June 30, 2010: Apple vs. Google – Handicapping the Coming Battle for TMT Supremacy

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A brief audio review of this research may be found here: http://live.ssrllc.com/wp-content/uploads/2010/07/June-30-2010-Paul-Sagawa.wma

This note is intended to compare the strategic positioning of Apple and Google and to examine how the likely rivalry between the two is likely to shape the future of the TMT sector.  We do not provide research coverage of either firm and no company specific investment recommendation is implied.

Apple and Google are the #1 and #4 largest US tech companies by market cap, and have appreciated 669% and 122% respectively over the past 5 years.  It has become apparent that the two companies have targeted the same market real estate for future expansion, turning these erstwhile allies into increasingly fierce rivals.  While the potential of these target markets is likely great enough to fuel both companies’ success for the immediate future, in the long term, we believe that their collision course will favor Google at the expense of Apple.

The opportunities over which Apple and Google will do battle are four of the six technology disruptions that we believe that will drive the evolution of the TMT universe over the next decade, and the two companies are the only players with a stake in more than three of them.  Specifically, they will spar in smartphones, internet TV, cloud computing and telepresence.  Given the ambitions of the two companies, it appears unlikely that both will be able to meet expectations simultaneously.

Our reasons for favoring Google in these battles are seven fold:

  1. Google’s open and royalty-free licensing policy has attracted an all-star team of hardware partners committed to its software platforms, while Apple will play alone.
  2. Google outspends Apple on R&D 2.5 to 1, not including the Android/Chrome related spending from its ecosystem partners, which likely double the resources committed to Google’s platforms.
  3. In smartphones, Google updates its platforms several times a year, with hardware partners competing with each other to push the leading edge and adapt to changing market conditions, while Apple has been content to do a single iPhone model and software upgrade each year.
  4. Google’s ecosystem approach means a variety of choices for consumers and a wider range of channels vs. a one-size fits all approach for Apple.
  5. Apple’s lone wolf approach and aggressive tactics is earning it a reputation as an industry bully, which could translate into less willing content and application suppliers and even damage perception of the company amongst users and the media.
  6. Google has far more comprehensive approaches for internet TV and cloud computing, opportunities that could be even more attractive than smartphones.
  7. The war will be fought on Apple’s home turf, forcing it to play defense for its iPhone, iTunes and iPod franchises, while Google’s on-line advertising stronghold will be unchallenged.  As such, the risks of battle are asymmetric in Google’s favor.

The major knock on Google has been its inability to monetize its technology strength.  Its many popular software products are largely free to developers, hardware partners and users.  We believe this has been a choice made to maximize the adoption of its platforms by minimizing the perceived threat to its partners.  Google retains the lucrative potential of charging for elements of its technology in the future.  Meanwhile, the tide of consumer eyeballs migrating from channelized television to internet video will fuel significant growth for Google’s core advertising business.

Apple’s tight control has driven its recent success, with dominant device category market shares and extraordinary profitability.  However, going forward, it may become a liability.  First, the strategy leaves less opportunity on the table for others and aligns many potential partners – including content providers, applications developers, and telecommunications carriers – against it.  Second, there is not a lot of room for increasing market share and even less for expanding margins.  Finally, Apple’s strong handed tactics are subtly shifting the company’s image to that of a bully, possibly affecting consumer, media and industry enthusiasm for future innovations and bringing increased government attention.  An eerily similar scenario played out 20 years ago with Windows vs. the original MacIntosh, and we note that the mobile device industry has history of rapid market evolution and dramatic reversals of fortune.

In the near term, the momentum of iPhone and iPad appears to outweigh the immediate prospects of the internet advertising market.  As such, the relative performance advantage of Apple over Google may persist for several months.  However, longer term, we believe that Google and its ecosystem are better positioned for opportunities in Smart mobile devices, Internet TV, Telepresence and Cloud Computing than is Apple, and that it will have many opportunities to monetize those opportunities.  If so, Google’s success is likely to come at the expense of Apple, which could see market share and margin contraction.

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