Friday, February 22, 2008

Mind the Gap

Is Yahoo going to get got by M$? Doesn't matter really. They're both sucking wind – according to Brian Milner of the Globe & Mail. Of course, with revenues in the billions of dollars, when you suck wind, you suck all the air out of the room. What Milner is talking about is what Francis McInerney calls the Edison Gap. Which, as anyone who has worked for a tech company would recognize, is the common and natural habit of spending far too much on R&D compared to revenues. But what's a company to do? As a designer, I want every company to spend all their cash flow on R&D. Isn't that a good thing? Apparently not. Turns out, you should only spend as much on R&D as you can afford.

"The Edison Gap is a related performance measure that refers to the financial hole technology companies dig for themselves when they allow spending on research and development to outstrip operating profits. That's likely to happen when cash velocity is low and the flow of information slow."

This nugget of information coincided with reading that Yahoo! has folded up their Yahoo! Design Innovation team and had laid off everyone working there. Unfortunately, we were the benefactors of their innovative work rather than their bottom line. I guess if your profits are thinning and you keep spending on fancy stuff you can't use, then, you're in trouble. In short, Yahoo! is trying to decrease their "Edison Gap". I remember when Nortel tried to decrease their Edison Gap by laying waste to their design group. It didn't work out so well for Nortel which is still floundering after years of attempting a turnaround. Is that Yahoo's fate?

I guess this wouldn't easily happen to Google Labs because they would have to spend a bloody great heap of money on anything before they close in on their incredible revenues. Oddly, McInerney gives Apple full marks for getting the formula right. It seems Apple's R&D costs are proportionately half that of Microsoft's. Quality vs Quantity?

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