Why Google Will Win the Smart Phone Battle

Includes: AAPL, GOOG
by: Galileo Russell

In the last 5 years we've gone from using clunky grey Palm Treos for email to gliding around the internet on the iPhone's seamless user interface. The smart phone market has revolutionized itself into a booming industry that has attracted almost all of the worlds tech giants, and so far the clear leader of the pack has been Apple (NASDAQ:AAPL). But that is all about to change, because Google (NASDAQ:GOOG) has created a business model not only for profit but for expansion and innovation as well.

GOOG gives away the Android operating system for free and updates it systematically for free as well. That is why it is such a widespread operating system and is carried by so many different networks. The business plan is genius. Give the operating system away for free, let anybody use the software and make apps, take a 30% cut of all app sales. By deregulating their app market GOOG has opened the door to many more 3rd parties who've been denied by AAPL's secretive and selective app approval process.

AAPL has been hit with numerous complaints about the complexity of their app approval procedures. This has resulted in lots of 3rd party app producers switching to the much more coder friendly Android market, which also enables developers to publish basically any app after paying the one time $25 registration fee. For example, just recently app developer OpenFeint announced making a bigger investment in creating games for the Android Market than in Apple's App Store. Little switches like these, that may seem insignificant, are the reason GOOG will prevail. Getting innovative 3rd party developers is key to keeping the app market new and intriguing to customers.

Unlike Android, the iOS operating system is strictly a luxury product. Android can adapt and fit into both the upscale and basic smart phone markets. As smartphone's get closer to the norm, Android will be able to take advantage of the cheap/non-luxury side of the market, while still holding its ground in the upper echelon with iOS. This is all thanks to Android's versatile and vastly widespread software that can really be modified to fit any purpose. Thus, with a mostly tapped luxury smart phone market, Android looks like it will be in a better position than iOS to take a firm grasp of the next sector of smart phone growth.

There is only one phone using AAPL's iOS software and that's the iPhone, while Android is running on hundreds of different phones. Because of the growing number of devices featuring Android it’s safe to assume that developers will slowly shift to the bigger market with unlimited possibilities for growth. The iOS software is so good AAPL feels like only they can do it justice. Therefore it’s only featured on the iPhone.

GOOG's openness about Android is exactly what makes it so great. Because it's free and accessible more phones will use it, and with more phones using it more people will want Android apps. With a higher demand for apps, developers will flock to Android because of the size and diversity of the market. With a better app store and wider user base GOOG takes the cake. It's just that simple.

The Android Market is closing in on the App Store fast. Distimo reported on April 30th 2011 that in 5 months Android will have the biggest app store in terms of apps, surpassing the Apple App Store. You have to wonder how long AAPL can stay ahead of the smart phone game with a weakening app store and a developer’s world that is rushing the free Android operating system. GOOG is quickly gaining ground and it seems as if their investment in Android will finally pay off.

Android’s growth numbers have been pouring in as expected and only seem to be brighter from here on out. In 2008 Android had just a 2% market share, by January 2010 that increased to 7%. ComScore recently reported that as of April 2011 Android had a 31.2% U.S. market share. These growth numbers are huge and will only climb higher as time passes.

GOOG closed Wednesday at $535.79 per share with a trailing P/E of 19.63 and a projected forward P/E ratio of just around 15. GOOG is nowhere near the ‘growth’ price level tech stocks can reach when they get hot. Shares have seen an almost 10% drop YTD, GOOG has clearly been underperforming. Although the full potential of Android and the smart phone market are unknown it is clear it will have a significant impact on GOOG earnings in the future. That’s why I’m ready to go long GOOG at these prices and let the smart phone battle take its course.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GOOG over the next 72 hours.