Will Google Win The Mobile Computing War?

Reggie Middleton's picture

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Reggie Middleton's picture

Mid-2009 predates Reggie’s prediction of the “inevitable conquest of Google’s Android OS and ecosystem”. My contention is that claiming to have “been proven correct beyond a shadow of a doubt” for the past year (Reggie’s timeframe, not mine) is disingenuous in light of Google’s relative performance.

It is 2/2011, and Google's Android is number one. I believe I was correct, and I don't believe there is much doubt either. I don't give share price estimates out for free since I cannot generate them for free, but if you bother to purchase a subscription and check the price targets and the actual performance of Google and RIMM you will see that I have been quite accurate - to within a few dollars. Of course it doesn't always work out that well, but it did this time around.

You are suffering from short termism, a very widespread condition and you are extrapolating and reaching in an attempt to try to prove me wrong. I said Android will outstrip Apple and Blackberry, and it has. You cannot refute that. Thus far there is every indication that Google will outstrip Apple in the medium to long term in terms of fundamentals as well, but it is a process. Things may change and Apple may alter its course, there's just no indication that is happening as of yet.

No-1-U-Know's picture

 

It is 2/2011, and Google's Android is number one. I believe I was correct, and I don't believe there is much doubt either.

As of 2/2011, Google and its hardware partners are selling more smartphones than Apple but Apple is generating more profit than all of them combined. Since the name of the game is making money, it’s Apple’s iOS that is currently number one. The issue must be judged from the profitability perspective, in my opinion.

I don't give share price estimates out for free since I cannot generate them for free, but if you bother to purchase a subscription and check the price targets and the actual performance of Google and RIMM you will see that I have been quite accurate - to within a few dollars. Of course it doesn't always work out that well, but it did this time around.

You are suffering from short termism, a very widespread condition and you are extrapolating and reaching in an attempt to try to prove me wrong. I said Android will outstrip Apple and Blackberry, and it has. You cannot refute that.

Since you claim exceptional success over a stated period (“nearly a year now”), the onus is on you to provide evidence for that exceptional success over that time frame. Like I wrote, your market share prediction has panned out: you are correct in that regard.

However, you have a higher standard to live up to: the measure of your success as a financial analyst rests not in the correct projection of a particular metric, but in using metrics to predict asset appreciation. Your free commentary suggests that Google and its hardware partners, because of their tremendous unit growth, should be outperforming Apple, which has not been the case for most over the defined period of nearly a year. You might provide additional insight in your subscription material (different time frame, specific stock recommendations and targets) but I can only comment on what I see, and in light of the results (the financial underperformance of Google and most of its partners), you are wrong to claim being correct “beyond a shadow of a doubt”. I don’t refute the correctness of your market share prediction, I challenge its pertinence and value.

Thus far there is every indication that Google will outstrip Apple in the medium to long term in terms of fundamentals as well, but it is a process.

I also believe Google will eventually be highly successful, but not at Apple’s expense: Google (like Microsoft in PCs) will capitalize on its volume and Apple (as it does in PCs) will keep on capitalizing on its leadership in innovation and its distinction.

Things may change and Apple may alter its course, there's just no indication that is happening as of yet.

You have suggested that Apple license its software to try to reverse the unit share decline relative to Android. What would hapen if it did? It would lose its main differentiator and enable other phone manufacturers to compete against it, bringing prices down. This might increase iOS’ market share, but would decrease Apple’s profitability. It’s not a solution. As a matter of fact, the problem doesn’t exist: Apple doesn’t need to alter its course, as it’s not pursuing the highest unit share, but the most valuable unit share. It’s based its iPhone strategy on the proven success of its Mac business. Apple will probably end up with a lower market share when the dust settles, but just like in PCs, that lower share will be a lot more profitable.

Google’s mobile business should also become very profitable over time, but Apple will not sink if it keeps trailing Android in unit share. It will sink if it loses its grasp on the most profitable part of the market.

 

No-1-U-Know's picture

 

Nowhere in my comment do I claim you indicated to sell Apple.

