The Future of Computing and the Coming Apple – Android Wars

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Edward Harrison submits:

Right now, we are watching what I believe is a game changing power struggle in the technology world as we move to a cloud computing, platform-independent world. It pits Google ( GOOG ) and its ubiquitous presence on the Net against Apple ( AAPL ) and its tentacled reach into sundry platforms both in hardware and operating systems and Microsoft because of its legacy position in desktop operating systems. I see the Apple - Android wars as central to this shift.

It won't be winner take all because the new world will be platform independent. Instead, the winner will get the lion's share of the spoils and the losers will have to innovate to keep up.

Where we came from


The technological convergence that many of us who worked in the tech world during the bubble days a decade ago heard was coming is finally here. So, let me back this up to the pre-computer world and run through a bit of history. It's relevant to how the world of technology, dominated by only two of the five senses, is coming to take on a disproportionate number of the activities we now perform. That means, from the standpoint of society-wide capital investment, this is a very important struggle.

The old world pre-computer was one only of touch, smell and taste that involved real objects you could also see and hear. When microprocessors and computing came along, it changed all that. Forget about touch, smell and taste. Forget about smelling perfumed letters or feeling old books as you read or tasting dirt if you fell as you played a game. Many of these activities have moved to little boxes via e-mail, e-reader or video game. I am talking about using your eyes and ears to read books or play games or watch movies or look at pictures, regardless of the place or device you used. A lot of the activities we used to do that could involve touch, smell and taste moved to the realm of seeing and hearing only.

Initially though, this world of computing devices was un-networked the way that mechanical devices like dishwashers and cars and turntables was. We had tape decks, touch-tone phones, cd-players, home computers, camcorders and video recorders, all standalone devices that didn't 'interact' with each other. This first technology world was a balkanised space of semi-compatible technology platforms that people used to communicate, read, listen, watch and play.

Networking and The Computerizing of Devices

Last decade, as networking capabilities moved out of the business environment into homes, and as processing speed and storage capacity allowed computers to be used as the basis for other devices like TiVo ( TIVO ) machines, iPods and Smart Phones, devices started to 'talk' to one another. This meant the much fabled TMT (Technology, Media and Telecommunications) convergence of computing, telephony, music, and video had finally arrived. But the PC was always the controlling element. You got TV tuners and DVD Players in computers, MP3 players that synced with your computer, phones that synced with your computer, and videos that played off of your computer.

The PC was front and centre, and that gave Microsoft ( MSFT ) and Intel ( INTC ) a dominant role since Wintel machines accounted for some 80-odd percent of computers.

The Internet Shifts the Balance Away from Wintel

As we move away from the PC-centric model that has been dominated by the Wintel duopoly for nearly a quarter-century to a platform-independent Internet-centric model, the main adversaries in this shift are Microsoft, Google and Apple. What is happening now is that the Internet allows an unlimited networking of platform-independent computing devices to interface with each other limited only by bandwidth, software interface, and hardware processing power, size and design.

This effectively spells the end of the Wintel duopoly. But it also introduces the network providers like AT&T ( T ), Vodafone ( VOD ) or T-Mobile as gatekeepers (think net neutrality). And it makes it critical that operating systems like Windows, Android or iOS can be ported to a wide spectrum of device formats from phone to tablet to PC to set top box. Think of your iPhone as a mini-Computer that you can use for calls, texting, e-mail, video calls, movies, gaming etc. The same is true about your PC, iPad or set-top box. If you want to watch a movie, you stream it. If you want to watch or read news, you can stream that too. If you want to type an e-mail, you can do it from any device. Same thing for games, texts, pictures and music. All of this 'content' lives in the Internet cloud or on your own networked devices and personal storage devices.

Going forward people will want to access 'their' content anywhere and on any device on any platform and have it work without a huge amount of technical know how. This is the world we are moving to. And that means Microsoft has a one-time window to move from its prior platform dominance into content gatekeeping via a more ubiquitous operating system or role as content king.

