Google, which recently reorganized and renamed into a holding company called Alphabet (GOOG, GOOGL), is worth a full $130 billion less than rival Apple Inc. (AAPL). But it’s demolishing Apple in one key area: GOOG’s Android operating system boasts nearly six times the market share that AAPL’s iOS has.
Apple doesn’t really care though. That’s because the company’s strategy of controlling all aspects of the customer experience — both the hardware and the software — has proven to be a wildly profitable strategy. AAPL is literally the most profitable company in the world.
Well, GOOG is sick and tired of seeing Apple rake in all those profits despite its meager grip on the mobile OS market. So watch out, AAPL: A Google phone is likely on the way.
But does a Google Phone actually pose a risk to AAPL and its flagship iPhone? That remains to be seen.
Here’s why Apple, and AAPL investors, shouldn’t write off the competition just yet … and a few reasons why they should.
Google Phone: Pros
There are more than a few obvious advantages GOOG could reap by building its own phone. Taking a page out of AAPL’s playbook, Google would be able to build software around its hardware, so that the two function seamlessly together.
And although it seems unlikely a Google phone could command the sort of price premiums the Apple brand does, who knows? GOOG becomes a master of its own destiny in that respect and could choose to build out a premium, high-margin smartphone brand if it wanted to.
A Google phone would also ensure that the Android OS lives forever.
At the moment, that’s not really an issue: Android enjoys an 82.8% market share; iOS has a market share of just 13.9%, while Microsoft (MSFT) and BlackBerry (BBRY) combined account for less than 3% of the global market.
Still, Samsung (SSNLF) is developing an OS of its own, called Tizen, and while it doesn’t pose a huge risk this second, it’d be unwise for GOOG to leave its Android empire in the hands of third-party handset makers with no allegiance to GOOG.
Google Phone: Cons
One of the major risks for GOOG, should it undertake the challenge of making its own Google phone, would be managing the strained partnerships with mobile phone manufacturers the move would surely create.
AAPL doesn’t have to worry about maintaining relationships with outside handset makers, but Google will still desperately need Samsung, Huawei, LG, HTC and the like to keep churning out Android phones to maintain market share. Call it a hunch, but the aforementioned might not take it well if GOOG muscled in and became a competitor itself.
Another reason AAPL stock holders shouldn’t sweat the Google phone just yet is Google’s less-than-stellar history in the handset hardware business to begin with.
Specifically, Google’s Motorola experiment didn’t go too well. Just last year, the company sold Motorola Mobility for $2.9 billion. Two years earlier, it had spent $12.5 billion for the company. It also sold off Motorola’s set-top box unit for $2 billion, and retained aton of patents, so what remains s basically an overvalued patent portfolio GOOG paid $7.6 billion for.
Apparently it took the Stanford-educated billionaires Larry Page and Sergey Brin a while to comprehend that the smartphone business was, you know, difficult. Said Page, upon the Motorola Mobility divestiture:
“The smartphone market is super competitive, and to thrive it helps to be all in when it comes to making mobile devices.”
Uh, yeah. Spoiler alert: you have to try.
Bottom Line
In a nutshell, there’s no telling whether the Google phone will be a hit or a flop. AAPL stock holders shouldn’t worry about their Mountain View-based rival just yet — it’s got a long ways to go.
But I wouldn’t count Google out, either.
It probably picked up a lesson or two in its ill-advised Motorola endeavor, and if after years of exploring the idea GOOG is finally making a Google phone, the search giant must see a compelling reason to pull the trigger.
As of this writing, John Divine was long AAPL stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
