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Microsoft spent $2.6 billion for Advertising in the fiscal year ended June. Apple spent $1.1 billion in its fiscal year ended October.

Other companies will report their full year ad spending later but their previous years' spending is shown below.

I added a second graph showing the percent of sales that each ad budget represents. Note that Coca Cola retains the crown as the most prolific advertiser when it comes to budgeting. ((Think of it as 7 percent of every Coke purchase going to pay for the ad that presumably got you to buy it.))

However, Microsoft is climbing into a region of 3 to 5% of sales. What's even more striking is that we can isolate the revenues which are actually being targeted by the ads: consumers. Microsoft's Business and Server and Tools divisions may have some ad budget but it's likely to be much smaller than the Windows, Entertainment and Online divisions.

When the ad budget is measured as a percent of consumer sales, Microsoft suddenly looks like the biggest spender overtaking even Coca-Cola. ((Note that Samsung can also be similarly split into consumer vs. total.)) I don't know what to make of this. It seems extraordinary that Microsoft needs the same level of effort to sell software (and some hardware) as Coca Cola does to sell soft drinks. Coca Cola spends heavily to preserve brand value for what is essentially a commodity product. Is this the way to read Microsoft's marketing?

It's also interesting that Apple spends the least (nearly) in absolute terms and fractionally less (one twelfth) in relative terms. This is in contrast to the alternatives above. The stronger, more differentiated the product, the less it needs to be propped up by the ad.

 

For the year ending October Apple's R&D costs were $4.475 billion. These costs have been rising. Though, as the company explains, not faster than net sales:

The growth in R&D expense was driven by an increase in headcount and related expenses to support expanded R&D activities. Although total R&D expense increased 32% and 39% in 2013 and 2012, respectively, it remained fairly consistent as a percentage of net sales.

[My emphasis]

We can see this in the following graph:

R&D has remained very nearly 3% of sales since at least 2005.

 

SG&A Expenses barely grew however:

The growth in SG&A during 2013 was primarily due to the Company’s continued expansion of its Retail segment and increased headcount and related expenses, partially offset by decreased spending on professional services.

The change in R&D and SG&A on a full-year basis is shown below.

I emphasized the mention of increases in headcount. We cannot know with any precision what portion of last year's $15 billion in operating expenses went toward wage expenses since there are other costs such as advertising ((Apple's advertising expenditures for fiscal 2013 were $1.1 billion or 10% of SG&A or 0.64% of sales.)) commissions and public relations in the case of SG&A and outside services, equipment leases, in the case of R&D. However, it's more likely that wage expenses are a far larger proportion of total R&D than they are of SG&A.

My estimate, based on wage rates, is that there are approximately 15,000 R&D staff at Apple.

If we divide sales by this number we get $11.4 million in sales per engineer.

In fiscal 2013 there were 395 million visits to Apple retail stores. In 2012 there were 372 million.

The difference is approximately the population of Australia. This was in addition to the population of the US and Canada already passing through. Although this is a fun way to think about total traffic, it does not reflect performance of the stores themselves since new stores are always being opened. 21 new stores in 2013, to be precise.

The better benchmark should be the number of visitors per store.

This shows that, except for seasonal peaks, the visitors per store per quarter has been a fairly steady 240k since mid-2010. What's more, this rate was also remarkably steady at around 160k/store/quarter from 2007 to 2010.

So what caused this quantum jump (("Quantum leap" is often used to mean "giant leap" but in the original usage it meant a specific, discrete jump)) in traffic? Was it due to a re-design of the stores? Was it a change in product mix? Or was it due to a change in staffing rules?

I think we can rule out staffing changes. The data shows that staffing ramps with visitors and there was no specific "quantum" increase in employment (on a per-store basis or otherwise).

Re-design as a cause has some more merit. On one hand, we have seen bigger stores opening and many more flagship stores. We have also seen specific renovations of existing stores. We have also seen re-designs where the layout was changed to allow for more traffic. The only problem with this as a cause for the quantum leap is that these changes are constantly under-way and have been for some time. It's hard to point to a specific "big bang" redesign across the board in early 2010 as possibly a cause.

That leaves product. Here we have a clear suspect. The iPad launched exactly at the point in time when the visitor count leaped. In my opinion this is the best explanation.

Let's remember also the comment from Ron Johnson at the time of the iPad launch. He said that it was as if the stores were designed for a product like the iPad. In other words, the iPad is something that needs to be discovered with a retail experience. You can sense this when you visit the stores and the placement of the iPads within.

It all points to a something more profound: that the stores are brand ambassadors. Apple products create a purchase decision by speaking directly to  the users. For the type of product Apple makes, that conversation can only happen face-to-face. The place where this meeting happens is the store.

Apple's capital expenditures for product tooling, manufacturing process equipment, corporate facilities and infrastructure has followed very closely their production of iOS devices. The pattern is shown in the graph below.

Note that although reported expenditures did not match forecasts for 2012 and 2013, the differences nearly cancel each other. ((I suspect that the difference might be caused by a payment being brought forward in 2012.)) The company's forecast for fiscal 2014 is shown as well.

The orange line shows iOS unit production ((Technically, shipments)) with the scale on the right-side axis. Note the correlation with forecasts on CapEx. The relationship can be seen more clearly in the following scatter plot.

I added the 2014 Forecast ($10.5 billion from the latest 10-K filing). If the relationship holds into next year then the iOS unit shipments should be between 250 million and 285 million. ((The equation for the trend line shown suggests 285,908,000 units)).