Turf Wars: Apple And Google Face Off

| About: Apple Inc. (AAPL)


In the past two weeks, both Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL) have made large acquisitions of mapping software firms. Google purchased the Israeli startup, Waze, for approximately $1.1 billion just one week ago. On Friday, Apple confirmed its purchase of Hopstop, a public transportation routing platform. What is intriguing about both purchases is the fact that both apps operate in the mobile space on both the Android and iOS platforms. Although Google has had made numerous apps for the iPhone, Hopstop will be Apple's first app for Android.

Google's Acquisition

The most obvious motivation for Google's purchase is to strengthen its foothold in mobile mapping. Google's first foray into maps for the iPhone was clearly lacking in some basic functionality such as turn-by-turn directions, and was eventually banished from the iPhone concurrently with the launch of iOS 6. Apple replaced Google Maps with its own native Maps application, but released an underdeveloped version of the app which disappointed users. Apple eventually allowed the Google Maps app back into the app store in recognition of the shortcomings of its own app. Even with the subsequent updates, Apple Maps lacks functionality.

I began using Waze in one of its first incarnations, and was impressed with the app. Since I don't drive long distances, the social side of the app was irrelevant to me. When I took a trip to Israel in January, I decided to take the app for a spin in its home country. While driving with the app off in the familiar Arava region I noticed odd traffic patterns. It seemed as if all the vehicles on the road would speed up and slow down in unison. When I turned Waze on I noticed that the social users of Waze had reported and mapped all the speeding cameras throughout the country. I was also able to get accurate traffic and accident reports well in advance from other users.

The Waze app fills two distinct roles for Google. Google's presence is distinctly absent in the social media world and Waze is an inherently social app. Secondly, and more importantly, mobile is the future of both adds and mapping, and if Google wants to stay in the game, the company will have to compete with Apple which controls 39% of the US market share of phones and is still growing. Appropriately, the announcement came before Google's earnings announcement where the effects of mobile computing were blamed for the disappointing revenue numbers. Google still controls a whopping 56% of mobile revenues, but competitors such as Facebook (NASDAQ:FB) are becoming increasingly competitive.

Apple's Acquisition

Apple's reasoning for purchasing Hopstop is no less clear. Hopstop is an app which provides public transportation directions in 140 of the world's largest cities. After failing at the initial release of the Maps program with iOS 6, Apple has been playing catch-up. Hopstop fills a glaring gap in Apple's Map app in which public transportation information is anemic. In light of the impending release of iOS 7, this acquisition is particularly important. Apple has a fresh start with many users and will have to nail the release of an updated Maps app.

The end user can expect deep integration of the public transit data in the native maps app and within other applications such as Siri as well. Nonetheless, the app must remain as a standalone for Android users, and it will be Apple's first foray into software for third-party platforms. This purchase also highlights the maturing phone hardware industry. Apple's most recent acquisitions have all been software-based including Particle, Locationary, and Wifislam. In fact, this happens to be Apple's third, and likely its largest location-based software acquisition in the past four months. Prior to this, we have seen more hardware-oriented deals the likes of AuthenTec, Anobit, and Liquidmetal (lqmt).

Google clearly possesses more experience when it comes to mapping with over 9 years of provision of mapping services. Google's purchase reveals that the company senses a threat to its mapping dominance on mobile platforms. As the native software provider for 39% of phones in the US, Apple possesses the ability to chip away at Google's customer base with relative ease.

Acquisitions are often dangerous territory for the shareholder, and are often dilutive instead of accretive. The technology sector is rife with failed takeovers, most prominently, Time Warner's (NYSE:TWX) botched takeover of AOL. The added value gained by adding public transportation mapping into Apple Maps is quite tangible. Google on the other hand, which has paid for questionable companies in the past such as Motorola, may have decided to purchase a customer base and not a major asset in terms of functionality.

The metric of success for each takeover will be on separate scales. For Apple, success will be measured in terms of usability of the native iPhone mapping software. Once Apple has a fully functional mapping app, the users will come naturally. Google on the other hand provides a mature product. The metric for Google will be solely usership on mobile platforms. It's clearly easier to justify Apple's purchase. Apple plans on obtaining its user base for free via the purchase of innovation.

Growth and Competition

With the advent of Android, Google and Apple have begun to compete increasingly in the same markets. This has developed into a trend, with Google and Apple offering similar products in phones, streaming music and possibly mobile payments in the near future. This competition is great for the consumer but indicates growth issues for both companies. Both companies are straying from their core business in search for inorganic growth. The mobile device makers are approaching saturation in existing markets, and for this reason Apple must expand horizontally. On the same note, web usage is increasingly a mobile activity and Google must adapt to deal with the new reality.

Apple's shares have already corrected for the slowing growth and trade at a PE of 6.2X net of cash. Google's shares trade at a comparative premium to Apple's, and like what was seen with Apple, will eventually see a correction. The rule of large numbers states that companies cannot compound enormous growth forever, but investors ignore that and get drawn into the hype while ignoring fundamentals. The decline in revenues should raise a large red flag for investors in Google who can expect the share price to return to Earth in a way not unlike how Apple's shares dropped. For the longest time these companies were able to exist side-by-side, but a new era of competition has opened where the victim will be margins and profitability.

Disclosure: I am long AAPL. 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.