Brian Grosso's  Instablog

Brian Grosso
Send Message
Investment manager at Rugged Group LLC, an independent, fee-only registered investment advisor based in New York that I formed in August 2015. Find out more and follow my blog here.  Email: brian [at] ruggedgrp [dot com]

My company:
Rugged Group LLC
My blog:
Rugged Group LLC Blog
  • Apple And Google Are Not The Same Part I: Quantity Vs. Quality 0 comments
    Apr 4, 2013 8:38 AM | about stocks: BRK.A, GOOG, MSFT, AAPL

    Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL), two of the most well known public technology companies in the world, are routinely compared without hesitation by investors these days. Sure they are similar to a degree, but equating the two is a dangerously ignorant mistake that could really hurt investing performance. I believe that the best investments are often made in businesses that the investor thoroughly understands. Thorough understanding is hard to come by, but you know when someone possesses it. When someone is read up on a company's annual reports and can summarize the company's lines of business and most recent events in a few minutes and act on all the information, I become convinced of their knowledge. This is the kind of understanding I have sought in my investments and tried to develop of both Google and Apple. In my search, I have found that the two companies are very different and probably are compared way too often. In this article I will begin to go about differentiating the two companies to aid fellow investors interested in both.

    Google

    Google is a company that seems determined to do just about everything (or at least try). The following is in the company's 2012 annual report:

    Our product development philosophy is to launch innovative products early and often, and then iterate rapidly to make those products even better. We often post early stage products at test locations online or directly on Google.com. We then use data and user feedback to decide if and how to invest further in those products.

    The company has no problem releasing a product that still needs work and then perfecting it once it is already out there for consumers. A good example of this is Android. Android is an open source mobile operating system developed by Google. It was first released in late 2007 and several new versions have been released (iterations) since then. Android versions are named using code names of dessert foods that begin with sequential letters of the alphabet. The first widely commercialized version was Android Cupcake and the current version is Android Jelly Bean. The version naming system indicates that Google anticipates more improved versions in the years to come.

    Maybe an even better example of this ongoing process of product improvement is Google Search. Originally created in 1997 by Larry Page and Sergey Brin, Google Search is what started the company. To this day Google Search is still the central product in Google's portfolio. Since being created the product has been changed countless times and perfected while being used by consumers at the same time all along.

    Google also has a case of 'corporate ADD'. The company exists in many different segments. The following is a comprehensive list depicting the company's various products and segments:

    1. Google Search
    2. AdSense
    3. AdWords
    4. Google Display
    5. DoubleClick
    6. YouTube
    7. Google Mobile
    8. Google Local
    9. Android
    10. Chrome OS
    11. Google Chrome
    12. Google+
    13. Google Play
    14. Google Drive
    15. Google Wallet
    16. Google TV
    17. Gmail
    18. Google Docs
    19. Google Calendar
    20. Google Sites
    21. Google Maps
    22. Google Earth
    23. Motorola Mobility
    24. Google Glass

    I believe the reason for this multitude of products is the nature of Google's development process. Google understands that it doesn't need every one of its products to be a hit for the company to succeed. 5 to 10 big winners is enough. Because the company releases products earlier on in the development process than other tech companies, we know about more of them. The company doesn't usually sink too much money into any one idea. Rather it makes many small bets, hoping for a big winner. Google is the equivalent of a diversifying investor with plenty of resources and an open mind. The strategy has worked so far. Through its strategy, Google has discovered Android and Chrome, both of which are probably underestimated for their contributions to the company's bottom line. Although they don't contribute much on their own, they both have been vital to Google Search's continued popularity on new technological platforms.

    Apple

    Apple has a very different development strategy. When Steve Jobs rejoined the company in 1996 he immediately worked to eliminate the company's plainest products and narrow the company's focus to its best ideas. Below are a few quotes from Walter Isaacson's Steve Jobs that illustrate the wind of change Jobs brought:

    "What are the five products you want to focus on? Get rid of the rest, because they're dragging you down. They're turning you into Microsoft (MSFT). They're causing you to turn out products that are adequate but not great."

