Google vs. Apple - two different business models

Too often, when people discuss Android phones on the Net, things degenerate into a smackdown contest between iPhone and Google. Actually, when you step behind the stereotypes and look at each company's business model, it's hard to say that they compete directly. Yes, in a sense you can say that they both create operating systems used by the end-smartphone user, but that's it. Their business motive, business model and sources of revenue are widely divergent.

As we know, Google does not make money off Android, because it is an open-source, free software. In fact, it probably costs Google big money to keep developing the numerous iterations of Android that come out each year. The company has a long term strategic reason to invest in Android, in addition to the short term financial gains.

The long term reason is simple to understand - it centers around Google's search monopoly, which drives their enormous advertising revenue. In this YouTube video Google CIO Douglas Merril Google  describes Google as a 'search, ads and apps company'. He also puts up the company's mission statement which is to 'organise all the world's information and make it universally accessible and useful.' Do note the motherhood of this statement - all information (across languages - hence Google Translate), across mediums (from books, to TV, to the web), accessible on any device. Also, from Google's perspective, the world's information includes information about YOU as a user of Search, YouTube, Chrome and numerous other Google products - what interests you, what ads you click on, what products you buy - which in turn helps them to target relevant ads to you. So if trends indicated way back in 2007, that more and more people were going to access the internet through their mobile phones, it made sense for Google to jump in and have a presence that integrated Google products with the device and operating system. It was an incredibly smart piece of foresight, putting Google ahead of software giant Microsoft in the mobile space. Soon, when mobile advertising builds up momentum, as it will, Google will comfortably slide into its old role, on a new medium.

And in the meantime, Google has other ways of milking revenue from Android. First and foremost, the company takes a cut of 30% from developers on sales of apps through the Android marketplace.
Google also has revenue sharing agreements with carriers who support Android devices (I am not clear about this but I think that Google splits the 30% revenue that comes through Android marketplace with the carriers). And there are revenue sharing arrangements with handset makers who offer Google branded handsets like Droid and Nexus, and install Google applications like search and maps on their phones.

Apple has a 'closed' business model, which is closer to that of Nokia or RIM (Blackberry). Google does not attempt to build handsets, they give huge leeway to manufacturers to layer Android with their own User Interfaces and they do not control what kinds of apps go up in the Android Marketplace. Apple on the other hand, builds phone hardware to consistently high standards, and controls every aspect of the software, user interface and usage experience. The app store is very much like a walled garden, with Apple reviewing and approving each app before it is offered to users.  Apple's rigid control comes from its obsessive desire to maintain a stable, consistent and high quality user environment, and they have succeeded brilliantly in this.

The initial business model of the iPhone 3G in the US makes for interesting reading. Customers would pay the full price of the iPhone upfront and carriers would share their monthly revenue with Apple. It says a lot for Steve Jobs that he was able to negotiate such a deal. Eventually however, Apple shifted to the same revenue model as other handset manufacturers - the carriers would subsidise the phone to customers, and make up the money through contracts.

So Apple makes money through selling hardware and controlling the platform (iOS/ App Store) through which software is sold. Unlike Google, Apple is also a distributor with the iTunes platform, retailing movies, music, ebooks etc. And like Google, Apple also rolled out its iAds platform which would create a potential revenue stream for developers as well as the company. As a combination of all these measures, the Apple business model is a highly profitable one and proven to be successful through the years.

So where do Google and Apple actually compete, if at all? I would say, the direct clash of interest comes only when you look at Apple as serving ads to its users. Barring this, the two companies operate in very different spaces.

Google aims for world dominance, in line with its mission statement. The route to world dominance is through open networks, collaboration and flexibility. Google wants to carry as much of the world as it can, to the New Mobile era. Whether you are on a Rs. 6000 Micromax Andro or a mid-priced HTC Wildfire or a high end Nexus S/ HTC Evo, you are of value as a Google customer.

Apple on the other hand, looks at high revenue generation through premium products with high usage satisfaction and loyalty. The company does not earn as much profit (per piece sold) from iPad and iPhone, as it does from Macs. But the volumes sold more than compensate for this. Apple has not shown interest in creating a cheaper mass phone/tablet which might lead them to compromise their industry-leading standards for digital products. So, they will not achieve the scale of growth that Android phones do, but they will remain a vastly profitable segment of the market, for a long time to come.

The bottomline - like I said, Google and Apple do not compete. Not in the sense that old rivals Microsoft and Apple did. And both are here to co-exist in a market that is only going to grow for years to come. It's unlikely that Google will kill off/ stifle Apple's growth (and why would they even want to?). Let's celebrate real choice in the mobile market. It can only benefit us as consumers


Sources
Wired
Pocketnow
Hardgeek
CNNMoney

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