How Google Is Trying To Emulate Apple’s Ecosystem

With Google's (GOOG 0.37%) (GOOGL 0.35%) recent developer conference behind us, the next creation for whole package tech is right around the corner.

As Apple's (AAPL -0.57%) ecosystem allows users to sync everything effortlessly, other companies are toeing the line to match those streamlined capabilities. While Google is already on its way up with its unique ecosystem, Microsoft (MSFT -1.84%) plans to compete with its own ecosystem that would allow remote docking and syncing. Although the necessary technology has yet to be developed for Microsoft to realize this vision, it is pushing on to remain relevant in the tech space.

A full transcript follows the video.

 

Sean O'Reilly: You weren't at the Google I/O developer conference? We've got the inside scoop on this tech edition of Industry Focus.

Greetings, Fools! I am Sean O'Reilly joining you here from Fool headquarters in Alexandria, Va. I'm joined today by a very special guest, Mr. Daniel Sparks. Joining us from the Mile High City. How are you today, Dan?

Daniel Sparks: Good. How are you, Sean?

O'Reilly: Not too bad. What's the weather like out there?

Sparks: It's sunny. It's nice. Been a couple weeks of a lot of rain. I think it's been that way in a few places in the U.S.

O'Reilly: I'm in the nation's capital and, of course, it's automatically humid the second it turns to May. So, there's that. So, yesterday Google had their I/O developer conference, and they basically crammed about 3,000 developers in a room and talked about what they think the future's going to look like over the next year or two.

What did you think were some of the takeaways?

Sparks: Yeah. Some of the bigger things were, they announced the latest version of Android. Right now they're calling it Android M. It's released to developers, it will come out to consumers later. Maybe we'll see the dessert name for that. Sometimes they like to name them after desserts. Right now we'll call it "M," though. Then there's the remake of Google Wallet. Google Wallet still exists, but...

O'Reilly: That seems like a shameless rip off of Apple Pay.

Sparks: Yeah. It's very similar, but at the same time you could say Apple took some things from Google Wallet when they did Apple Pay, but it is. It's very similar to Apple Pay. Indeed the name, too. Android Pay.

O'Reilly: Yeah.

Sparks: It's about exactly the same.

O'Reilly: Do you anticipate that getting any kind of legs? Because it doesn't seem like Apple Pay is getting tons of traction, either.

Sparks: I think that it's just the technology that is. ... It's kind of how I view it. Before, when everyone looked at near-field communication as a technology for this it was doubted even by Apple. I think it was just a way where "Hey, if we just give into near-field communication we can make this happen today. It might be a little cumbersome compared to what the world expects having to hold up a physical device, but it works and it's a way to make it happen." So, I don't know. I think it could be something that evolves over time.

O'Reilly: Very cool. So, you thought the biggest takeaway here -- and I happen to agree because this is actually a big deal for me because I've got a 15-month-old son and I'm essentially recording all of his life and taking tons of photos and everything -- but one of the big news events out of there was Google Photos and how that's becoming a big draw to the entire Google ecosystem.

Sparks: Yeah. Google Photos was -- I think it's not surprising to see Google expand their cloud. They're already doing a lot of stuff in the cloud. They already had photos in cloud storage, but this; they're just taking it to a new level. Basically they're saying "We can store your photos and videos unlimited."

So, that's a big deal, but there is a catch, of course. The photos with resolutions beyond 16 megapixels and videos with resolution beyond 1080p will be downscaled. So, that's how they try to get to upsell you, get you committed and then someday when you care about having a photo over 16 megapixels -- which, I don't know who does other than photographers -- and then someday maybe I'll actually care to have a 4k video of my kids opening Christmas presents -- that won't be soon either -- but when that happens people will upgrade.

So, it's a really competitive battle here. Everyone lately, all the tech trends have seemed to be introducing these better storage options.

