Google & Apple: The New Age of Transformation

All companies need to transform. Despite their relative positioning in the digital age, Google and Apple are by no means an exception. As the digital era matures (characterised by cloud, social, mobile and data) and the age of exponential technologies ensues (Quantum Computing, AI, Blockchain, VR, IOT etc.), we are witnessing a battle for ascendancy between these two companies and a raft of new-comers. We are also witnessing their transformations.

At Deloitte, I've written and spoken publicly about transformation of businesses and I think it is helpful to have a working definition before exploring what is going on at Google and Apple. Transformation is about:

Continuously evolving the way business is conducted to create sustainable value in response to shifts in the market or operating conditions.

Both Google and Apple are on similar transformation trajectories despite their very different beginnings and their seemingly insurmountable positions in their respective markets. Apple was created in 1976 with a purpose of 'making the personal computer ever more personal' and Google was founded over 20 years later in 1998 with a purpose fit for the information age of "organising the world's information". Despite these differences, they both have leading roles in the cornerstones of the digital age - Apple has led the growth of mobility globally through its iPhone and other products. Google on the other hand has dominated internet search as well as other aspects of the consumerisation of the internet (e.g. SVOD, Maps). They are near equals in terms of market value, with Google narrowly nudging out Apple in being the world's most valuable company in May this year with Apple claiming this title again recently.

Shifts in the market and operating conditions

We have just seen the latest quarterly results for Google and Apple and each talk to the shifting nature of the operating conditions facing each company.

For Google:

These results were exceptional particularly compared to last quarter's earnings. It was in last year's third quarter that Google added additional features to mobile search results, the effect of which may be coming in to play in the 20% increase in revenue it experienced this quarter. The company now controls 95% of the mobile-search market and 78% on desktops according to recent estimates. This is a strong position to be in but it is also points to a fundamental change in their operating conditions. The source of revenue is moving from desktop to mobile and with it the value attached to search advertising. Mobile ads are generally cheaper than desktop ads, so advertisers’ average price for an ad-click has declined as mobile ads have increased. Google said that advertisers' cost per click decreased 11% in the quarter compared to 7% in the prior quarter. They are balancing mobile's higher acquisition costs with sustainable advertising revenue.

To add to this, Facebook's recent quarterly announcement put a spotlight on the strength of competition Google faces for mobile advertising revenue. Facebook now controls 13% of the worldwide digital advertising business second only to Google at 32%. The future of search advertising is questionable compared to the specificity of Facebook's 'graph'. Also, the rise of AI and assistants (e.g. Alexa, Cortana, Allo, Siri) will provide a significant challenge to 'traditional web-search'. Instead of searching and providing a list of options (paid for or influenced by advertisers), these services will just tell you the answer that is most suitable for you and what it already knows about you.

For Apple:

Devices, smartphones in particular, are continuing to play a huge role in our lives but innovation has slowed for the handset manufacturers and upgrade cycles appear to be slowing (although this may also be the effect of pulling forward people who have upgraded). What was interesting from the recent results is that the Mac business for Apple is now more of a side business to its phone, tablet and watch businesses, accounting for ~10% of total revenue. This may well change with the launch of the new Macbook but it also highlights the opportunity and difficulty of being a business primarily focused on product innovation vs. services in the technology industry. Product life-cycles can be fickle and innovations often become incremental (e.g. a slightly new camera) towards the end of a product's s-curve.

Apple is entering interesting territory as it searches for the next improvement on the smartphone or the watch (what is more personal than these devices?). It is also up against competition that are using data to make devices even more powerful - something that Apple is working towards with its Siri product but will struggle to lead due to the limited amount of data it captures by comparison to the likes of Google, Microsoft or Amazon.

Continuously evolving Google and Apple

Google's transformation - Edges and 'Moon shots'

In August 2015, Google announced a change to become Alphabet which split off the 'moon shot' parts of its business from Google to provide structural separation. On the recent earnings call they noted:

As we've frequently noted, our move to Alphabet was motivated by our belief that revolutionary ideas drive the next big growth areas. Long-term success requires a commitment to making bets, putting the right talent and resources behind those bets, and remaining flexible and dynamic as we pursue them.

As of yet, Google's 'other bets' which is the focus of 'Alphabet' have failed to return much to shareholders. The earnings call highlighted that in the case of 'other bets' Google last quarter spent more on stock-based compensation ($200 million) than they derived in revenue ($197 million). The recent shuttering of Google Fiber is also another example of a 'moonshot' providing dubious value to the company. It is still early days - the bold move to focus on 'moon shots' may yet pay off with a big business being born out of one of these bets.

To its credit, Google has many sustainable growth opportunities, and all of them are on the edge of what Google is uniquely capable of doing (e.g. search advertising) rather than the more risky 'moon shots'. Selling hardware (like its recent Pixel phone and Daydream VR announcement), developing Google Cloud or building out YouTube Red's proposition are far less exciting than any 'moon shot' but are also a natural evolution from Google's core search business. Not all of these will succeed (I don't think Google expects them all to) but they all make sense in the context of Google's business; most of the 'other bets', in contrast, exist only because Google has cash to put toward them.

Sustainable transformation for Google means finding a balance between evolution brought on by more disruptive 'moon shots' (disruptive innovations) and transforming its core business on the edge (natural extensions of its existing business). The moonshots which leverage Google's assets to a much greater extent, like Google's self-driving car, provide compelling narrative for the Alphabet business - something Google is keenly aware of for the security of talent and future public funding.

Apple's transformation - Products and Services

In contrast, Apple's transformation efforts with regards to their product businesses show a tenacity for the company to make new products at the expense of cannibalising existing profitable businesses. For example, the iPod business (its many variations - Mini, Shuffle, Touch) was decimated by the iPhone's launch and subsequent growth since 2007 and arguably the tablet business has usurped the PC/Laptop business. For Apple, its purpose of 'making the computer ever more personal' has meant that these transformations have had strong internal and external narratives which will continue to help Apple transform to support new products (driverless cars, airpods and virtual reality) and customers (B2B segments, emerging markets). However, this is not the major transformation issue for Apple. Rather, Apple's ability to compete with 'smarter products' that use data and link to valuable services is its transformation challenge.

iTunes and Apple's cloud offerings are examples of the type of service transformation Apple has been capable of in the past. However, even these services have required their own transformation in the last 10 years with the growth in streaming music and video leading to the launch of Apple Music about 18 months ago and AWS's dominance of cloud. Siri (Apple's voice assistant) represents another example of how Apple is looking to bring integrated services into its products. Like iTunes before it, Siri is facing significant competition from other providers (like Amazon and Google) who are able to leverage much larger data sets (e.g. Google's search database; Amazon's consumer products database) to make their assistants smarter and more intelligent.

At the core of these transformations is an evolution in capability. For Apple, it is about adapting and investing in capability that is service (instead of product) oriented and for Google it means applying existing capability to edge businesses or divesting moonshot capability when necessary. These two cornerstones of the Digital Era will continue to provide interesting case studies for how transformation occurs in a rapidly changing world of consumer preferences and technological innovation.

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