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How Much Does Amazon Spend on R&D? Less Than You Think.

By Timothy Green - Updated Jun 13, 2018 at 8:35AM

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The widely reported number for Amazon's R&D spending is just plain wrong.

There's no question that (AMZN 0.19%) spends a lot of money on research and development. The company is doing so many things on so many fronts, from developing cashier-less stores to rolling out new cloud-computing services, that it's not surprising it's one of the biggest R&D spenders.

But exactly how big of a spender is up for debate. Back in April, Bloomberg published a chart of the most prolific R&D spenders. Large tech companies populated the top of the list, which wasn't surprising. What was surprising: According to the chart, Amazon is not only the top spender, but it outspends No. 2 Alphabet by $6 billion annually. With $22.6 billion of annual "R&D" spending, Amazon outspends Microsoft and Facebook combined!

That sounds impressive. It would be more impressive if it wasn't nonsense.

The Amazon logo.

Image source: Amazon.

Comparing apples and oranges

I put R&D in quotes above because that $22.6 billion number Bloomberg cites is not actually R&D spending. Amazon doesn't report R&D spending, so there's no way to know exactly how much the company spends. What Amazon does report is "technology and content" spending, which Bloomberg uses as a proxy for R&D spending. R&D spending is included in technology and content spending, along with a bunch of other stuff.

The Bloomberg piece points out that R&D spending and technology and content spending aren't quite the same. But the truth is, treating Amazon's technology and content spending as R&D spending overstates the company's true R&D spending by billions of dollars.

Not R&D

One thing I've always found weird about Amazon's accounting is how it treats its cloud-computing business. Nearly all of the costs associated with AWS are classified as technology and content spending, except for payment processing costs, which are classified as fulfillment spending. AWS is treated as if it has no cost of sales, which inflates the company's gross margin and seems downright bizarre to me.

This means there are a bunch of costs within Amazon's technology and content spending that are absolutely not R&D. Infrastructure costs, which include "servers, networking equipment, and data center related depreciation, rent, utilities, and other expenses," are a prime example. If you use technology and content spending as a proxy for R&D spending, you're treating the depreciation of computer equipment as research and development.

Depreciation is one thing Amazon does disclose. In 2017, the AWS segment booked $4.5 billion of depreciation. And because Amazon's retail business uses the same infrastructure, and the company allocates depreciation based on usage, some unknown portion of the depreciation expense for Amazon's other segments is also included in technology and content spending.

There's at least $4.5 billion of depreciation included in Amazon's technology and content spending, probably more. Add to that other AWS costs like utilities and rent that aren't R&D, as well as things like maintenance of websites and curation and display of products, none of which are disclosed, and Amazon's true R&D spending is likely in the same ballpark as other tech companies.

A big spender, but not that big

Of course, Amazon is still spending billions of dollars each year on genuine research and development. Exactly how much is unknown, but it's certainly not $22.6 billion. This number, whatever it is, is likely to rise as the e-commerce and cloud-computing giant hurls itself into new businesses and continues to invest heavily in its core operations.

A separate question is whether all of that R&D spending will yield adequate returns. Despite a wildly profitable cloud-computing business, Amazon doesn't make all that much in the way of profit. The market couldn't possibly care less, given that it's propelled Amazon stock about 73% higher over the past year despite a negative and worsening free cash flow. As always, growth trumps all when it comes to Amazon.

Thanks to Amazon's strange way of reporting costs, we don't know exactly how much it spends on R&D. But we do know that it's quite a bit less than the company's technology and content spending.

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