O'Reilly: It's interesting that Google's going with charging for quality as opposed to the competitors of Amazon.com (AMZN -1.14%) -- which I use -- and Apple and Dropbox and everyone. They're just going straight up storage size to give you a certain amount free, and then above that you're going to pay $10, $20.

Sparks: Yeah. If you look at the different options out there -- like you said, you're using Amazon. I messed around with that a little bit and then I noticed one of the things they do to try to upsell you is they limit the amount of videos you have.

O'Reilly: That's how they got me. Yeah.

Sparks: Exactly. So, then they're like "Hey, now that you've spent five hours gathering all your photos and you realized that you need videos too and you've hit your max, how about you upgrade?" So, that's kind of their thing. Then Google -- $10 a month you can take your original quality photos and videos. That's with 1 terabyte you'd get, paying $10 a month. Then Apple, you get 500 gigabytes, $10 a month. Dropbox, $10 a month gets you one terabyte.

So, really similar offerings here, but I think the catch for each service differs, and it is interesting to see...

O'Reilly: They differ on the catches. Yeah.

Sparks: Yeah. I think it's interesting to see that Google chose quality. I think it makes it -- because they chose quality of videos and photos, it makes it -- my favorite option for storing videos and photos right now is Dropbox. I'm actually thinking of switching. But I think it makes it interesting because what they want is a high volume of photos and videos, and that makes sense because Google has always been the type of company that wants to tag metadata to all your information.

So I think they just want a lot of information on their servers and they said that they're going to tag metadata to your photos and videos so when you search for them within your -- you could search things like 'cat' and it will pull up photos of cats. And this is in line with what Google does with its business.

O'Reilly: How did you know what I do all the time?

Sparks: Right. Exactly. Of course you're going to search for cat.

O'Reilly: So, if you're a Google shareholder, obviously this is The Motley Fool, investment for the long term and everything; it seems to lend itself to the bull case for Google because it really just develops the Google ecosystem further.

Sparks: Yeah. It does. And they are a search business. Ninety percent of their revenue comes from search in advertising and 77% of the advertising revenue is search related and this does tie into search. They are learning more about you, and at the same time, by offering these free services just like they do with Gmail, they get to offer the ecosystem. Then they get to make money off that ecosystem by learning more about you and being able to target better ad products.

So, that is one of the unique things about Google's business. They can offer these awesome ecosystem of products and really invest a lot of time and effort into the ones that end up working. Of course, they try things and they die off, but the ones that do work could really bolster their ecosystem and serve their customers. I think this Google Photos shows the strength of their business model and why they can afford to offer such a sticky ecosystem to customers.

O'Reilly: Yeah. I'm pretty much married to Gmail, Drive, apparently I'm going to start giving them photos, too. So, I obviously read all of your content on fool.com, and it's all awesome and you're obviously bullish on the king of ecosystems, which is Apple. Can you give our listeners that aren't fully aware, just how good Apple is at that? Just to get a sense. I was also really curious of what you thought.

Microsoft's playing catch up and arguably they're doing a good job in creating an ecosystem. [CEO Satya] Nadella's actually doing a heck of a job there at Microsoft, but I wanted to get your thoughts on if Microsoft can play catch up, and where they are in the process. That was a two parter, sorry.

Sparks: Ecosystem has always been something that I've looked at, particularly with Apple. If you look back even in 2013 the stock pulled back to about 50%. A lot of the worry when things like that happen has been product related, or near-term changes to gross profit margins related to more expensive hardware and things like that. But what always seems to be happening with Apple is their total ecosystem of products, services, software has continuously been improving.

So, even in 2013, 2014; each year their ecosystem is better than the year before. Just to make it clear here for listeners, the ecosystem is basically what is referring to Apple's suite of services like Apple Pay, iTunes, the App Store, and then you have the hardware that just works so well together. Then because Apple has integrated hardware and software, this means when they release a new software update like iOS 8, a high percentage of users can actually upgrade to that software.

For instance, right now iOS 8, 80% of users have downloaded iOS 8 compared to Android's latest version. I think it's around 10%.