The controlling element in the short-term is bandwidth. Despite the advent of broadband, we still live in a bandwidth-constrained world, especially in North America where home broadband speeds lag behind developed European and Asian economies. That also gives the legacy telecom providers a limited window of opportunity to extract rents and expand in scope while they have their gatekeeper position.

All of the technology companies know this - from the hardware manufacturers to the Internet Service Providers and telcos to the software companies and Internet companies. And they are all re-orienting strategy around this shift (Intel, for example, is moving into Smartphone chips).

Apple and Google Will Dominate

I really don't think the Telcos or Microsoft will be able to make the transition without forfeiting their existing monopoly positions. Moreover, the desire to forestall the movement away from their legacy control is huge and that will mean organizational inertia stops them from making the transition deftly. Instead Apple and Google will rise to prominence.

Monetizing the future computing world is important because a lot of the kinds of things we used to do (looking for information, searching for jobs, playing games, reading books) are going online. There are four ways to profit from this.

  1. You can have the content. This is the game my prior employer Yahoo! ( YHOO ) fought against Microsoft and [[AOL]] by building quality content. App developers for Mobile phone platforms play in this sphere by creating applications to view content. The problem, of course, is that the Internet is an open ecosystem and it's very difficult to build a lasting franchise around extracting rents from apps and content alone. You can't maintain a paid walled garden (Good luck New York Times and Rupert Murdoch) because people will get similar content for free elsewhere. Netflix ( NFLX ) can do it because there are few competitors. However, outside of a few examples (online commerce), advertising becomes a big factor. Gatekeeping becomes crucial then too.
  2. You can gatekeep by controlling network access. This is what telcos are trying to do, especially in squelching net neutrality. They want to turn themselves from dumb pipes into gatekeepers who can extract rents by controlling which applications and websites are preferred. Quite frankly, I see this behaviour as anti-competitive. But, in due course, this kind of behaviour will invite competition and the telcos will find their monopoly rents diminishing.
  3. You can gatekeep by controlling the operating system . This is where Apple lives and breathes. Google plays this game via Android as well. For instance, I use Microsoft's Bing as my search engine on the desktop but on my mobile I am forced to use Google because of the Android OS on my Nexus One. Apple can decide which applications to select for its devices and exclude any apps that reduce their ability to monetize their music and video content at iTunes.
  4. You can gatekeep the content . Google has come to prominence by using search as a content gatekeeper. Rather than building proprietary content, which is expensive, Google focused on search which is infinitely scalable. But since a large percentage of internet activity happens through search rather than people going directly to previously vetted content, that gives Google a gatekeeper role which they have monetized via advertising.

Conclusions

I see a future computing world which is networked and platform independent. And that means gatekeepers of bandwidth and content will be the winners in that world. Over the short-term Microsoft and the telcos will play their part in protecting their legacy franchises in these arenas. But ultimately, people just want to get their content when- and where- ever they can. And that means the organizations which dominate the multi-device interfaces of the future will take on a leading role in technology, perhaps the leading role. Right now that looks to be a battle between Apple and Google because the mobile Internet is in an unprecedented early stage of growth. Mobile phones and mobile devices is where it is at. Research in Motion ( RIMM ) still has a chance to play a large role as does Palm ( PALM ) given the pending HP ( HPQ ) hook-up. But Apple and Google will definitely be central in this game.

I'll leave it there for now. But in my next technology post I will outline how I see that battle shaping up. I will concentrate on the source of Apple's competitive position from the closed system tying the iPod/iPhone/iPad hardware platform to the iTunes content platform, the inherent network effects in this tie, and the premium pricing which drives profit margins. And I will discuss the Android threat to all of this and Apple's incursion into Google's advertising space.

In the meantime, here is a very recent presentation on Internet Trends by Mary Meeker outlining how she sees that market shaping up (hat tip Paul Kedrosky ).

Mary Meeker Morgan Stanley Internet Trends

See also Apple Exceeds Expectations Again on seekingalpha.com



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Technology


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