Why Apple / Facebook Makes Sense

 |  Includes: AAPL, GOOG
by: Dan Ramsden

It has been a week of large and unexpected change in digital technology. The week began with Apple’s announcement about the departure of Steve Jobs and his temporary replacement by Chief Operating Officer Tim Cook, and it is ending with Google’s announcement about the departure of Eric Schmidt from his Chief Executive Officer position, to be replaced by Larry Page, who will be focused on execution. A COO emphasis at Apple (NASDAQ:AAPL), and execution focus at Google (NASDAQ:GOOG). Such perfect bookends for a week to kick off earnings season.

These themes taken together serve to remind us that the sector is entering a season of maturation. In one way or another, we talk about maturity and mature issues when we talk about operations, execution, big changes at high levels, and for that matter very sizable cash balances that continue to accumulate. To be clear, maturity in the context of this article does not imply diminished growth, but a diminished rate of acceleration, at least in contrast with the 10-15 years past. Attention to detail and competitive positioning, in this context, takes on paramount importance, and a COO background for the CEO may be the ideal calling card. (The subjects of innovation and execution were covered in a previous article here already.)

And when we talk about such mature issues involving Google and Apple, we really should not leave out Facebook from the discussion. Because just as Google may be challenged to find a substantial growth area outside of its core search business, and as Apple may not be able to continue its 10-year roll of disruption much longer (iPod, iPhone, iPad, etc.), so too Facebook is at some point going to test a few limits. For example, December data shows that Facebook’s U.S. growth has probably plateaued, with the U.S. contributing only 5% of new users during the month. Applications supported by Facebook are arguably only beginning to crystalize, but revenue growth will always be closely linked to user growth, and the subscriber statistic referenced is not insignificant.

All of the above notwithstanding, it’s too soon, undoubtedly, to throw around maturity labels – especially in any financial sense – in a discussion about Apple, Google and Facebook. Nevertheless, it may not be too soon to speculate and to think about next steps for these three sector giants. Projecting out a few years… what? And what, especially, given market valuations predicated on growth for a long time to come (in the case of Facebook most of all)? In mature industries – say, like digital technology and consumer media in a few years, when Zuckerberg’s like 30 – participants begin to consider consolidation possibilities or other strategic combinations. (In the media industry more recently, the cable segment consolidated, and then Comcast (NASDAQ:CMCSA) bought NBC.) Projecting out a few years… what will Google, Apple and Facebook muster up?

Oh, I don’t know, but it is great fun to speculate, and as I play around with permutations and combinations among the subject trio of this article, my conclusions seem always to point to one likely outcome: Apple and Facebook. I usually begin my speculations with the idea that Facebook’s vulnerability will always be the sources of its revenue, which will always create an internal conflict with Facebook’s source of popularity – private user information. Were Facebook not under pressure to make money, this conflict would not exist. By extension, Facebook can only reach its full product potential when advertising revenue is eliminated from its business picture.

A combination with Google will not resolve this issue, but will in fact aggravate it, and for this reason (among others) any strategic combination between Google and Facebook is likely to face some regulatory obstacles. Apple, on the other hand, does not sell advertising. Apple, moreover, quite possibly never will. Apple sells product as a hardware vendor, and Apple sells software as an app retailer. In neither of these cases is the use of private data of any consequence or advantage. What Apple does not have, however, is a network with a network effect, and this adds pressure to the company to keep creating new products that are better than last year’s, every year.

Now, we’re talking about a maturation scenario, remember, in which Apple at some point in the future may no longer be able to keep this up. And we’re talking about Facebook in a scenario in which subscriber and advertising growth are in a natural state of tension. Would it not make sense, at such a point, for Facebook and Apple to combine in a unified business model that does not require advertising or use of private data, and that is based off a unified content distribution platform? Considering the emphasis on operations, execution, and sundry subjects of maturity for all parties involved, maybe this point arrives sooner than one would expect. And anyway, why wait?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.