Any long-term investment view of Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) hinges on a single question: What matters more, the client or the network? If you say it's the client, then buy Apple. If you say the network, buy Google.
When it comes to client devices, Apple is a monopsonist – the single buyer. It uses its cash to buy the next generation of Chinese hardware before it's made, putting up the money that will control new factories and, thus, their output. Apple began this business model with the iPhone, perfected it with the iPad, and now plans to use it in an effort to dominate all clients through its iOS and Mac X Lion. Companies like HP (NYSE:HPQ) and Dell (NASDAQ:DELL) have no clue about the hurt that is coming their way, because they can't match Apple in features, costs, or profitability. And they won't, so long as Chinese parts dominate the market.
Seen in this light, Google's Android is really just an effort to let Chinese OEMs fight back against their American masters. Its direct cost to Google is minimal; it's just producing the software. It's up to the OEMs to find a way to deliver product off that platform that can compete with iOS. They may do well in market share, but margins are going to be wafer-thin. That's okay with Google because it's not in that business.
Google is about the network. Google has the same advantage in Internet infrastructure that Apple has on the client side. This is its secret weapon. It can deliver low-cost bits to most major cities around the world, at a fraction of the cost of competitors.
Apple's cloud strategy, thus, is a bit like Google's device strategy, a feint. Robert Cringely says Apple's vaunted data center in North Carolina is a Potemkin Village – that it doesn't really exist except in the minds of competitors. Data Center Knowledge says Apple is presently using Microsoft's (NASDAQ:MSFT) Azure to deliver its iCloud services.
Both these companies have an Achilles Heel, of course. Apple's is succession. Steve Jobs is not going to be around much longer. He's on his second medical leave, and has already lived far longer with pancreatic cancer than anyone had the right to expect when it was diagnosed in 2004. The hope of Apple's shareholders is that he has set the company on a 10-year growth path, and that it can execute on his vision long past his death.
Google's Achilles Heel is less obvious. It's the Last Mile; that is, a consumer's network access. This remains under the control of cable companies, phone companies, and mobile companies who are anxious to squeeze the last dollar out of every bit they deliver. They have more lobbyists and lawyers than Google could ever want, and they know how to manipulate public opinion against anyone -- even Google.
Apple is addressing its network weakness through a reality distortion field, pretending to have solutions when it does not. Google is not yet addressing its own weakness, in my view, because it doesn't want to go toe-to-toe with the lobbying might of the Bells. But it will have to. Network operators will keep running their networks in a way that favors Apple until they're forced to change by the presence of a serious competitor. In the long run, this gives Google a lot more room to grow along its present path than Apple, even though Apple's near-term prospects look much better.
Disclosure: I am long GOOG.