The good news for Google (Nasdaq: GOOG ) and Apple (Nasdaq: AAPL ) investors is that both companies look to have built tremendous leads as innovators in the mobile race. Don't let naysayers temper your enthusiasm: Mobile is the next technological sea change, and these two companies are winning. Congratulations.
Rapid adoption of advanced mobile devices is changing how consumers spend their electronics dollar, and to the winner goes great spoils. How big? By 2012, researcher Gartner believes, smartphone sales will outpace laptops and approach $200 billion in sales. The icing on the cake: $200 billion is just the start; it doesn't include the applications and additional content being consumed on mobile devices. It also doesn't include an on-rushing sea of tablets, eReaders, and a vast array of other electronics using light, mobile operating systems.
Would you look at the size of that ...
However, notice I said that Apple and Google have the innovation lead. Innovation in technology can be a tricky, tenuous lead to maintain. Luckily for them, the mobile revolution has some similarities to the personal computing revolution of the 1980s that ensures early platform leaders can dominate an entire technology cycle. Developers are flocking to popular platforms and playing kingmaker by choosing to disproportionately develop apps for the iPhone and Android. If this trend continues, Apple will continue making piles of money selling its hardware, and Google assures its search stays at the center of a mobile experience through its licensing strategy.
However, it's worth thinking about what will happen if apps aren't the next big thing? What happens if development moves away from platform-specific apps and back to the Web as a dominant development platform? But, before looking at this question, it's worth peering back to another technology revolution on par with the mobile explosion; a revolution that will take us all the way back to … 1994!
Hop into the hot-tub time machine
Yes, back in the mid-'90s there was another revolution going on, one that promised to deliver untold riches to all the winners of this newfangled Internet. So, like any silicon-infused gold rush, companies poured inordinate amounts of resources into areas they thought would lead to control over the next technology cycle.
- Gold mine No. 1, Internet Service Providers (ISPs): Yes, it's hard to believe, but people thought controlling the phone pipes to the Internet would assure dominance over the Internet cycle of technology. AOL (NYSE: AOL ) built out its own network of sites for users to surf and was seen as the darling of the era. Microsoft (Nasdaq: MSFT ) poured tremendous amounts of money into its own ISP in an effort to defend itself from the vague threat of the Internet. Of course, by the time cable companies started laying out record levels of fiber optics, we realized ISPs were providing a commodity product, and provided little value to shareholders.
- Gold mine No. 2, Web-browsing: Believe it or not, but the quest for Web-browsing dominance almost brought down mighty Microsoft. The company was obsessed with defeating Netscape in the browser wars, and its ruthless tactics brought about tremendous antitrust scrutiny. Today, we realize that Web browsers don't add a lot of value. AOL learned that lesson when it bought Netscape for $4.2 billion and spent nearly a decade floundering with a money losing effort before shuttering the browser.
Of course, the real value-creating darling of the era was left in the backwater after the dot-com bust. It wasn't until very late in the Internet revolution that people realized the true value of targeted advertising through search. Making money off displaying ads on browsers seemed like such a better plan, but it had serious limitations. In retrospect, people use search for everything: you can build up a profile of search history to make results more targeted and you can easily display advertised results right next to the actual search results. It's a much better system than trying to monetize search on browsers, but in 1998, that idea was clear to very few people.
Back to the future!
Given a future in which apps continue defining platforms like the iPhone, the future looks bleak for companies not named Apple or Google:
- Nokia (NYSE: NOK ) : Will continue to see declining prices on its phones as it increasingly targets low-end and foreign markets.
- Research In Motion (Nasdaq: RIMM ) : Can count on continuing strength in the enterprise market, but will see weakness in the consumer market where it previously saw expansion recently.
- Microsoft: Windows 7 Phone may be too late to the market to gain traction with developers.
- Hewlett-Packard (NYSE: HPQ ) : Should expect struggles introducing webOS phones and new tablets based on recently acquired Palm's operating system. There's just not enough developer support behind the platform.
Yet, if the above example from the Internet era taught us anything, it's that this 'platform-centric' era isn't yet assured. Many signs point to rich platforms that control apps, services, and content being differentiators for mobile devices. However, in a rapid technology shift, these early areas of differentiation and value can be turned on their head.
If development shifts back to the Web, or becomes more agnostic between mobile operating systems, Android and Apple's vaunted apps and content lead would be of much less value. In such a scenario, the mobile world could be far more of a fragmented picture with companies like Nokia, Research In Motion, and Hewlett-Packard able to capture their own niches. Software loses more importance, and the companies are once again more hardware-focused.
Foolish bottom line
We're three years into a technology shift that should bring about stunning advances. The (multi-multi) billion dollar question isn't whether the market will support closed systems like Apple, or licensed systems like Google or Microsoft. The big question is whether the self-perpetuating cycle of app development can propel early leaders Google and Apple to continued dominance.
Keep the lessons of the past in mind, but if developers do shift from the Web to mobile platforms, look out, because Google and Apple will define the next generation.