Google Eats Apple

Are there any two companies cooler than Google (NASDAQ:GOOG) and Apple Computer (NASDAQ:AAPL)? Sure. If you check out the Rule Breakers newsletter service, you can probably find some pretty amazing companies working on next-generation applications like robotics in the operating room, or making small things do big things in the booming field of nanotechnology. But when you get around to gargantuan-sized companies, it's hard to get any cooler than Google and Apple.

Google and Apple were some of the market's biggest winners in 2005. Their share prices more than doubled, as the graph below shows.

However, each Joe Cool's rise to the top may soon have these two seemingly noble bosom buddies at each other's throats.

It seems like a ludicrous notion at first. Apple and Google are friendly consumer-driven companies, and even though "don't be evil" and "rip, mix, burn" may seem like mutually exclusive mantras, it's not as if folks are being forced to pick sides at the moment. Apple? Google? Arch enemies? How can that possibly be, when both companies consider Microsoft (NASDAQ:MSFT) to be Public Enemy Numero Uno?

Easier than you think, my friend.

Connecting the dots in pencil
The battle between Microsoft and Google hasn't been brewing as long as the decades of venom between Apple and Mr. Softy has. However, it's been a more intense battle; although Microsoft may have always had Apple in the back of its mind, it truly fears Google these days. That's why it fought tooth-and-nail to block a defecting executive from joining the ranks at Google. That's also why it held a strategic conference for key executives last year titled "The Google Challenge."

Google's steady market-share advance in the search engine space is worrisome to all of Big G's smaller rivals. But it hit too close to home for Microsoft, whose monopoly on operating systems has previously allowed it to ram just about any piece of application software down consumers' throats. That's why it was able to vanquish Netscape and other budding browsers with Internet Explorer. It's also why Word Perfect and WordStar soon bowed before the pervasive sword of Word.

But as more and more aspects of everyday computing begin to rely upon the Web, Google's increasing control over Internet traffic is a thorn in Microsoft's sidebar. This was bound to happen even if Google had never tapped Microsoft's Kai-Fu Lee to head up its operations in China. Now it's getting personal.

Back in October, Google hooked up with Sun Microsystems (NASDAQ:SUNW) in what seemed to be a small-time deal to expose Sun's value-minded software applications to the mainstream. However, just as Google's desktop, sidebar, AdSense, and browser toolbar introductions have aspired to hang on to loyal users even when they're not visiting Google.com, the Sun deal has Google carrying the banner of a company trying to beat Microsoft in the server market with the open-source Linux operating system.

I'm not about to pump Sun Microsystems' chances here. I will say that if Google succeeds in promoting open source as a mainstream alternative to Microsoft's operating systems and productivity software, Microsoft will clearly suffer first. But Apple will suffer next. If Google is able to turn the tide and make personal computing and online access more affordable -- something that it would love to see, given that 99% of its revenues are being generated from online contextual ads -- the value proposition would eventually make Apple a victim of collateral damage.

Of course, it's not just about the software and proprietary platforms. It's also all about you.

There is no "U" in Google, but there's a whole lot of "you"
Apple's revival and Google's emergence have one thing in common: Both companies have connected with the masses. The Apple iPod is a "must-have" consumer appliance. More importantly, Apple is breathing new life into the once-moribund music industry through its iTunes Music Store. After selling 850 million digital music downloads, it's now set to rescue the video industry with its new line of video-streaming iPods.

One can't overemphasize the influence that Apple now wields over tens of millions of earbud-donning iPod owners. However, while Apple has found a new way for the mainstream to spend money, Google has given them a way to make it. Between its AdWords and AdSense online advertising programs, the Internet's most valuable company has empowered advertisers and webmasters in far-reaching ways.

Until Google rolled out AdWords four years ago, Yahoo! (NASDAQ:YHOO) owned paid search, with advertisers paying as little as a dime for interested click-throughs with its Overture service. Google didn't just make the model more affordable to advertisers (who can now pay as little as a penny for each lead). It also cast its ad-network net further out when it introduced AdSense in 2003.

Thanks to AdSense, Google's text ads sprung up all over small and mid-sized websites that Yahoo! had ignored, giving web site owners a piece of the revenue Google received from topic-specific advertisements displayed on their sites. It has been a viral marvel ever since, creating more than a few cottage industries for both website designers and localized businesses hungry for affordable quality traffic.

