Apple’s Mobile Future

May 11th, 2010

There is a reason Apple included their new advertising platform, iAd, as one of iPhone OS 4′s seven “tent pole” features. Apple’s future is mobile devices, and iAd is an integral part of their goal to define the mobile market.

Google’s Threat

Apple’s strong response to Google in the past few months isn’t a surprise. Google, like Apple, knows the next big market is mobile devices. Both companies have prioritized their mobile platforms, and are trying to define the market. But while their general goals are the same, their strategies are quite different.

Apple’s strategy is hardware-based. Apple profits primarily by selling iPhone, iPod touch and iPad devices. They do not make much money from content–application–sales. Rather, the iPhone OS and the App Store are the primary reasons people buy iPhone-devices. They make money by selling their own hardware, but the selling feature is the OS. As such, Apple will not license out the OS. Even though this would increase market share substantially with little work, it would commoditize the iPhone’s biggest advantage, the OS, and would thus destroy the platform.

Google’s main source of revenue, though, is through advertisement. Their Android OS is a means. Google allows anyone to use Android because they do want to have a majority of market share, and they want it so everyone will use Google services. If most mobile devices run their OS, and they are using Google’s services, then they are tied to Google and are subject to Google advertisements. This is how they intend to control advertising in the mobile market.

Whereas the iPhone OS is Apple’s central advantage, Android is Google’s loss leader. Android is what gets you in the store, so you use their services and see their ads. For Google, then, commoditizing the OS benefits them. Allowing anyone to use Android for free hurts Apple’s competitive advantage. In fact, this is Google’s general strategy–commoditize their competitors’ main businesses. Chrome OS, Android, Google Docs, Google Maps Navigation–they all commoditize one of their competitors’ businesses.

Google does not want Android to be a mere player in mobile devices, peacefully coexisting with other competitors. Google wants Android to dominate the market, and that threatens Apple’s entire future.

Attacking Back

That is the context for iAd. When Jobs explained why Apple created iAd, he said that on mobile devices, people don’t use search–they use applications. This means, Jobs argues, that advertising must be centered around applications on mobile devices.

This is the weakness Apple sees in Google, and Apple’s advantage. Until Google bought AdMob, Google had very little presence in mobile advertising. But even with AdMob, their mobile advertising is weak. AdMob’s ads are fundamentally poor–they are little more than banner ads displayed in applications.

Jobs emphasized that there will soon be 100 million devices running the iPhone OS because they want mobile to be the platform advertisers focus on. And the reason is that Apple has an advantage over Google in the mobile market.

Through iAd, Apple wants to threaten Google’s main business in the mobile market (and thus their future). Google is the established and untouchable leader of advertising on the web, but on mobile devices, they are weak. Their offering is poor. A convincing advertising platform will make the iPhone much more attractive to advertisers.

Apple plans to do this by reinventing mass-market ads. Rather than just show banner images, Apple wants advertisers to create interactive mini-applications that engage users and provide something useful. At the iPhone OS 4 special event, Jobs showed off a mock Toy Story 3 ad that allows users to look at the characters, download wallpaper, watch clips, purchase a game, and check movie times. This is a very different kind of advertising than Google provides, which creates an advantage for the iPhone. If done well, ads of these sort should be much more engaging than mere text and banner ads. This provides a better return for advertisers, and higher rates for application developers that include these ads in their applications.

If companies choose to advertise on the iPhone in place of competitors, the iPhone will be much more likely to become a market standard, and it will crimp Google’s advertising business in the next largest market. By threatening Google’s main business, Apple can marginalize Android, the main threat to the iPhone.

Apple has little choice but to enter advertising. For the iPhone to define the mobile market, it requires a great way for companies to advertise on it. Even more important, though, is Google has made it their strategy to destroy the iPhone with Android. Because the iPhone is the future of Apple, they must try to strengthen their own platform and hurt Android. The Mac will continue to grow, but the PC market has reached its apogee. Apple will do everything it can to make their future, the iPhone, as strong as possible.