How the battle between Silicon Valley's superstars will shape the future of mobile computing

On Jan. 5, Google (GOOG) did a very Apple-like thing. In a presentation at the Googleplex in Mountain View, Calif., the 11-year-old search behemoth unveiled Nexus One, a stylish touchscreen smartphone that runs on the company's Android operating system, is sold through a Google-operated retail Web site, and greets the market with an advertising tagline ("Web meets phone") as simple and optimistic as the one Apple used in 2007 to introduce its iPhone ("The Internet in your pocket").

On the same day, Apple did a very Google-like thing. Steve Jobs, the king of splashy product launches and in-house development, announced a strategic acquisition. For $275 million, Apple purchased Quattro Wireless, an upstart advertising company that excels at targeting ads to mobile-phone users based on their behavior.

When companies start to imitate one another, it's usually either an extreme case of flattery—or war. In the case of Google and Apple, it's both. Separated by a mere 10 miles in Silicon Valley, the two have been on famously good terms for almost a decade. Jobs and Google CEO Eric Schmidt, both 54, spent years in separate battles against Microsoft (MSFT) while Schmidt was at Sun Microsystems (JAVA) and Novell (NOVL). Over time, they went from spiritual allies to strategic ones. When Apple had an opening on its board in 2006, Jobs tapped Schmidt. "Eric is obviously doing a terrific job as CEO of Google," Jobs said at the time. Schmidt, meanwhile, called Apple "one of the companies in the world that I most admire."

Tensions in Silicon Valley's special relationship began to emerge in late 2007, when Google announced plans to develop Android for mobile phones. Apple had unveiled its iPhone in January of that year, and it was clear that the two companies would spar in the smartphone business. Still, both were niche players, with more formidable rivals in companies like Nokia (NOK), Samsung, and Research In Motion (RIMM). Only after software developers began creating thousands of mobile apps, and it became clear that phones would become the computers of the future, did the conflicts begin to grow serious. Last summer, Apple refused to approve two Google apps for sale to iPhone users, raising questions about how much of a Google presence Apple would allow on its devices. In August, Schmidt gave up his board seat. "Unfortunately, as Google enters more of Apple's core businesses," Jobs said at the time, "Eric's effectiveness as an Apple board member will be significantly diminished, since he will have to recuse himself from even larger portions of our meetings."

Now the companies have entered a new, more adversarial phase. With Nexus One, Google, which had been content to power multiple phonemakers' devices with Android, enters the hardware game, becoming a direct threat to the iPhone. With its Quattro purchase, Apple aims to create completely new kinds of mobile ads, say three sources familiar with Apple's thinking. The goal isn't so much to compete with Google in search as to make search on mobile phones obsolete. "Apple and Google both want more," says Chris Cunningham, founder of the New York mobile advertising firm Appssavvy. "They're gearing up for the ultimate fight."

Apple spokeswoman Katie Cotton declined to comment on the company's advertising plans or its relationship with Google. Google spokeswoman Katie Watson said the company would not make executives available for this story. She did provide a statement, attributed to Vic Gundotra, Google's vice-president of engineering: "Apple is a valued partner of ours and we continue to work closely with them to help move the entire mobile ecosystem forward."

Collision Course

Apple and Google, once close allies, are battling on a growing number of fronts


SMARTPHONES

Apple has ridden the iPhone to 14% of the smartphone market in three years. Google's original plan to let hardware partners make phones running its Android software has garnered only a sliver of the market. So Google, risking the ire of Android phonemakers, is launching its own Nexus One phone.

MOBILE SOFTWARE

The 125,000 apps iPhone users can download bolster the popularity of Apple devices and give it influence over how people use their phones. Rather than use Google's search, iPhone users can fire up the New York Times app for news or Yelp for local restaurants. Google is well behind with 18,000 Android apps.

ADVERTISING

Google's core business is advertising, with virtually all of its revenue coming from the text ads that pop up alongside search results. Apple aims to break into the mobile advertising business Google has been eyeing by creating new ways to advertise within apps on the iPhone and other Apple devices.

PERSONAL COMPUTERS

Apple still gets almost 40% of its revenue from Mac computers running its operating system. Now Google is developing Android to run competing machines and has designed a separate operating system, Chrome OS, for simpler computer Web surfing. Both companies will soon back tablets, too.

ENTERTAINMENT

While Apple has become the world's largest music retailer, Google just began using its search engine to direct people to Apple rivals to play and buy songs. Google owns YouTube, and Apple is adding more video to iTunes, reportedly including a push to offer cable-like subscriptions to shows from CBS, ABC, and others.

ACQUISITIONS

Apple and Google, with $23 billion and $22 billion in cash and short-term securities, respectively, are competing increasingly for the same startups. Google won out in bidding for the ad service AdMob, then Apple outbid Google for the music site LaLa Media last year. Apple is adding people and processes to better compete for deals.

[businessweek]