An Overview Of 2 App Ecosystems: Google And Apple

Includes: AAPL, FB, GOOG, T, VZ
by: Cris Frangold

Mobile search engine Xyologic published a report pointing out that the number of Apple (NASDAQ:AAPL) iPhone apps that hit the Top Free 100 rankings has decreased by 37%. On a year-on-year comparison, 422 apps entered the Top 100 Free iPhone apps in April 2011 compared to the 277 apps in April of this year. In contrast, the number of apps that hit the top 100 free rankings in the Google (NASDAQ:GOOG) Play remained stable, albeit at a smaller scale.

According to the firm, this phenomenon is a further indication of maturation of the platform. Once an app hits the top charts where it can be seen by real users, it receives huge downloads per day. This highlights Apple and Google's huge roles in the app industry. It seems that Apple has given the independent developers a shot at getting enough exposure into its system. Prior to this era, the independent developers had no shot at penetrating inside the mobile industry. Mobile operators such as Verizon (NYSE:VZ), AT&T (NYSE:T) and Vodafone (NASDAQ:VOD) collaborated with big content mobile publishers to develop these applications for the old generations of smartphones.

Back in the early days, consumers had limited use for applications, such as portals and decks to access mobile internet. It was difficult for independent developers to hit the jackpot in terms of producing a highly successful app. Mobile content developers would line up at trade shows and meetings to showcase their goods to the telecom giants. The telecom giants continue to hold most of the bargaining power, as consumers pay upfront for the mobile content, translating into huge cash flows for telecom giants. Over the past 10 years, Verizon has increased its operating cash flow from $22 billion in 2002 to $29 billion in 2012. Verizon's return on equity reached above 15% and has declined to below 10% in recent years. Various factors have contributed to this, including the shift in the industry's control over consumer consumption. Meanwhile, AT&T also experienced growth in operating cash flow of $15.21 billion in 2002 to $34 billion in 2011. The company has also experienced a decline in return on equity from 17% in 2002 to 3% in 2011. Although telecom giants still generate massive cash flows, their future growth will not match their historical mean growth.

With the rise of Facebook (NASDAQ:FB) and Myspace, smaller companies have started to venture into mobile social networks. This creates a level playing field for the smaller independent developers. As the number of startups increases, the bargaining power of telecom giants has started to weaken. The success of a relatively young mobile ad companies like Admob has put developers in the front seat. In 2008, the company generated $42 million in gross revenue and over a billion in monthly impressions in the U.S. alone. Google's acquisition of the company in 2010 resulted in smaller developers taking a shot at mobile app development. The trend continued as Google and Apple started to launch their respective app ecosystems.

The Ecosystem of Apple and Google

The launch of smartphones, such as the iPhone and Android-enabled phones, paved the way for open mobile development. The reason for this is fairly simple. It's easy to get published under these ecosystems. Even an individual could register with both Apple's Appstore and Google's Play. You could even set up a separate company and outsource the whole app development. An individual could put up a drawing board and delegate the tasks to small app and mobile development companies.

There are many solid mobile app companies out there. UK-based Via Studios is one good example. It is a leading multi-discipline web design and development company based in Manchester England with active business office in New York. Most of its clients are top-notch companies such as Accenture (NYSE:ACN), BBC and The Big Life Company. Via Studios' development team can easily understand a client's specifications and needs with its wealth of industry experience. The challenge is to fill the gap between consumer demands and developer's ideas, which could ultimately result in creating blockbuster apps.

The outlook for the mobile app marketplace is still positive. Over the past five years, both Apple and Google have amassed more than 40 billion cumulative app downloads. Most industry pundits say that the industry is still poised for massive growth over the next few years. The industry is expected to grow from 31 billion downloads in 2011 to 66 billion downloads by 2016. This translates into annual growth of 20% over the next five years. In its first-quarter 2012 earnings report, Apple said that iTunes generated revenue of $32.9 billion, up from the previous year's $24.7 billion. This shows that mobile application development is still going strong, and will continue to show strong gains over the next few years.

Meanwhile, Google Play is also gaining traction as it celebrated with its 25 billion app downloads. This is a solid milestone, although this is still relatively lower than Apple. Moving forward, I think Apple will continue to dominate the app industry by a wide margin. However, Google has outpaced Apple in terms of growth rate.

The overall competition between these two ecosystems will result in strong prospects for mobile publishers. There are lots of reasons to be bullish on content publishers like Apple and Google over the next few years. The increased use of mobile and tablet devices will mean that consumers will demand better content compared with previous years. This gives app ecosystems huge incentives to improve their app and content discovery going forward. Apple and Google are both strong growth stocks from this angle, and I recommend both stocks to investors today.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.