Jan 08, 2010 04:00 PM
by Darcy Travlos, forbes.com
While other mobile Internet companies chase after Apple and fail, Google is broadening its attack. Other developments over the past five months have brought it down to an Apple-Google ball game. Research in Motion ( RIMM - news - people ) suffered three outages in December alone, which has to create some consternation among corporate IT departments on the stability of the platform. Recall that the iPhone is either being deployed or piloted in 50% or more of Fortune 100 and Financial Times 100 companies.Palm lost its momentum with the Pre, and Motorola's thunder with the Droid was knocked for a loop with the introduction of the Nexus One.
Google has risen to the Apple challenge by taking a completely different tack than all the other competitors. Palm ( PALM - news - people ), Research in Motion, Nokia ( NOK - news - people ), Motorola, Samsung, et al, have tried to take Apple on at its own game by trying to make a better device or attacking one of Apple iPhone's perceived weaknesses to win customers through head-on assaults.
Google, cleverly, is broadening its assault by attacking on a number of fronts. Apple has exclusive relationships with carriers; Google is open to all carriers and, in fact, is offering its new Nexus One "unlocked." Apple is a closed system; Google is open. Apple makes its own hardware; Google licenses its software to hardware makers. Apple has its own retail distribution; Google to date is distributing via carriers.
Given the stark contrast between Apple's and Google's strategies and the recent disentanglement of the boards, investors are really focusing on the Apple vs Google battle to see who will win the mobile Internet war. My verdict--in the near term, they both win and other competitors will lose market share; over the longer term, they will redefine the old Microsoft-Intel investment thesis to an Apple-Google investment thesis. Apple has more momentum and focus, while Google has broader-based distribution.
First, over time, mobile advertising and search has the potential to be a more effective lead to actual purchases than does desktop advertising and search. The ability to target ads to consumers when they are in the vicinity of "point of purchase" will be extremely effective in generating sales. Both Apple and Google have recently purchased companies that enable them to deliver mobile ads embedded in applications. Thus, distribution of these mobile ads will be dependent upon the number of handsets that can deliver the ads and the number of apps that have ads embedded in them.
Currently, Apple has a head start in both camps, with over 30 million iPhones sold to date, with a 55% market share in OS requests in the US, an estimated 36 million to 40 million more to be sold in 2010 and 125,000 applications. By comparison, Google is just beginning although it is increasing at such a fast pace that Gartner expects Google's Android OS to increase from 2% market share in 2009 to the top market share of 18% in 2012.
Second, the age-old debate around "open" (a la Google) vs. "closed" (a la Apple) systems doesn't apply here. The knock against closed and the lure of open has always been innovation. People embraced "open" when "closed" did not meet all its needs. This was relevant years ago when the enterprise had IT departments that needed open, flexible systems in order to customize systems for their specific needs.
Mobility, on the other hand, is largely a consumer-based groundswell and customization is provided by third-party applications. In fact, Apple has overcome the legacy disadvantages associated with closed systems and boasts the greatest number of opportunities for users to customize their iPhones while maintaining all the advantages, namely quality control, of a closed system. Again, Apple offers approximately 125,000 apps to Google's 18,000.
Third, Apple has much more experience and is among the most successful companies in the world with product introductions. Over the next several weeks, Apple is rumored to announce its tablet or e-reader and is expected to begin selling sometime in the next three months. According to iSuppli, the e-reader category is expected to grow from 5 million units in 2009 to between 13 million and 15 million in 2010. A large potential catalyst for e-readers will be textbooks, and Apple has always had a foothold in the education market.
The concern investors will have when Apple introduces its tablet will most likely be the price point and, if so, this will offer investors a nice opportunity to buy on a dip. Apple has been successful at creating value to consumers at higher price points. Given its success with the iPod, the iPhone and the market share gains with Mac computers, track record is on Apple's side. In contrast, Google will leverage its Android OS and its digital library to power other hardware maker's wares, such as Spring Design. Google is expected to introduce its own Chrome Netbook and attack from a different category.
The tech cycle from the mid-'80s to the end of the '90s created enormous wealth, and we all wished for just one more shot. Here it is: the mobile Internet is a secular growth cycle with strong momentum. Today, according to Forrester, the portion of U.S. subscribers adopting smart phones increased from 11% in 2008 to 17% in 2009. Pyramid Research suggests that smart phone sales will capture 37% of all cellphone sales by 2014. The smart phone market expansion is underway, and it is going to extend to other categories, such as e-readers, or products like larger form-factor smart phones. Investors have the opportunity to take advantage of this new technology cycle still in nascent stages.