Watch CBSN Live

Google, Apple Transforming Battle for Mobile Media Consumers

Apple and Google dueling for the hearts and pocketbooks of connected consumers with branded smart phones, e-tablets, operating software and services conjures images of a Transformers-like battle to the death.

Google's direct entry into the smart phone fray underscores the emergence of Internet-connected mobile devices as the definitive conduit for personal search, socialization, entertainment, information, marketing and e-commerce.

The new Google-supplied phone, Nexus One, is what Goldman Sachs calls "the biggest competitive threat to iPhone" embracing Apple CEO Steve Jobs' modus operandi: to own the consumers, you must control their devices.

The end game for Apple and for Google is to become a consummate hub for mobile interactive services and consumer connections. Morgan Stanley estimates that within five years, more users will be connected to the Internet by mobile devices than on desktop PCs as usage increasingly centers on data - not voice.

Jobs has built a $180 billion ecosystem generating an estimated $28 billion in mobile related revenues, according to a voluminous report published this week by a team of Morgan Stanley analysts headed by Mary Meeker. It is a walled garden supported by 57 million iPhone and iTouch devices and 2 billion downloaded iPhone applications, in addition to iPods, Mac laptops and operating system, and gated iTunes services.

Google wants a piece of the action to assure its continued dominance of digital search and advertising on mobile gadgets by controlling user experiences and applications such as visual and voice search.

For instance, Favorite Places is a new app for any mobile device supported by Google Maps and real-time search including public social network posts. The integration of corresponding QR scanning and bar codes render reviews and electronic coupons on mobile devices. Google also is a major investor in Cloud Computing technology that provides boundless capacity for consumers to build "unified digital lockers" with individually selected entertainment, information, applications, social connections and location-based personalization (such as virtual contacts).

While Google's plans to bring desktop functionality to mobile devices has been in the works for some time, the underlying economics remain unclear. It surely will have implications for advertisers as well as for struggling local television and newspaper operators seeking stronger mobile ties.

Google recognizes the need to shore up a 38 percent drop off in paid click and search query volume growth the past two years, according to JP Morgan analyst Imran Khan. Mobile search advertising should command higher unit pricing while improving relevant search, he said. Nascent mobile advertising will grow 40 percent while online advertising will level off at six percent growth in 2010, according to eMarketer.

Goldman Sachs estimates that the new Google phone could generate $3 to $5.50 per user in monthly mobile search revenues, and more display advertising applications driven by its recently acquired AdMob mobile ad network.

"This display advertising opportunity may ultimately be as large in gross revenue as the search advertising opportunity," Khan said. Initially, the Google phone may render up to 40 percent gross margins, compared with about 65 percent on Apple's iPhone, even after paying a subsidy to carriers.

Goldman Sachs analysts James Mitchell and Jason Armstrong say Google could use its cash reserves to subsidize $50 to $100 of each new "unlocked" Nexus One phone whose open platform will compete with its Android operating system-based handsets from partners Verizon, T-Mobile and Sprint.

In fact, Google will deal directly with app developers and consumers, bypassing and reducing carriers to bit pipes by selling the Nexus One through outlets such as Amazon and Best Buy, analysts say. The aggressive move reflects Google's concern about the fragmentation of the Android ecosystem.

Although Google is investing billions from WiFi to space travel and green technology, the manufacture and support of mobile equipment represents a new strategy and risk that are contrary to its high-margin online advertising and search businesses.

Google is betting that such mobile devices eventually can be fully funded by advertising revenues, says Barclay's Capital analyst Douglas Anmuth. In the interim, availability of the new phones will support Google's campaign to use mobile devices as universal remote controls across open systems and networks.

As a result, Apple's dominant ecosystem -from hardware t software to integrated applications - appears vulnerable for the first time ever. "Apple's ownership of the hardware and operating system has enabled rapid cycles of innovation and seamless version control and software upgrades, keeping Apple out in front of competitors," Mitchell said.

Google's branded phone affords greater platform control and the opportunity "to create a distribution mechanism for Android applications and digital media that is as powerful or consistent across hardware platforms as iTunes and the App Store for iPhone," Mitchell said.

Inevitably e-tablets and e-readers, netbooks, Internet-enabled mobile TV and game consoles will follow. "The depth of the global app ecosystem, user experience and pricing will determine long-term winners," Morgan Stanley analysts say. But innovation -- such as Google Goggles vision search, demonstrated on YouTube -- will be the secret weapon.

"Epic battles like the one that's developing around the mobile Internet...with the best and the brightest in the a war game," Morgan Stanley said.

View CBS News In