You did not "claim" it but you very much implied it in your reply to Reggie:

Hence the readers who followed your contrarian research and analysis would have been richly rewarded by selling Apple and buying Google over the past year, right?

 

Selling Apple and buying Google can be implied from his analysis, that’s why I pointed out Google’s underperformed Apple over the past year, the timeframe he provides.


"Anyone playing the Android related ecosystem for a bit longer than "past year" (say since mid-2009 - by which time the post-2008 general run-up has been finished mostly, to keep the stats fair) had been richly rewarded: long HTC, Motorola, Google, short NOK - just to name a few."

Mid-2009 predates Reggie’s prediction of the “inevitable conquest of Google’s Android OS and ecosystem”. My contention is that claiming to have “been proven correct beyond a shadow of a doubt” for the past year (Reggie’s timeframe, not mine) is disingenuous in light of Google’s relative performance.

"Shorting the bubble itself directly (AAPL) is difficult - it's always difficult to short long-running bubbles. Also, AAPL does make a ton of money and stock valuations are extrapolated based on that, so shorting it without direct, immediate financial signs of trouble would be more than silly."

I made no mention of shorting in my post. I only supposed that a reader who sold his Apple shares and bought Google instead based on Reggie’s analysis, not his explicit recommendation, would have vastly underperformed.

Apple grew its earnings by an average of 63% over the past 16 quarters (http://www.asymco.com/2011/01/20/apples-growth-scorecard-63-average-earnings-growth-over-16-quarters/) and shows no signs of letting up. Yet AAPL’s PE is only 19.22, compared to the S&P’s 14, putting its ttm PEG at 0.3. Those are not bubble metrics. Apple’s growth is being discounted by the market.

“Btw., I don't agree on everything with Reggie - for example I think his call on the further collapse of real-estate (and banking) were a bit too pessimistic - once it was clear that US policy makers chickened out from letting any big bank go bust in early 2009 it was clear it was a one-way road up, with the costs and risks of banking socialized in essence. But his Android call was spot on.”

He got Android unit share right, but fails to see a significant part of the big picture, in my opinion. Those who read his initial analysis a year ago and decided to buy Google or most Android phone makers (even though there's no explicit recommendation) instead of Apple have underperformed. He’s hence been far from “spot on” or “correct beyond a shadow of a doubt”.

 

More Critical Thinking Wanted's picture

 

Selling Apple and buying Google can be implied from his analysis, [...]

But he did not say so and did not suggest any specific price levels, right?

Just like you just acknowledged that there is a material difference between implying a future direction and suggesting specific trades (you just two replies before vehemently denied claiming something but then acknowledged that you implied it), can Reggie point to that material difference as well, don't you think so?

 

No-1-U-Know's picture

 

Selling Apple and buying Google can be implied from his analysis, [...]

But he did not say so and did not suggest any specific price levels, right?

Right. But he does provide a time frame of “nearly a year now” to claim his “research and analysis has been proven correct beyond a shadow of a doubt”. Since Google has underperformed Apple during his stated time frame, it casts a doubt on his claim.

Just like you just acknowledged that there is a material difference between implying a future direction and suggesting specific trades (you just two replies before vehemently denied claiming something but then acknowledged that you implied it), can Reggie point to that material difference as well, don't you think so?

Absolutely: suggesting a trend and making a specific recommendation are very distinct. The difference is material. Reggie explicitly claims exceptional success over a specific period (“nearly a year now”). As such, the onus is on him to provide evidence for that exceptional success over that time frame. It’s this claim that I challenge, not a specific trade. I compared the performance of the protagonists of his analysis to illustrate that his overconfidence is unwarranted. I acknowledged that his market share prediction has panned out: he is correct in that regard. But, as I further comment in reply to his post below, the correct projection of a metric is insufficient for a financial analyst to claim being correct “beyond a shadow of a doubt”. Financial outperformance is the standard, and it has not been demonstrated.

 

No-1-U-Know's picture

“Again, I'm wrong often enough, so I don't need anon commenters making things up.”

