Google's Search Lead Can Become Apple's Advantage In 5 Years

| About: Alphabet Inc. (GOOG)

There has been substantial negative sentiment developing about Apple, Inc. (NASDAQ:AAPL) lately, both in the news headlines, as well as in the value of its shares. Apple stock dropped by as much as 11.6% from an all time high of $705.07 on September 21, 2012, to an intraday low of $623.55 on October 9, 2012. Apple shares have since bounced back to close at $634.76 on October 15, 2012.

Apple year-to-date chart. Source: Yahoo Finance

Despite such setbacks, Apple shares are still up 57.4% since the start of the year. Apple's recent negative sentiment has been attributed to several factors as discussed in our article published on October 8, 2012 "9 reasons Apple shares will make new highs, again." One dominant factor relates to Google's (NASDAQ:GOOG) competitive threat to Apple arising from Google Maps (due to the initial setback experienced by Apple's Maps) as well as Google's new Android mobile operating system.

Apple shares vs. Google shares 30-day chart. Source: Yahoo Finance

It may seem that momentum has shifted in Google's favor recently, whereby its shares were reaching for new recent highs while Apple's shares were retreating, and where Google's shares dropped by only 6% from their intraday high of $774.38 on October 5 to an intraday low of $730.70 on October 15, 2012 (see above chart).

Apple shares vs. Google shares 2008-2012 chart. Source: Yahoo Finance

However, we believe that these factors that have negatively impacted Apple in the short term, and that may have contributed to Google's recent high on October 5, may be short lived, while a bigger threat actually looms down the road for Google. After all, Apple shares are still up 57.4% year-to-date and 221.8% since the start of 2008 , while Google shares are only up 14.7% year-to-date and 5.7% since the start of 2008 (see above chart).

The upcoming battle for search

Many seem to believe that it is a foregone conclusion that Google has already won the search engine wars. After all Google currently holds 66.7% of the U.S. search market as of September 2012, with its closest competitor, Microsoft (NASDAQ:MSFT), at a distant 15.9% and Yahoo (NASDAQ:YHOO) at 12.2%. Furthermore, Google currently generates about 96% of its revenues from advertising driven by its search engine.

There has been a lot of focus recently on Facebook's (NASDAQ:FB) challenges in monetizing ad revenues as consumers shift to smartphones. The challenge rests with the diminishing screen size; as the screen size of a smartphone is considerably smaller than the screen size of a desktop or laptop, then the number of advertisements that can be displayed is more limited. Such consumer transition to a smaller screen is likely to affect display advertisements more than paid search advertisements, although it will still have some negative effect; hence it seems Google is better positioned to weather such transition than Facebook.

What if the screen size went to zero? How can the screen size go to zero? Voice recognition. Although in reality the screen is still there, when a user dictates his query and the phone provides an answer through its own voice, as Apple's Siri does, then the user is less likely to look at the screen. This will undoubtedly present a challenge to Google. Consumers may be fine being visually exposed to no less than ten search results on their screen, but it is less comfortable for consumers to actually listen to no less than ten possible answers to their questions.

It is important to note that Siri at this time is not a fully fledged search engine. As a matter of a fact Siri can be instructed to use Google, Bing or Yahoo in retrieving its results. Furthermore, Google has also developed its own voice powered search for iOS. However, Apple will always retain the upper hand, as it has been pointed out by Daniel Eran Dilger of Apple Insider:

Apple previously held up approval of Google Voice for over a year, and kept Google's Latitude friend finder app in limbo for two years as it considered the features. This left Google to rely upon web app alternatives to native titles in the App Store.

Apple currently generates most of its revenues from sales of its products and services, with minimal advertisement revenues. During the next five years, it is very likely that Apple will try to take a bite out of Google by targeting the paid search market through Siri. As a matter of a fact, if Apple simply succeeds at becoming less dependent on Google in the search market, without a noticeable decline in user experience, then it would consider such efforts well worth it. To such effect, Apple has recently announced the hiring of William Stasior, previously in charge of Amazon's A9 search engine, hence paving the way for further incursion into the search engine market.

During the next five years, the battle for search engine market share will be fought in the voice recognition arena, where Apple currently has advantages through its iPhone market penetration and Siri. Furthermore, given Google's current dominant search market share of over two-thirds, such battle can only present downside risk potential for Google, while Apple has a potential upside. To conclude this article on the light side, such search engine wars will not be as entertaining as the Google-MSN-Yahoo search engine rap battles in this video.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL over 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.