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Are Apple and Google Preparing for Battle?

Jeremy Glaser

Jeremy Glaser: I'm Jeremy Glaser with Morningstar. This morning, Eric Schmidt, CEO of Google, resigned from Apple's Board of Directors. Here to discuss the impact of this announcement and any potential competition between Google and Apple in the future is our analyst Rick Hanna. Thanks for joining me, Rick.

Rick Hanna: Thank you, Jeremy.

Glaser: So what impact do you think this has on Apple, if any?

Hanna: Well, I think it's more symbolic than anything else. What I think it really is is how quickly technology changes. Eric Schmidt has been on Apple's board for almost three years now. Three years ago, Apple wasn't in the phone business. Google was primarily focused on search and advertising related to search, and how, in three short years, they're intersecting in phones, and now increasingly in software as well. I think that because of that increasing overlap, they've mutually come to a decision that it probably would be in their best interests that he would leave the board.

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Glaser: So, what business do you think Google and Apple overlap the most on?

Hanna: First and foremost, clearly it's going to be the iPhone. With Google's entry with the Android phone, it's clear that Google's intent is to build a competing ecosystem just as Apple's iPhone. They want the app store and all that. Without Mr. Schmidt's participation in Apple board-level discussions about what their strategy and so on, you just can't allow someone of his stature to be able to glean important strategies or strategic intent that Apple's going to try to do with that platform.

Glaser: Android has not exactly been a runaway success. I think it's been out for about a year now. It hasn't gained a lot of traction. They use third-party hardware instead of Apple building their own hardware. It hasn't really caught on with consumers. Do you think that this is a business that Google is really in for the long haul or something that could really be a serious threat to Apple in the long term?

Hanna: The long term is really the question. In the short term, I don't really see Android deterring Apple's momentum in the slightest. I mean, Apple is just really on a tear with its iPhone. I think the issue with Eric Schmidt's being on Apple's board, however, is to what extent would he be able to glean where Apple's trying to go with that platform strategically. Would he be able to capture some of that that he could take to Google and try to work on the Android platform? Longer term, it appears to me that Google is in that. They see that the mobile computing platform - we call it the iPhone, but it really is becoming more of a mobile computing platform. That also really corresponds with what Google is trying to do with its Chrome operating system.

It sees the mobility which really spans the spectrum, not only the phone, but also mobile computing, or a laptop, or a netbook. Google wants to own part of the real estate so that they can capture the traffic that would be related to consumers using that type of a device.

Glaser: Yes, that certainly seems to be one of the key tensions maybe between Apple's philosophy and Google's philosophy is that Apple likes to control the entire ecosystem. They want you to buy the songs and then put them on iTunes, put them onto your iPhone or iPod, while Google has more of an open architecture. It wants people to be able to take it from a few different places. Recently, Google launched a service called Google Voice, which lets people have a single phone number that could ring their cell phone, or their work phone, or their office phone. They created an iPhone app that kind of touches this, and Apple summarily rejected it from the iPhone.

Do you think that those kinds of disagreements might have also led to Eric being pushed out of the board?

Hanna: Yes, I think it was symptomatic. Again, the perception of him being pushed out, I really, honestly believe it was a mutual decision. I think they both - Steve Jobs as CEO, Eric Schmidt as CEO - recognize the fact that they're competing on more and more levels right now, that it would probably be in the best interests of Apple shareholders, who really Eric would report to as a board director on Apple. It really is in the shareholders' best interests that he not participate in some of those very key strategic decisions. Related to the Google Voice application, that to me seems like it may be moving closer to some of the arrangements that Apple has with AT&T in terms of the use of its network and so on. How that plays out going forward - I don't know that that was the deal-breaker behind Mr. Schmidt's departure. I think it really was more at the strategic level.

Glaser: Do you think that Google is the biggest threat that Apple faces competitively, or do you think it's another company or combination of companies, perhaps?

Hanna: I think it's a combination. You mentioned Apple likes to control a lot of the whole ecosystem. It really is kind of a walled garden sort of a strategy. They combine the unique designs with all the hardware and the software, and they can really optimize everything for user experience versus something that's open system which may be commodity part-sourced - a lot of free stuff, kind of going for the value. I think there's room for both in the market. Right now, Apple's functionality seems to be winning over, but, down the road - we've seen it in PCs. The commoditization just continues, and that's allowing a lot of new companies and new entrants to disrupt some of the traditional business models.

Take Microsoft as an example with the operating system, and office software, and so on. There are a lot of disruptive elements in technology that could threaten their foundation. That's certainly true with Apple, as things go forward, as technology matures, as competitors come into different areas.

Those are always the things that we think about as analysts here at Morningstar, how the future revenue streams and profitability could be affected by technology changes.

Glaser: So this announcement might be making a lot of headlines, but it probably doesn't have really any impact on Apple's business or on Apple's competitive position.

Hanna: Not in the near term, no. Not at all.

Glaser: OK, great. Well, thanks so much for talking with me today, Rick.

Hanna: Thank you.

Glaser: I'm Jeremy Glaser with Morningstar. Thanks for watching.