Apple's Spat with Google Will Only Get Worse

 

Apple's relationship with Google recently reached a new low. The Cupertino, California, company announced it would drop Google Maps from the iPhone in favor of its own software and retire the YouTube app from the start screen of its mobile devices. It also launched legal action to halt sales of Google's flagship Galaxy Nexus smartphone, which it claims infringes on several of its patents.

Map attack: Apple’s Scott Forstall introduces the company’s alternative to Google Maps for the iPhone—an opening salvo in what could be a lengthy war.
Credit: Getty Images

The tussle is far from over. The direction that both tech companies are headed—toward greater reliance on mobile computing for their revenue—is setting them up for a long-term fight over the same technological turf.
Apple and Google have been fated to collide since at least the summer of 2005. By then it was clear to the leaders at both that mobile computing would become central to everyday life, and more important than conventional computers. Apple was working on the first iPhone, and Google had just bought a startup called Android along with the technology that would underpin its own mobile operating system.
For the first few years, though, the companies saw their missions as complementary, and they collaborated. Apple licensed Google's Maps technology to make the iPhone more appealing, and Google's then-CEO Eric Schmidt joined Apple's board.
"Apple and Google both saw Microsoft as a common enemy, and they had a highly cooperative relationship," says Hemant Bhargava, a professor of management and computer science at the University of California, Davis. "That honeymoon is now over."
Within a few years, everything changed. With phones and tablets ascendant, and Microsoft seemingly irrelevant, Apple and Google became focused on grabbing a healthy slice of whatever future moneymaking opportunities that allows—a realignment that has turned them from collegial frenemies into full-on foes.
Apple dumped Google Maps, says Bhargava, because it needs full control of its devices' most important features (see "Apple Charts a New Course on Mobile Maps"). But Apple will also begin expanding into new areas, says David Yoffie, a professor at Harvard Business School. He believes the company's focus will be the most likely source of mobile revenue beyond just selling devices—advertising. And this leads Apple directly onto technological ground that is firmly Google's, since ads provide almost all the search company's revenue, mostly via search.
Advertising represents both an opportunity for Apple to hit Google where it hurts, and potentially a new income stream alongside its high-margin gadget sales, which may dwindle in markets where smartphones are reaching the saturation point.
Could Apple go after Google's search and ads business directly? With over $100 billion of cash in its coffers, Apple could easily buy the expertise, infrastructure, and technology needed to build a rival search engine. But experience suggests that would not be enough to succeed. "Microsoft has cash, and you can see how much difficulty it's had in making its search engine [Bing] successful," points out Yoffie.
Indeed, Apple appears to be taking a different tack. Siri, the voice assistant that comes with the latest iPhone, has the potential to divert queries that would otherwise have gone to Google. Siri may now be relatively rudimentary (it is still labeled a "beta" product) but it has strong potential, and Apple appears committed to it (see "Social Intelligence").
At the same time, Apple is beginning to tussle more directly with Google for mobile revenue via its iAds mobile advertising service, launched by Steve Jobs alongside the iPhone 4 in 2010 (see "Jobs Shows Off Apple's New iPhone"). That was the result of Apple purchasing a mobile ad company called Quattro Wireless for $275 million in 2010. That purchase came only after Apple failed to buy a similar company, AdMob—which went to Google for $750 million.
Despite both company's best efforts, however, it is far from clear whether mobile ads will be as wildly profitable as Web ads have become. Neither Google nor Apple report the performance of their mobile ad businesses, but media reports suggest that Apple's has struggled to match expectations. Meanwhile, Google is still working on integrating AdMob with its existing ad technology, and Facebook's struggles to make mobile ads pay have spooked many tech investors (see "The Facebook Fallacy").
As Apple and Google seek a more reliable way to make money through mobile, they may well converge on the same solution. "It culminates in local transactions," says David Hsu, an associate professor of management at the University of Pennsylvania's Wharton School. "All the data available on mobile gives good leverage in making deals around local commerce."
Both companies are in a position to use the information smartphones gather about their owners to target ads, offer coupons and promotions, and to develop seamless ways of paying with a phone at the cash register.
Google's intentions in this area are particularly plain, the company having launched Google Wallet, and bought the local business rating and recommendation businesses Zagat and Frommers (see "Google Wallet: Who'll Buy In?"). Apple's aims are less clear, although it did introduce the wallet-like Passbook app that stores tickets and coupons, and has said that its new mobile maps will provide information on local businesses and available "deals."
So as Apple and Google contest more fiercely over mobile ads and local commerce, the fight between them could get uglier. A forthcoming report from Nielsen suggests that smartphone and tablet users have less need for the Web and for search. It found that searches for new information using a phone began with apps, not the Web, 80 percent of the time. Combined with Apple's growing control of mobile ads and commerce, this could pose an existential threat to Google.
Google's own figures show that in the U.S., 50 percent of searches for information on the Olympics were made from tablets or phones. This shows that user behavior is changing, and hints at Apple's opportunity to divert searches using Siri or other means.
Apple will need to excel in new areas of technology to press its apparent advantage. In the coming years, the company could dip into its healthy bank balance to acquire the resources it needs. "Apple has done a variety of things to make life as difficult as possible for Google," says Yoffie, "and there will be more to come."