I've discussed this trade in the past and I don't want to repeat myself, but here I go again. Just look at some of the bigger web / internet companies these days and you'll see a clear pattern. Companies such as AOL (NYSE:AOL), Yahoo (YHOO) and Valueclick (VCLK) that all reported disappointing earnings are struggling. Why? For one, because the web is becoming more "mobile" and while an operating system such as Android is in fact an "open" O/S, it does remain much more of a challenge for companies other than Google (NASDAQ:GOOG) to interact with users. The same is true on Apple (NASDAQ:AAPL) devices, with Google being the one big exception. Why? Because it has built exceptional apps/web services such as Gmail, Google maps, etc.
Yahoo said it was hoping to get its apps into the hands of a billion more users in the coming years. I'm the first to admit that the recent "Weather app" is a great start. It still seems like an uphill battle though. For that to succeed, Yahoo will need to build many more apps that are significantly better than what those ecosystems offer.
Who Are Those Ecosystem Plays?
I'd argue that Google and Apple are the two dominant ecosystems that need to be owned if you believe in this play. They dominate the smartphone space and I don't think that's likely to change anytime soon.
The two other plays are less clear but I still think they need to be made: Amazon (NASDAQ:AMZN) and Facebook (NASDAQ:FB). I've argued for both and own some Facebook shares. Amazon is also a clear long term hold even though it's difficult to nail down the right timing to buy.
AAPL data by YCharts
Why Are These Ecosystems So Critical?
Think about how we used to use the web. We'd have these 10 or 20 pages, would start searching around on Google, using our Yahoo mail or Hotmail, would go from link to link to news sites, shopping, dating, using services such as Mapquest, etc. Now that most of us access the web through mobile (and even in the case of those that don't), we generally have an operating system and either look for apps that we access, or use "native or embedded apps" such as search.
In both cases, users generally go through the ecosystem. For example, when users buy apps or content through iTunes or Google Play, Apple and Google end up making a cut. In similar ways:
- Amazon is able to make margins through selling products on its own but also by letting merchants use its infrastructure / ecosystem;
- Facebook has built the most used social network that other major players such as Zynga (NASDAQ:ZNGA), TripAdvisor (NASDAQ:TRIP) and even Netflix (NASDAQ:NFLX) have built on.
Disclosure: Long Facebook (FB),