Thank you for replying to my post. My original comment was confrontational, so a parting jab was probably deserved. Whether anonymous or not however, the question I raised is pertinent and I made nothing up.

“Actually sir, no where on my site did I indicate one should sell Apple - at least not yet. That's your first error.”

Nowhere in my comment do I claim you indicated to sell Apple. I pointed out that, since you have been pitting Google against Apple and congratulate yourself for “our highly contrarian research and analysis” having “been proven correct beyond a shadow of a doubt” “for nearly a year now”, Google would logically have been the superior investment over that period, which is far from being the case.

“The second is I went bullish on Google in the mid $400s or so. It is somewhere around $620 now and the options on Google were much, much cheaper than the calls on Apple since Apple is on everyone's radar while Google was (and is) underestimated. More bang for the buck, you know.”

I made no claim as to any of your personal positions or the relative value of options, so there is also no error there on my part. But since you bring it up, you provide insufficient context to judge the quality of your trades.

“Your 3rd error is that I have a considerably longer horizon than "the past year".”

Your horizon may be longer but, again, since you pat yourself on the back for your outstanding research “for nearly a year now”, you should demonstrate superior results over that period. Granted, you had predicted that Android would overtake the iPhone in terms of market share and that prediction has come to pass. As such, you are partially correct. However, you are a financial analyst, such that the yardstick of your success is making your clients money. In that context, because the company you favor, Google, has underperformed the competitor you target, Apple, the claim “I feel our highly contrarian research and analysis has been proven correct beyond a shadow of a doubt” is much exaggerated.

“I look forward, and looking forward Apple looks to lose this race. If or once Apple is relegated to a smaller, slower growing niche, both developer and advertiser's hearts will drift towards the faster growing and more populated platform - undercutting the source of Apple's outsized profits. Of course, you will not be able to see this if you are looking at this quarter by quarter or even year by year.”

It’s possible, but there is an important precedent that you are unaware of or fail to acknowledge that weighs heavily in Apple’s favor: Apple’s Mac business has shown that the company is able to generate the lion’s share of profits (35% in 2009) with minimal revenue share (only 7%). Also, the iPhone should by now have begun to feel the effects of the Android onslaught. Yet, as I pointed out, it’s been able to maintain its huge profit share and has forced Verizon to see the light and add the iPhone to its lineup (http://www.asymco.com/2011/01/11/verizon-back-at-bat-revisiting-the-last...).

“Methinks that this time next year, this will be quite obvious, though. This is a very dynamic and fluid market, but thus far Google is in the pole position and pulling even farther ahead with a plethora of entrepenurial initiatives that are only starting to sprout.”

I believe your focus on unit share as the ultimate measure of success is misguided. The two protagonists have different models that can both win. As things stand, evidence suggests that the iPhone and other iOS devices will keep making a lot of money, that Android will win the greatest market share in smartphones, that Google will eventually come up with ways to monetize Android’s market penetration and that the Android phone makers will be competing on price to sell commoditized clones, just like Windows PC makers. More simply, things are shaping up as Apple-WIN, Google-WIN, Android phone makers-LOSE.

“The tech company that I did recommend to sell dipped about 20%… So, the brilliant analysis has paid off already.”

Again, without context, judging the quality of a trade is impossible.

More Critical Thinking Wanted's picture

 

Nowhere in my comment do I claim you indicated to sell Apple.

You did not "claim" it but you very much implied it in your reply to Reggie:

Hence the readers who followed your contrarian research and analysis would have been richly rewarded by selling Apple and buying Google over the past year, right?

Anyone playing the Android related ecosystem for a bit longer than "past year" (say since mid-2009 - by which time the post-2008 general run-up has been finished mostly, to keep the stats fair) had been richly rewarded: long HTC, Motorola, Google, short NOK - just to name a few.

Shorting the bubble itself directly (AAPL) is difficult - it's always difficult to short long-running bubbles. Also, AAPL does make a ton of money and stock valuations are extrapolated based on that, so shorting it without direct, immediate financial signs of trouble would be more than silly.

