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Who Is Winning the Battle for Tech Innovation?

By Mark Morelli – Jan 18, 2014 at 8:00AM

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Apple, Google, and IBM fight over the Internet of Things

A recent article proclaimed that Google (GOOGL 2.81%) was winning the innovation war over Apple (AAPL 1.56%). The basis for the premise was that the search engine giant's purchase of Nest, the manufacturer of smart thermostats, COdetectors, and other networked objects, would give it a serious heads up in the burgeoning Internet of Things. 
Does the Nest deal indicate that Google will win out over Apple in the long run? Does another big inventor, International Business Machines (IBM 1.45%)actually rule the roost?
There may be room at the inn for shareholders of all three companies.
Empty nester
On the surface, Nest would seem to have been the perfect fit for Apple. Nest makes very innovative products that can interface with those of Apple, and its founder and several top staffers are former Apple employees.
However, since Apple likes to control the development of its own products, in reality Nest may not have been a good fit after all. In the past, Apple has been successful at creating entirely new product categories, then making enough tweaks and improvements along the way to generate huge profits from Mac, iPod, iPhone, iPad, and iTunes sales. Shareholders have been rewarded with fantastic returns.
After a recent swoon, Apple stock is poised to soar again. The company has updated all of its products, using innovations such as a fingerprint sensors, faster processors, and increased battery capacity, which should interest and excite loyal users. Plus, Apple finally announced a deal to allow China Mobile to sell the iPhone, which will subsequently let Apple tap into the Chinese carrier's 700-million-strong subscriber base. 
Apple has received a patent for an "interconnected home network" of objects that can be controlled by any number of its own inventions. So, Google would have to work around that to benefit from the Nest purchase. 
Google, on the other hand, doesn't shy away from using the designs of other companies to profit. For example, in the smartphone and tablet industry, synergies and product lines were added to the Google fold only after the acquisition of Motorola in 2012. The $12.5 billion deal was Google's biggest ever. 
The company has been making acquisitions and developing other products (like a blimp that provides wireless Internet service and a driverless car) in order to diversify its business away from just web searches. The company is not lacking ideas, and the stock probably has more room to run.
Big Blue is No. 1
If you measure innovation prowess by patent activity, IBM is actually the winner, and has been for a long time. Big Blue, for the 21st consecutive year, was awarded the most U.S. patents and broke its own annual record with over 6,800 in 2013. Google and Apple trailed well behind at Nos. 11 and 13, respectively.  
IBM patent activity has been focused on cloud-computing and Big Data, which is needed to manipulate and store the vast quantities of information that will make the Internet of Things possible.
IBM is hoping that the patents will pan out and the products and services can generate a robust revenue stream, something the company has been lacking lately. IBM has had to resort to share buybacks and dividend increases to return value to investors. 
Foolish conclusion
In spite of the Nest purchase, it doesn't appear that Google has any clear advantage over Apple on the innovation front.
Google is using acquisitions and new product development to help diversify its business away from a proven money-maker. Apple is making incremental changes to several best-selling devices that have delighted hundreds of millions of users over the years.
An old hand in the tech world, IBM is also actively inventing things and has been rewarded with the most U.S. patents for many years.
All of this bodes well for the future of all three companies and it's very likely investors will be amply rewarded.

Mark Morelli owns shares of Apple and International Business Machines. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and International Business Machines. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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