It's all about the apps

You're hearing a lot about the brewing smart-phone war between Apple and Google, but the applications fight has higher stakes.

By Jim J. Jubak Jan 6, 2010 2:42PM

Jim JubakThere are two fronts in the increasingly bitter war being fought between Apple (AAPL) and Google (GOOG)


And while the contest between the iPhone and Google's Nexus One (and other Android phones) is getting most of the ink, it's the applications (apps) battle that comes with the biggest stakes. (For another potential winner in the smart-phone wars, see my post on Qualcomm (QCOM).)

The most recent salvo in that fight was fired on Tuesday, when Apple acquired mobile advertising company Quattro Wireless for $300 million. That deal followed Google's acquisition of AdMob, another mobile advertising network, back in November for $750 million.


Now, you might think that with Apple and Google both buying companies that specialize in selling ads on mobile devices, the two companies are facing off over advertising. Maybe Apple is even going after Google's headlock on search advertising?


But you'd be wrong. The advertising battle, while real, is secondary in these deals to the value of advertising as a way to recruit the best developers to the two app stores operated by Apple and Google. Right now, Apple has a runaway lead in that contest: iPhone users have access to 100,000 apps, while the Google app store features just 18,000.


But both companies know that an early lead in apps is no guarantee of a final victory. And that's where advertising comes in.


With most apps now selling for nothing -- 80% of the downloads from Apple's app store are free -- the challenge for developers isn't writing software or even getting it accepted by Apple or Google. It's getting paid.


If you give away the app, exactly how do you make money?

The race right now is for Apple and Google -- and Research in Motion (RIMM) with its BlackBerry store -- to provide easy tools that app developers can use to make money even if they're giving away their apps.


So, you've got efforts to build a really easy-to-use “buying” platform into the phones so that app developers can charge for character upgrades, data bases, game enhancements, and the like.


And you've got the ad battle. The goal of both acquisitions is to build a platform that sells ad space on mobile apps. Developers of the apps wouldn't have to sell the ads themselves; Apple or Google's ad network would do it for them.


Any company that can offer app developers a chance to pull in significant ad dollars from an app that the developers are giving away has a huge edge in attracting the best developers who will most likely write the best new apps.


Right now, the mobile ad market is really small. Advertisers spent just $416 million on mobile ads in 2009 versus $22 billion on Web sites. But projections show mobile ad spending growing to $1.6 billion by 2013.


If I were an app developer looking for a way to get paid for a free app, a piece of $1.6 billion -- even a very small piece -- would be attractive indeed.


At the time of this writing, Jim Jubak owned shares of Qualcomm in his personal portfolio.

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