Shorting other, non-bubbling members of the same ecosystem and going long on the contrary forces was much easier.

Btw., I don't agree on everything with Reggie - for example I think his call on the further collapse of real-estate (and banking) were a bit too pessimistic - once it was clear that US policy makers chickened out from letting any big bank go bust in early 2009 it was clear it was a one-way road up, with the costs and risks of banking socialized in essence. But his Android call was spot on.

 

Hephasteus's picture

Reggie reggie reggie.

It's a new decade.

Here's the menu.

Java becomes closed source, Apple becomes a monopoly, Microsoft is the underdog and Google is evil.

Google using cia spooks to manipulate sales figures.

http://www.tuaw.com/2011/01/31/ipad-not-losing-share-to-android-tablets/

Strategy analytics are spooks. They spook for both apple and google but they are trying to play a game here.

No-1-U-Know's picture

"BoomBustBlog is just about the only financially orientated publication that declared for nearly a year now, the inevitable conquest of Google’s Android OS and ecosystem. I feel our highly contrarian research and analysis has been proven correct beyond a shadow of a doubt."

Hence the readers who followed your contrarian research and analysis would have been richly rewarded by selling Apple and buying Google over the past year, right?

Wrong. Apple has appreciated by over 70% in the past year, while Google has only risen by a little over 10% (http://finance.yahoo.com/echarts?s=GOOG+Interactive#chart2:symbol=goog;r...).

Why are you wrong? Because you focus on the wrong metric: unit share matters much less than profit share, and Apple kept raking in over 50% of all mobile industry profits in Q4 2010 in spite of the growth of Android, which Google gives away for free

(http://www.asymco.com/2011/01/31/fourth-quarter-mobile-phone-industry-ov...

and

http://www.asymco.com/2011/02/01/the-iphone-share-17-25-of-smartphones-4...).

When should one expect your brilliant analysis to pay off?

 

Reggie Middleton's picture

Actually sir, no where on my site did I indicate one should sell Apple - at least not yet. That's your first error. The second is I went bullish on Google in the mid $400s or so. It is somewhere around $620 now and the options on Google were much, much cheaper than the calls on Apple since Apple is on everyone's radar while Google was (and is) underestimated. More bang for the buck, you know. Your 3rd error is that I have a considerably longer horizon than "the past year". I look forward, and looking forward Apple looks to lose this race. If or once Apple is relegated to a smaller, slower growing niche, both developer and advertiser's hearts will drift towards the faster growing and more populated platform - undercutting the source of Apple's outsized profits. Of course, you will not be able to see this if you are looking at this quarter by quarter or even year by year. Methinks that this time next year, this will be quite obvious, though. This is a very dynamic and fluid market, but thus far Google is in the pole position and pulling even farther ahead with a plethora of entrepenurial initiatives that are only starting to sprout. 

The tech company that I did recommend to sell dipped about 20%. Again, I'm wrong often enough, so I don't need anon commenters making things up. So, the brilliant analysis has paid off already. Apple

More Critical Thinking Wanted's picture

Actually sir, no where on my site did I indicate one should sell Apple - at least not yet.

I don't see an efficient way to play an AAPL long-term short either.

The puts are overpriced and in contango and the moment there's a bad quarter the stock will implode overnight.

And there's no dependent economy worth speaking of - the Apple universe is all concentrated into AAPL.

 

Cognitive Dissonance's picture

Jeez, I don't know what to do.

Here I am a Verizon customer off contract and looking for a new phone. Banzai7 tells me the new Verizon iPhone4 is my ticket to happiness. And since I'm an existing customer I'm pretty certain they will let me in on the pre-public sale.......assuming I get up at 3 AM Thursday morning to order.

But Reggie tells me my future is with Android and he makes what appears to be a reasonable business and user experience case.

What to do, what to do? :>)

Reggie Middleton's picture

I suggest you spend some time with the top of the line of each camp and make the decision based off of what's best for you. The main reason why iPhones and Blackberries sold so well was aesthetics, marketing and the perception that everyone else had one. I have converted many Blackberry and iOS people over to Android simply by using my little mini-computer in front of them.