    "Jobs insisted that Apple focus on just two or three priorities at a time. "There is no one better at turning off the noise that is going on around him," Cook said. "That allows him to focus on a few things and say no to many things. Few people are really good at that."

    "So that's our approach. Very simple, and we're really shooting for Museum of Modern Art quality. The way we're running the company, the product design, the advertising, it all comes down to this: Let's make it simple. Really simple." Apple's design mantra would remain the one featured on its first brochure: "Simplicity is the ultimate sophistication."

    In Apples Q1 2013 earnings call, Tim Cook signaled that Jobs' philosophy is still alive at the company, saying, "We could put the Apple brand in a lot of things and sell a lot more stuff, but that's not what we're here for. We want to make only the best products."

    If we look at the segments and products that Apple offers, the list is significantly shorter than that of Google, despite Apple being the larger company:

    1. iPhone
    2. iPad
    3. Mac
    4. iPod
    5. iTunes
    6. App Store
    7. iCloud
    8. iOS
    9. OS X
    10. Application Software
    11. Displays & Peripheral Products
    12. Apple TV

    Apple continues to focus on a few products to prevent dilution of efforts, resources, and the company's brand image on subpar ideas. The company's development process is equivalent to a focus investor, almost like Warren Buffett. Buffett, through his perch at Berkshire Hathaway (NYSE:BRK.A), is always on the hunt for what he calls 'elephants,' attractive investment ideas that he can allocate plenty of capital into so that they are worth his time and efforts. Similarly, Apple sifts through the hundreds of ideas that it is inevitably presented with and puts the ones it likes most into production.

    The iPhone is proof that the focus strategy works. In 2012, the iPhone alone contributed $80 billion to the company's revenues. A single product driving Apple's success so much shows why the company focuses.

    Apple also tends to wait to release a product until it is perfect. Sure they iterate nearly every year but I would argue that Apple's product iterations are more a business move than developmental. The new product versions provide big boosts to sales but are not usually all that different from the products that preceded them due to the fact that the product was largely perfected before the first generation product was even released. A good example of this is the iPhone. The latest version of the iPhone, the iPhone 5, isn't all that different from its predecessor, the iPhone 4S. It has a slightly larger screen and a new charging adaptor but not many other material differences and the same basic appearance and functionality. In the company's latest earnings call, an analyst grilled Tim Cook about iPhone screen size. Cook replied: "The iPhone 5 offers as you know a new 4-inch Retina display.. for iPhone customers without sacrificing the one-handed ease-of-use that our customers love." Cook mentioning one handed ease of use and customers is evidence of Apple's strategy. The company will make slight variations to products like the increase in screen size, but not do anything drastic that would make the product less appealing to the majority of its customers. If no change is worth making, the company won't make a change solely for the sake of change. This is why most of Apple's products look so similar. The design works so there is no reason to change it.

    Conclusion

    So what is the use of all this information. Well as an investor, I want to own a company whose vision and strategy aligns with my own. Since I am a focus investor and a perfectionist who advocates optimal capital allocation, I own Apple. Other investors who sport a strategy of diversification and an open mind may find Google more attractive.

    The other use of this article is to begin to differentiate the two companies. Far too often, they are equated to each other when they are really quite different. I see no harm in basic comparisons but the comparisons I've been hearing have been more than just that. I also think many will find that even if you only are interested in Google or Apple, reading about how one is different than the other will be more effective than if I were to just say something like "Apple focuses on a few products" or "Google diversifies." The qualities are strengthened through differentiation. I hope to follow this article up with more focusing on other points of differentiation. Stay tuned.

    Disclosure: I am long AAPL. 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.

    Stocks: BRK.A, GOOG, MSFT, AAPL
Back To Brian Grosso's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (0)
Track new comments
Be the first to comment
Full index of posts »
Latest Followers

StockTalks

  • $SKUL now a net-net although I still don't think it's that attractive on a going concern basis
    Jan 15, 2016
  • "Although volume upon volume is written to prove slavery a very good thing, we hear of the man who wishes to take the good of it by... $STRA
    Dec 2, 2015
  • Even if there's no major problems at $VRX, the stock trades at 13x EBITDA and 28x FCF...
    Nov 11, 2015
More »

Latest Comments


Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.