O'Reilly: It seems so low, too. I just would have assumed everybody would update it.

Sparks: Exactly. But Android has trouble getting people to upgrade just because that lack of integration. They have all sorts of different hardware using Android. So, I think Apple's ecosystem has just been a big catalyst for the company and it lets Apple make mistakes in the near term on a particular product or software they release. Google Maps was a big flop.

The Mac Mini ... never really turned into something big. They can make these mistakes and they can have a bad year where one iPhone's sales are flat over the year before instead of sales actually growing, and that's kind of how I view the -- why the ecosystem is so important. It takes away the risk of products and failures and Apple just really tries to focus on whole suites of offering improving for customers.

O'Reilly: Yeah. The ease of use of carrying around your iPhone all day and then going home and plug it into your Mac and then it updating your music; it's very easy. Do you feel like -- I'm sure you've heard about Microsoft's plans to let your phone be the operating system and you'll just be able to plop it on your desk and it will automatically sync up to a monitor at home. So, all of a sudden your phone becomes your PC.

That sounds really attractive to me. Will Apple have to answer that at all?

Sparks: Well, I think they're trying to head in that direction. It seems like they're just not pushing it very fast. They're waiting for -- I think Apple's approach to integrating between the PC and the mobile devices seems to be more of waiting for the technology to develop so they can make sure that when they do it, the experience is just right. It's easy to use, and I think Microsoft seems to be pushing it a little faster, waiting less on the technology and just making it happen.

Which could, in hindsight, in a couple years maybe we'll look back and think...

O'Reilly: Go "Aw, that was genius" or something. So, Apple is your favorite stock right now?

Sparks: Yeah, I would say so. I've always been an Apple bull, and even at these prices I think after the rebound it's still a good priced stock. When you look at -- a lot of people get stuck on the total market cap, or this company's just so big, but when you look at the underlying value it's just -- they're a $750 billion market cap, but they have around $64, $65 billion in free cash flow. So, that puts the price to free cash flow for Apple around $12.

O'Reilly: I just can't even imagine $64 billion in free cash flow.

Sparks: Yeah.

O'Reilly: I don't think the human brain is wired to handle that. It's just not. Obviously the concern there --because it doesn't look over value compared to the rest of the market, or anything. It doesn't look crazy. But on the flip side, you're talking about the biggest company on the planet outside of Saudi Aramco.

Sparks: Right.

O'Reilly: Where does it grow from here? Are we just counting on everybody in Southeast Asia buying and iPhone now? What's the deal there?

Sparks: Yeah. I think this brings into mind two things for me. First of all, it brings up that ecosystem thing again. I think that the company's so big, but the ecosystem of products, services, and software is so robust that it just takes away the risk of Apple suddenly losing market share in an important area. Not only do they have a robust suite of offerings, but they're leaders in so many areas.

In tablets, in high-end smart phones, in iTunes, in the App Store. That really takes away the risk. Then as far as growth, I think investors should always keep in mind that business doesn't actually have to grow for the share to grow. We see them repurchasing around 10% of their shares -- it could be a little less, maybe 8% of their shares -- every 12 to 15 months, or so. And this rate of repurchases will probably decrease a little because the share is pricier. So, they get less bang for their buck.

But they can really increase the underlying value just by using that awesome cash they're bringing in. Which, again, looks like it's protected by their hefty ecosystem -- by repurchasing shares and increasing the value per share for shareholders.

O'Reilly: Yeah. I doubt he'll go out and buy it anytime soon, but to borrow a Buffett-ism, it almost seems like Apple's ecosystem is its competitive advantage. Because technology always changes, and that's why [Warren] Buffett doesn't like tech. But it's really hard to get out of the Apple ecosystem once you're in.

Sparks: Right. I think you worded it well there.

O'Reilly: Very good. Well thank you for your thoughts, Dan. Have a great day.

Sparks: Yeah. Thank you.

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