Those who don't like it have plenty of other options. I actually do recommend the iPhone for people who just want to pick up a phone and go, or into the strong fashion sense thing. Anybody who craves, power, flexibility or raw functionality will feel left out by not getting the high end Androids, IMO.

the grateful unemployed's picture

has anyone considered that as manias go, this smartphone mania is our tulip moment?

Reggie Middleton's picture

With banks trading higher on loans against depreciating collateral, you comment on smartphones??? Smartphones are simply the next generation of PCs (personal computers). Some companies (the one's that put function over form) may actually benefit if/when things pop since they increase productivity and decrease cost, particularly the next generation that are set to come out assuming the come out at competitive prices. Since competition is thick, I belive that is a given.

Reggie Middleton's picture

With banks trading higher on loans against depreciating collateral, you comment on smartphones??? Smartphones are simply the next generation of PCs (personal computers). Some companies (the one's that put function over form) may actually benefit if/when things pop since they increase productivity and decrease cost, particularly the next generation that are set to come out assuming the come out at competitive prices. Since competition is thick, I belive that is a given.

More Critical Thinking Wanted's picture

 

I am really curious what will happen once Google tries to enter the corporate phone market.

So far Google has not even tried to compete with RIMM heads-on: the Blackberry just died off accidentally in essence, as collateral damage while Google was targeting web consumption.

 

imapopulistnow's picture

Android is much better than Blackberry, but no where near Apple.

Reggie Middleton's picture

Anybody who says this has obviously not tried ANY of the high end Android phones, which may I add are no more expensive than an iphone yet handily runs circles around it. Try this, If You Need More Proof Of Apple’s Inability To Keep Up With Google’s Android & Over 100 Other Android Hardware Vendors…

savagegoose's picture

the os is free but someone has to writre the apps.

pragmatic hobo's picture

since android is free, and mostly open, if android wins the "war" I don't see how GOOG can benefit from it?

williambanzai7's picture

I will only recount what I see on the ground in Hong Kong, one of the most intensive mobile handset markets on this planet.

The iPhone has clobbered the competition in terms of customer perception. That does not mean it is the only phone out there, but it is the phone everyone wants. Pretty impressive considering they are a latecomer to this market. I hear the same goes for the Mainland.

Similarly, the iPad is in high demand despite the added cost.

I don't think APPL want to sell to everyone based on a lower price point. They are focused on the high margin end of the market with lots of customers who are inclined to spend their money instead of looking for freebies. They have barely scratched the surface.

I dont know about you, but that is exactly where I would want to be. 

APPL has a constellation of synergistic elements that the rest of the playing field does not:

1. Extremely well designed hardware covering all angles (handsets, portable players, tablets, PCs and LTs)

2. Coupled with well integrated software platforms that they mange very well.

3. Existing customer base willing to pay for content and Apps that allow them to leverage all of their personal content (private and commercial).

4. Excellent customer service.

5. The innate ability to connect the preceding dots and implement a revenue generating social platform in the APPL user-verse. The trade are already noticing that AAPL are positioning themselves quietly. 

I don't consider Mobile me to be a serious cloud effort. I think it is a placeholder for what will inevitably follow. 

It is too early to see where the dust will settle in the living room. But everyone knows it is one of Jobs' hobbies, which means something is in development there as well.

Number 5 is their secret weapon. If they execute that right, they could blow the socks off everyone again. To date, Google has failed miserably in this regard, with the exception of uTube which is essentially an advertising platform. Facebook fails in terms of attentiveness to user concerns where as APPL gets an A+ in terms of customer respect. It is amazing how long it is taking for Web 2.0 montization mpdel to take hold.

In summation, the issue with AAPL  is not its business model, execution or performance to date. They have exceeded everyone's wildest expectations.

It is the hedge hog feeding frenzy driving up the name. APPL is not the only tech concern suffering this phenomena. But you can bet the people deciding strategy there are not people who make decisions based on what the stock will do tomorrow. 

It will be interesting to see how it all plays out.

