For those who follow the Internet technology sector closely, it's no secret that the mobile space is where it's at. Nearly two years ago Internet analyst Mary Meeker forecast that mobile Internet usage would be greater than desktop usage within five years; I think we're on track for that prediction to come true. As such, when evaluating Internet stocks, the firm's mobile strategy is especially crucial to consider. In this post, we'll take a look at "the Gang of Four" of the Internet - Amazon (AMZN), Apple (AAPL), Google (GOOG) and Facebook (FB) - and their mobile strategies.
First, I'd like to reference my previous article on the Gang of Four, in which I stated my preference for Amazon as the winner. I stand by that assertion. If I was forced to buy one of these stocks and would not be able to liquidate it for 10 years, my top preference would be Amazon (though I acknowledge Google as a close second). At these prices I'm not a huge fan of any of these stocks, and I agree that Amazon with its current P/E ratio is fully priced if not slightly overpriced.
Key Basis of Competition: Ecosystem Management
In the mobile environment, the key basis of competition is ecosystem management. In other words, the key question is: Who can deliver customers with the collection of apps, hardware and property rights management that creates the most economic value? Here's a look at how these companies stack up in this regard:
Apple: The iPhone remains a sales juggernaut, though I remain skeptical of the firm's long-term viability. I think Apple, at least under the reign of Jobs (the Cook era is still too early to evaluate, in my opinion) is most skilled at being an innovator that breaks open new markets and provides the blueprint for success. However, the company's cultures and values pursue perfection of design - not economics, and certainly not egalitarianism. As such, I think the company is perpetually at risk to competitors that can compete on price, and to ecosystems that are guided by different values. From this perspective, I would expect Apple's role in the smart phone market and the tablet market to decline in time - although the company could sustain growth through new products, such as TV sets.
Facebook. Apple is the incumbent, and incumbents tend to lose when a new entrant introduces a new basis of competition that the incumbent is not designed to perform well against. Facebook clearly has immense power as a social network, and Apple is a hardware company that has failed in social efforts (i.e Ping). Can Facebook leverage its social graph to create mobile devices that can displace Apple? They are certainly trying. I think Facebook has a shot here, although I agree with Henry Blodget in that there may be an opportunity worth pursuing in acquiring a hardware firm. If Facebook can acquire a hardware firm and use mobile as a way to turn Facebook Credits into a serious revenue source - something I previously noted as a requirement to justifying its current valuation and triple-digit P/E ratio - I think the company could have a shot to do something amazing here. But in light of how lucrative the mobile space is, I think the competition is simply going to be too intense and that other firms are better positioned. Such as ...
Amazon. Via its Kindle line, Amazon has already proven it has hardware skills - and rumors are abound that a smart phone will be added to the Kindle family. I think Amazon is extremely well-positioned here: The Kindle products are selling, and Amazon's robust media store, app store and ecommerce line give the firm what I regard as the strongest ecosystem of any in the bunch. The strategy of forking Android to create its operating system also gives the firm a cost advantage in software development, which of course will be passed on to consumers to ensure that Amazon can compete on price - as the firm is notorious for doing. While industry-leading Apple relies on hardware sales as a profit center, Amazon can give away its hardware to sell its storefront, Kindle books, and Amazon media downloads and rentals. This has all the ingredients of an industry disruption - meaning a new entrant taking the market from the reigning champ, preferably by commoditizing the incumbent's profit center and introducing a new profit center rather than competing directly via the same business model - and so Amazon is my favorite here. Also, given the importance of in-app payments to success monetization in the mobile environment, Amazon Payments is worth noting.
Google. Last but certainly not least is Google, which has pioneered the Android mobile operating system, purchased hardware manufacturer Motorola, owns the most powerful ad network in the world as its profit center, and most importantly, is poised to make a serious assault on the lucrative payments market via Google Wallet. Just as I regard Facebook Credits as the key to Facebook's success in the mobile arena, I view Google Wallet as the key to Google's success in the mobile space in the long run. I've been monitoring Google Wallet's developments here on SeekingAlpha - see my most recent article - and I think the company is very well-positioned. Still, though, they clearly have issues with Android fragmentation and in creating the kind of media and app market that generates huge revenues for developers and media makers. As such, Amazon is still my favorite.
Ultimately the technology sector is one I do not find to offer any compelling buying opportunities for patient, long-term value investors - a category I prefer to put myself in. But if there is a big exodus of capital from the sector in the next several years, an event I consider to be fairly probable, buying opportunities may emerge. And if they do, mobile strategies will be especially important to consider when searching for Internet stocks with the brightest futures.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.