Google's (GOOG) entry into the smartphone market continues to negatively impact other aspects of its business model in a classic case of "unintended consequences." The company's acquisition of Motorola Mobility (MMI) last year provided an opening to Microsoft (MSFT) in the smartphone space as handset makers were now open to new partnerships given that Google was now both a partner (Android) and a competitor. Microsoft's partnership with Nokia (NOK) has already produced the well-received Lumia phones. Microsoft now has around 4% of the market share of this growing sector and should see that increase significantly as Asian handset makers launch new Windows phones.
The latest ongoing casualty caused by Google's foray is its relationship with Apple (AAPL) which once was one of the strongest partnerships in techdom and at one time, Google's CEO (Eric Schmidt) sat on Apple's board. The latest Apple snub is its decision to replace Google Maps with its own mapping service on its iPhone line within its operating system. This is a major blow to Google's mobile business:
- Mobile ads associated with ads account for 25% of the mobile ad market, which is in a rapid growth mode. This has increased from 10% two years ago and is likely to increase further as the GPS technology gets better.
- Google Maps is used by over 90% of U.S. iPhone users.
- Google will no longer get data from Apple via Google Maps to improve its search algorithms.
This is just the latest salvo in an escalating war between the two previous "Friends." Apple's SIRI is a backdoor assault on Google's search business via a new voice channel. It is also selling mobile ads as well now. I would look for this competition to escalate as it is clear that both firms have totally abandoned their previous partnership.
I look for Apple to win this war both in the marketplace and with investors. Their earning streams from the iPhone and iPad franchises appear unassailable right now and I expect the company to continue to challenge Google on multiple fronts. Apple is selling at a slightly lower forward PE multiple than Google (10.4 vs. 11.3) despite having much higher current and projected revenue and earnings growth. Apple has vastly outperformed Google over the last year. It also has also outperformed its rival over the volatility of the last three months (See Chart). I think this outperformance will continue in the foreseeable future and these former partners make a very interesting pair trade (Long Apple/Short Google).
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