Much more interesting watching two well run companies compete head to head than watching pinstriped conmen figure out how to swindle their next QE dime.

 

More Critical Thinking Wanted's picture

 

I don't think it's possible to argue that AAPL is not a success or not a fashion article at the moment - so you are certainly correct to that extent.

The argument is to just observe the sheer, unprecedented inertia Android has achieved in the most hotly contested platform space, and to remember what happens to fashion article companies, inevitably.

In two short years Android has come from zero to hero. It leads in the US in web consumption - so like Apple it's a high margin business concentrating on high-value consumption individuals too, just not in the hardware space but in the digital consumption space. It clearly clicked both with a lot of customers, with a lot of developers and with a lot of companies.

Demand for Android tablets is so high that it has grabbed 25% of the tablet market without even trying. That is, at minimum, impressive.

I see this as an open versus closed race, free market versus centrally planned play.

Apple keeps tight control over distribution and features: it does not allow any free market competition with its own features in the application space - full stop. If you do any 'meta' App or replace  an Apple feature too well (see Google Phone) you are out of luck: Apple will control that market brutally, and all the (constantly shifting) ground rules of the Apple platform are set out in a way so you will stay small, isolated, individual and fragmented.

That is as anti-free-market as it gets. Yes, there's 300,000 Apps - but none are allowed to threaten Apple's authoritarian views about the platform and none are allowed to integrate with the platform like Apple's own features.

Should any of the 300,000 apps become too successful Apple will implement a competing in the platform - and thus kill much of the market of the original app - regardless of how smart, innovative and business-savvy the App developer individual or company was. With rules like that is it really any surprise that it is Apple that provides the most stunning, most integrated features on that platform?

If you think about it for a moment you'll see that App developers are not free citizens of the Apple universe but expendable corporate agents of it. There are no rights and there is no concept of an independent judiciary, only obligations and rules to follow - else you are out overnight and there's no appeals process: the whole 'judiciary' process of App approval, denial or forced removal occurs under an NDA - anti-free-speech censorship in essence.

Maybe Jobs will be able to play Dear Leader of the smart-phone universe for decades to come. Maybe people, developers and companies will accept Jobs's role as police, prosecution, judge, jury and executioner over their market destiny.

I just have my doubts about such central planning schemes and personally prefer the more colorful free market, free choice, free speech model over tidy, well-managed corporate dictatorships. YMMV.

 

Jim in MN's picture

Reggie has it in the article tag up top: "Being that Android is essentially a front end to Google's cloud services and apps, does this mean that Google now has (or soon will have) more application reach than Microsoft - the world's largest software company?"

They can benefit any way they choose to.  They'll have the whole world--in your hand.

And with Google's TV fix coming on strong, they may simply take over content provision and intermediation delivery, the whole value added middle of the information universe.  Other than hardware and data per se (including the cute little kitten pictures, er content, that we mere humans provide), they're positioning to take a little slice of everything.  EVERYTHING.  Oh OK maybe not...radio...'cept if it's streaming online radio....and newsprint....whatever that is/was...

Is there a Google moviemaking effort?  ICANHAZCHEEZBURGER in Omnivision 3d? 

More Critical Thinking Wanted's picture

 

Looking at the market share and growth stats it's also an interesting that Microsoft's 7th version of its phone OS has largely failed in the marketplace. Windows once had nearly 20% of the phone market ...

If MSFT buys RIMM or NOK then it sets up itself for an even bigger failure: to drive down a 20%-30% combined market share to near zero by merging two failed product lines? Does that make much sense?

Also, risking that and running into a spectacular and expensive failure would surely mark the end of Ballmer as CEO of Microsoft - not sure he wants such a legacy - he's probably already considering a soft exit.

What looks more logical (and more surprising) would be for Nokia to team up with Google to merge Meego/Maemo and Android and acquire some special edge in the Android space that way? With Intel in the mix perhaps?

Will the ex-Microsoft exec Nokia CEO be able to bridge his probably deep cultural and technological gap to the Linux based Android OS though?

Interesting questions.