So what's the difference between owning the mind and the imagination of the public? It can be pretty substantial when it's time for battle lines to be drawn. Apple runs, by far, the most successful online music and video stores on the planet. Google has avoided offering digital song downloads and music-subscription services like most of its rivals have, though last week it did start selling videos.

Follow me here. Apple has been huge for the music industry. (Expect great things to happen for the video industry, too.) However, its music store has been mostly about offering up major-label talent in digital spoonfuls. That's fine. That's where the money is. With a content library bulging at 2 million tracks and counting, the company has also scored just about every indie label worth digitizing, as well as some unsigned talent through digital-distribution deals with CD sellers such as CD Baby.

However, that still leaves a void. By the time the original MP3.com site was shut down, it had collected 1.7 million songs, uploaded by more than 250,000 mostly unsigned artists. When traffic at the site peaked, it was attracting nearly a million unique visitors a day, delivering 4 million daily streams and downloads. Yes, it was a free site. If Apple were to open up the submission floodgates, it wouldn't be generating 1.5 billion more paid downloads a year. However, MP3.com peaked nearly three years ago, and broadband access has exploded since then. Ignoring this angle, a niche that continues to be underserved beyond a few fledgling sites, could be a mistake for Apple. Why? Because Google will likely go there first, the moment it makes a legitimate move in digital music.

Turning cottage industries into virtual mansions
Check out the new Google video store, and you will already see an indie bent. When fellow Fool John Reeves and I were discussing Google's new venture last week, he was wondering whether we were approaching a time in which obscure clips or the often hard-to-find videos in the educational market would thrive in the inventory-hassle-free world of digital video. One would expect Apple to own this front, but things may get interesting if Google begins allowing the folks who submit original video content to start charging.

Sites such as YouTube.com and social networking hub MySpace.com have attracted amateur filmmakers and webcam hobbyists in droves, but video.google.com also has a fair share of family-friendly digital uploads. Now that Google is tapping into the consumer marketplace by charging for old television shows, rare documentaries, and even rarer movies and concert footage, are we not approaching the time when Google starts letting individuals set prices for their owned uploads?

Remember that even Google's IPO was all about helping out the little guy. Unlike a traditional investment banker stock offering, Google also allowed individual investors to register through Google in order to buy into the company before it went public at the $85 price paid by institutional fat cats. Between the quasi-auction IPO and its AdSense program, Google did the right thing, and it has profited nicely. It wouldn't surprise me to see this happen on the video front first, and then in the promising music realm.

Music is an intriguing hotbed, because players such as RealNetworks (NASDAQ:RNWK) and Napster (NASDAQ:NAPS) run mostly as unlimited music-subscription services, with a la carte downloads serving as a secondary source of revenue. The one hang-up, whether it's paid downloads or streaming buffet lines, is that the record labels have been too stingy in their pricing. It doesn't make sense for a digital download of an entire CD to cost nearly as much as a physical copy, but the labels have maintained their tight pricing policies. Opening up the submission floodgates -- again, something that Google is more than likely to roll out before any of its potential competitors do, even though it hasn't tossed its hat into that ring -- would grant the provider the ability to offer cheaper subscription services and cheaper downloads geared toward the indie-loving, local-band-absorbing music fan. The fact that Google is emphasizing local scenes in its search product is simply gravy at this point.

The war to end all wars
It doesn't feel like much of a battle at the moment. Rolling out its own video store, promoting the proliferation of cheaper online access and open-source software, and wallpapering the Web with "Ads by Google" doesn't smell like much of an affront to Apple. However, tack on the missing ingredient of Google's individual-empowering past into Apple's firm grasp on digital distribution, and it's really just a matter of time before Google and Apple are sparring over key hires and Apple is flying execs into Cupertino for its own "Google Challenge" summit.

When two cool companies with rich balance sheets go to war, it isn't necessarily bloody, though it can sometimes be costly. The stakes get higher. The margin of error shrinks. Expect a ton of consolidation in the industries that will matter the most. Looking over the list of past picks in the Motley Fool Rule Breakers premium newsletter, I can envision a few of those companies being acquired -- ideally at a juicy premium -- by either Apple or Google, to make sure that neither one relinquishes the throne after being crowned the King of Cool.

Yes, these are interesting times. Two good corporate buddies are about to bare their claws. Pull up a seat. This entertaining battle will bear watching.

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Longtime Fool contributor Rick Munarriz is a huge fan of both Google and Apple, though he does not own shares in either company. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.