Is Siri An Android Assassin?

Includes: AAPL, GOOG
by: Bill Shamblin

Apple (NASDAQ:AAPL) has a unique strategic opportunity to leverage the Siri product to redefine online search in the mobile space and capture a huge competitive advantage in the mobile space.

The rapid migration of users from PC to mobile computing platforms has Apple well positioned to loosen Google's (NASDAQ:GOOG) stranglehold on online search as well as blunt the Android onslaught in the mobile marketplace.

First, consider Google's current Android strategy: the Android operating system is provided at no cost to mobile manufacturers. This business model allows Google to capture the mobile search revenues from Android handsets. While this strategy currently provides little in the way of revenues for Google - I've seen revenue estimates for Android ranging from $3 to $20 per handset per year - Google is willing to forsake short-term profits based on the objective of gaining a majority share of mobile search as it has done in Internet search.

Given the vast majority of Google's profits are derived from search results, and the rapid transition from a computer-Internet-connected-world to an all-things-mobile-world, Google is focused on effectively monetizing mobile search and gaining a major share of the space. For Mountain View, making a profitable transition to mobile search is a key foundation to company growth.

Now consider Apple's business model: the company views software and services largely as value added to their hardware; software and service products are used to differentiate Apple hardware, drive sales and create a "sticky experience" for the user. In other words: Apple revenues for software and cloud services are a relatively an immaterial percentage of company revenues; while search services for Google are paramount.

Now consider Apple's Siri product, portrayed as a virtual personal assistant in the company's advertising. Imagine the long-term consequences if Apple adopts a search model that provides "free advertising" for businesses via Siri. Businesses would then compete on mobile search placement based solely on relevant search criteria - the company's products, services, location, consumer recommendations, pricing, etc. The incentive for businesses to pay for Google's mobile services would be seriously eroded, while the incentive to share information with Apple, in the hopes of garnering better search placement, would be increased.

Here are a few thoughts on why "free ads" might be a viable strategy for Apple and the company's Siri product:

  • Apple doesn't need to make money off of search, remember, the company's raison d'être is to sell hardware. Period. To Apple, ad revenue might be a valuable alternative source of revenue (consider the company effort with iAds), however, the ability to profoundly disrupt and change the mobile search business model significantly affects Google's ability to compete in the mobile space.
  • By providing an easy "mobile ad kit" to all businesses Apple could quickly acquire valuable information to supplement their mapping application (i.e. the business names, locations and detailed information on business services and products).
  • Siri could be opened to developers, shifting search revenues to developers, further increasing iOS's value in the development community.
  • The opportunity to increase the value of Apple's mobile products via higher value search results for the mobile user (content relevance, consumer feedback and product details would be king in search, while promotions would be tailored based on consumer preferences, not by search term bids).

Over the long term, it might be possible to bring "free ad" search to all search platforms, as Siri is rolled out to computers, tablets and iTV(?), further encroaching on Google's business model. Taken to the extreme, this concept of "free ads" to sell hardware could prove to be as disruptive to advertising as iTunes was to music.

Apple wants to own the world of high-value personal computing. Given the excess of revenues on Apple's balance sheet and the immediate opportunity available for significantly expanding their hardware footprint in mobile, going to a "free ad" model in the mobile space could provide Apple with a key source of leverage for continued growth in the mobile space.

Disclosure: I am long AAPL, GOOG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.