech and has contributed to corporate blogs, including those of Cisco and AMD and also consults for major technology companies.
  • Great idea.

  • DAVID STEVENSON

    Just to run with this idea a bit: maybe some congressperson might sponsor a bill to grant a tax credit to any company for repatriated funds that are donated to the NSF, NIH or NEA. So, for example, if Microsoft donated $10B of repatriated funds to NIH, it would get a tax credit of $10B for additional repatriated funds, i.e. a 200% tax credit for donations for “research.”

  • Great column and mad mad respect to Claude Shannon – one of the brilliant ones.

  • Anders CT

    Promising tax-exemption in exchange for funding research is problematic. Every company would want to do that, and now you have the problem of assesing the quality of the research and examining whether the research would have been performed anyways, without the tax-exemption. It would be easy to repatriate untaxed profits by simply redesignating existing product development as “research”

    The US has very high corporate tax rates combined with enormous and easily exploitable loopholes and a very complex tax code. That problem should be fixed not made worse.

    • steve_wildstrom

      Providing a tax break in exchange for research expenditures is not a novel idea in the U.S. tax code. For more than 30 years, we have had an on-and-off Research & Experimentation tax credit that gives a corporate income tax credit for certain R&D expenditures, subject, as always, to some complicated rules.

      The forgiveness I propose would be many ways be easier because the U.S. is never going to collect taxes on that money as things stand. And I would require that the repatriated finds be used to create a research endowment.

      • Anders CT

        But I do think there is a way for the US governent to tax Apples profits. And that is to provide US companies with a lower corporate tax-rate without all the exemptions, tax-breaks and complicated rules.

        And maybe taxing shareholders dividends and capital gains is better that taxing corporate profits in the first place. I just think that tax-schemes that are amenable to be legally eploitated will be legally exploited. If not by Apple then by everybody else.

  • steve_webb

    The difference between Bell Telephone and Apple is that Bell Telephone’s being a regulated monopoly prevented it from profiting from many Bell Lab breakthroughs. When Apple invents something, it is free to develop the idea into a product if it chooses to do so. When Apple does not see an immediate application of an idea, it saves it in the hopes that one day….

    Bell Labs gave away the transistor, the laser, C, Unix, superconductivity, fiber optics, et cetera. et cetera, because it saw no future in which it could profit from those inventions. AT&T finally volunteered to breakup Bell Telephone in order to get out from under the thumb of regulation. The irony is that Bell Labs (Lucent) did not survive the breakup!

    Bell Telephone was regulated three ways: what products and services it could provide, how much it could charge for its products and services, and how much profit it could make. On the one hand, it researched ways to maximize profits given a regulated revenue stream; and it invented ways to expense what otherwise would be excess profit.

    People credit Tim Cook as the genius behind Apple’s operational efficiencies. In his day, Herbert Tannebaum was an equal genius. He was a genius of AT&T finance, managing to fund one of THE MOST capital intensive infrastructures given a fixed rate of return. Not all research, and not all innovation, has to do with products or services.

    I don’t know what to say about Xerox that could be considered rational.

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