Friday, December 11, 2009

The Googlification of Apple

Even 5 years back, if someone said that Microsoft would be irrelevant in the technology world today, they would be laughed at. Today, MS is not only irrelevant, but doesn't look like it can regain its stature any time soon. For a long time, people thought it was because of Windows Vista - but even the launch of Windows 7 does not seem to have changed much.

Today, Google and Apple seem to have a monopoly on mindshare - everyone is on top of what these 2 companies are up to. At one point, it looked like these two companies were partners against a common enemy - Microsoft - but as MS has become irrelevant, it looks more and more like Google and Apple will end up competing with each other. In a way, Google taking the mass market route and moving up the chain, whereas Apple already owns the high end consumer, and is looking to move down the chain to the value conscious consumer. Each has different strengths that will help it fight the other.

Google has always based itself on search - even today, despite having fingers in so many pies, 97% of Google's revenues come from Search. In a way, all other activities at Google are being subsidized by the massive revenues Google makes in Search. Because of this, there is absolutely no way any company can challenge Google in any of its initiatives, unless they can challenge Google's ownership of Search. In a lot of ways, this is similar to MS owning Windows and Office, and using the revenues from those areas to muscle into a lot of other areas.

Apple on the other hand has always been a high margin player - they don't do anything unless they can make 30% margins on it. Because of this high margin threshold, Apple has always been a small niche of the market. Despite having a small % of market share, Apple has always had a disproportionate % of mindshare. Because of this mindshare, Apple actually comes across as a bigger threat than it is.

Google has always operated from the traditional mindset - that no one wants to pay for anything on the internet anyway, so might as well give it to them free, and make money displaying ads to them. Apple on the other hand has shown that people are willing to pay if they get a valuable product/service at a reasonable price. These are two diametrically opposite business models, but Apple has an advantage that they can extend their business model to make money from ads - but Google has not had success in making money out of anything but Advertising, related to their domination of search.

Over the last 2-3 years, we have seen moves by Apple and Google that position each company as a competitor to the other. Google announced Android soon after Apple's iPhone, and now with Chrome browser and Chrome OS, they are stepping on Apple's toes as well. Similarly, Apple made a big push into Cloud Computing with .Mac and the Mobile Me - which are competing services to Google Apps.

Considering the friendly relationship between Apple and Google in the past - to the extent of having a board member in common, it is a fairly major thing when you see the relationship turning into unbridled competition - especially note the tepid reaction to Google Voice at Apple, and Google's complaint to the FTC regarding the same. The gloves are now well and truly off.

Google today owns AdMob - and strangely, is now in a position to make more money off the Apple AppStore, than Apple makes. Apple has made it amply clear that the 30% it gets from the paid apps barely covers the costs of running the store - because of the fact that most of the downloads are not paid for - they are either for free apps, or for upgrades of already paid for apps (on which neither Apple nor the App seller makes any money). Google on the other hand now stands to benefit from the AppStore because it now controls the largest ad seller for the iPhone. How long will Apple allow Google to make money from the AppStore, while Apple pays all the bills, and barely breaks even?

When Version 4.0 of the OS and the new iPhone are launched by summer 2010, I think Apple would have taken some steps to remedy this situation. I foresee that Apple will come up with its own equivalent to AdMob, and offer the same 70-30 model to the app developers - basically keeping 30% of the ad revenues to cover the costs of running the store. To avoid FTC and monopoly issues, they will likely offer a deal where the free apps have a choice - stay totally free with no ads, pay a flat fee for hosting at the store and use any Ad service to make money, or go with Apple for Ads in exchange for free hosting. This will be a direct attack on Google and AdMob - but is inevitable.

The competition between the iPhone and Android also makes it inevitable that Apple will eventually take away Google's special status on the iPhone - by offering Maps and Youtube alternatives that are not from Google. There is already an initiative to replace Maps, but Youtube might not be replaced anytime soon, just because there are no viable alternatives at the moment. But I can easily see Apple building out a Youtube like service within iTunes, and give people a way to make money off their home made videos. They have the basic infrastructure in place, just need to beef it up significantly. Who knows, maybe this is the reason behind the massive data center coming up in North Carolina!

Considering that mobile is becoming a very significant part of internet access, and will only gain more prominence in the future, this move by Apple will be a direct challenge to Google's ownership of Advertising revenues. Remember, it is not Search per se that is lucrative for Google, but the Advertising dollars that Google gets because of its ownership of Search. Once Apple gets a foothold into the Advertising space with the AppStore, it is a lot easier to extend that reach to other areas - like the iTunes store, etc. And Apple's ownership of iPhone and the AppStore mean that Apple can easily extend this domination to all aspects of the iPhone - including Mail, Browsing, Apps, Music etc. The same targeted ads that Google serves up on the desktop can be done by Apple on the iPhone. Arguably, Apple can even charge a premium on these ads, because the audience served by Apple is the high end consumer - Mac users are way high end compared to the average desktop user, and iPhone users are high end compared to the average mobile phone user.

Like Google, Apple is also making grand moves - that are targeted at platform ownership and dominance. The only difference is that Google is doing the same without making money off of these moves, whereas Apple has managed to dominate music, movies and mobile in a profitable way. They are now making attempts to do similar things in the print publications space and in TV. This is one area where Google also has a lot of interest, and it is likely that Google and Apple will go head to head in this space as well. Google has a headstart in terms of converting books to electronic formats, etc., searching and giving access to the websites of magazines/newspapers, online Video distribution, etc., but they have not figured out ways to make money off these initiatives. Apple on the other hand has the model where they can make money off device sales, planned obsolescence cycles (no user replaceable battery), etc.

Today, it looks like Google is stepping on Apple's toes, and competing with Apple - but in reality, Google is trying to protect itself so that it stays relevant in the future. They know that the kind of domination Apple has, in important areas like music, mobile, online movie distribution, etc., can easily be extended to compete with Google. Apple has done the hard work to build the platform, and has even managed to make money while doing so. The moves Google are making today are actually defensive moves, to ensure that Google will also have a say in an Apple world, and Apple wont run away with all the profitable areas of digital content.

In the next 2 years, we will see the tide turning, and we will see Apple stepping on Google's toes a lot more. So many people have tried to fight Google and have failed - so people assume that Apple has no chance if they try to fight Google. But what most people dont realize, is that the Microsoft's and Yahoo's of the world dont have the type of advantage Apple has, if Apple decides to take on Google. Apple owns/dominates several important industries, so they can fight the battle in ways that other people cant.

Both companies have massive warchests of cash, both have immense goodwill in the markets, and at the same time both companies have detractors. This will be an great story.

Remember, you read about this here first. No other blog, web site, newspaper or magazine has seen this coming yet. Even today everyone looks at Google as the unstoppable juggernaut. But it is Apple that has all the trump cards in this fight.