This Is Where Google Will Hurt Apple

We've established that Google (Nasdaq: GOOG  ) is not out to kill the Apple (Nasdaq: AAPL  ) iPhone with its Android army. That doesn't mean you'll find CEOs Eric Schmidt and Steve Jobs swapping life stories over lattes in Sunnyvale every Tuesday. You see, Google really is trying to hurt Apple -- just not in the mobile space.

The real battlefield lies in the music business. Apple has already edged out the likes of Wal-Mart (NYSE: WMT  ) and Best Buy (NYSE: BBY  ) to become the world's largest music retailer. It's all digital, and the iTunes music store still doesn't have any real rivals, despite the best efforts by Amazon.com (Nasdaq: AMZN  ) and others. The business value of digital music sales has been proven, and now Google wants to stake a claim in Apple's territory.

A new day is coming
A Google Music service has been expected and hinted at for years, but it never materialized. This time is different. Respected trade rag Billboard reports that Big G is in serious talks with all of the major music labels to make it happen.

If Google gets what it wants, we'll see a combined subscription service and piecemeal download store, where all your music is stored in central servers -- a.k.a. The Cloud -- but managed and accessed from any gadget or browser that can connect to the Web. It's a very Googly idea to run it this way, and would add significant value to the Android mobile platform. Sure, Google would love to publish apps for this service on the iPhone, too, but it'll be a cold day in Miami before Apple lets Google collect golden eggs from that luscious goose.

But if you try sometimes ...
But of course, Google will not get exactly what it wants. If the Nexus One experiment taught us anything, it's that even Google can't just walk up to an established and mature business model and expect to change the world in one fell swoop. AT&T (NYSE: T  ) barely stuck a toe in the Nexus One waters, and Verizon (NYSE: VZ  ) never even got around to supporting the Nexus One before the whole project went kaput. The devil truly is in the details, and I wouldn't be surprised if the label negotiations would drag well into next year before we see a Google Music service.

Some of the sticking points include how much of a preview you should be able to hear before making a purchasing decision, the exact payment terms (especially in the streaming subscription world), and the length of the first contracts. Google wants a longer-term deal that gives the new service a fair chance to establish itself while the labels would prefer a shorter trial just to see how much it hurts -- or not.

The elephant in the room
But the biggest issue on the table is far more controversial. The way Google's proposed service would work is to scan your hard drive for music files, and then make those songs available in the cloud. That would include songs purchased from Google Music, Amazon, or iTunes (all OK), tunes digitally ripped from your own CD collection (still nice and legal), files you downloaded from your best friend's iPod or memory stick (Oh no! File sharing!), and even materials downloaded from online file sharing services (Run! Hide! The pirates are coming!).

A file scan is the closest thing you'll get to establishing that you have the right to listen to these particular pieces of music, but as you can see, the files may have arrived from unapproved sources. But how do you tell a downloaded file apart from a song you ripped from that dusty stack of CDs in your closet? Answer: You can't. This is a very ugly can of worms to the legacy music industry, and also a very important aspect of how Google wants its service to work. There are top-notch lawyers and negotiators on both sides, which is why I expect a knock-down, drag-out battle over finer points that will last for a long time.

Friends in unexpected places
And that brings us back to Apple, whose market Google is trying to steal here. Jobs and his gang have already done some of the groundwork that may make the Google Music thing happen, and faster than it would have otherwise. Not only has iTunes proven the viability of online music sales, but the company also bought Lala last year and is trying to put that undisclosed pile of cash to good use.

Lala's music services were a subset of what Google is working on, so the label representatives are hearing many of the same arguments from both Google and Apple now.

Endgame?
For these reasons, I expect Apple to launch a cloud-based update to iTunes around the same time Google goes to market with its new music service. Consumer choice is always good, and both companies will be highly motivated to beat the other with ever better services. And if Google is going to hurt Apple in any market, rather than just piggybacking on its successes, it'll be this one.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. He does own a guitar and will rock you on request. Best Buy, Google, and Wal-Mart Stores are Motley Fool Inside Value recommendations. Google is a Motley Fool Rule Breakers pick. Apple, Amazon.com, and Best Buy are Motley Fool Stock Advisor selections. Motley Fool Options has recommended buying calls on Best Buy. The Fool owns shares of Best Buy, Google, and Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. You can check out Anders' holdings and a concise bio, and The Motley Fool is investors writing for investors.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 16, 2010, at 10:49 AM, xmmj wrote:

    I WILL NEVER EVER EVER LET GOOGLE SCAN MY HARD DRIVE!!!

    (And I have no stolen music.)

    What data will they "accidentally" pickup while there? Besides - I am sure they will classify all that data, then try to figure how to target ads to me from my music collection. No thanks!

  • Report this Comment On September 16, 2010, at 11:57 AM, Henry3Dogg wrote:

    Considering what a tiny part of Apple earnings, music sales is, I suspect that a even major success by Google in this area, would be no more than a minor irritant.

    So far Google remains a search lead advertising one trick pony. Nothing else that it has done, or bought, has had any commercial success. So there is no reason to believe that it would do any better selling music. If they couldn't sell Android phones, then why do you think this will be different.

    But their reputation for lack of respect for IPR and copyright will have the studios shuddering. Before long Google would be allowing you to listen to your friends online music and pretending this was nothing to do with them.

    No, the music publishers know that Apple drives a hard bargain, and not always one that they are minded to accept, but they also know that Apple has a history of respecting copyright, not of ripping it off.

    If you think I exaggerate then remember Googles plans to put every book online, and the way the authors has to go to court to stop it. Or think of the battle to get copyright material off YouTube.

    This feels like a ploy to do the same with music, by the back door. ...we didn't put it there, it was him, but he let's anyone listen...

  • Report this Comment On September 16, 2010, at 8:31 PM, TMFZahrim wrote:

    Tiny part of earnings? iTunes contributed $1 billion to last quarter's sales and iPod another $1.6 billion. That's $2.6 billion out of $16 billion, and you also have to assume that many Apple fans are now using iPhones and iPads as music players because the phone line has been cannibalizing iPod sales from day one. Call it insignificant at your own peril; I believe that the whole Apple ecosystem would fall apart if you removed the iTunes glue that keeps it all together.

    Anders

  • Report this Comment On September 16, 2010, at 10:43 PM, rlcato wrote:

    Like I'll let Google (or anyone) scan my hard drive for ANYTHING! Talk about FAIL!! That sounds like something a politician would say.

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