On the other hand, most don’t view Google Inc (NASDAQ:GOOG)’s ecosystem as being nearly as robust. Sure, there’s Android, and the Google Inc (NASDAQ:GOOG) Play store, but Android is fragmented and chaotic — there is little incentive to stick around.
Yet, that’s really missing the point — although it’s more abstract than Apple Inc. (NASDAQ:AAPL)’s, Google has slowly built itself a very robust ecosystem — one that many investors likely don’t appreciate.
Apple’s ecosystem
Apple’s ecosystem is fairly easy to understand because it’s relatively tangible. In the past, I’ve written in detail about the factors that comprise Apple’s ecosystem. But briefly speaking, they may be summarized as follows:
- All Apple iDevices use the same operating system — people want to stick with the familiar
- The devices work well together — they sync and communicate easily
- Accessories can be shared among devices
- People who purchased a lot of apps and content in iTunes do not want to have to pay for those things again
Thus, Apple Inc. (NASDAQ:AAPL) has a sort of stickiness to its products — if you own an iPhone, and you want a tablet, it makes sense to get an iPad. If you’re upgrading your phone, and you’ve used the iPhone for many years, it makes sense to get the latest iPhone.
Apple bulls have argued this phenomenon puts a kind of floor into the stock — even if the iPhone is outclassed by its competitors, existing iPhone adopters will remain loyal simply because they don’t want to be burdened with switching costs.
Google’s ecosystem
Whereas Apple Inc. (NASDAQ:AAPL)’s ecosystem is built around hardware, Google Inc (NASDAQ:GOOG)’s is composed of web services — comparatively, it’s more a “soft” ecosystem to Apple’s hardware-based one.
The core of Google’s ecosystem is built around the Chrome web browser, gmail, and Google search. But even the company’s lesser used products like Google+ and Google Music feed into the larger ecosystem.
If a user is on the Chrome web browser, they’re likely to use Google search — queries typed in the address bar are run as Google searches by default. Of course, that works the other way too — if you do a lot of Google Inc (NASDAQ:GOOG) searching, Chrome is a great browser to use.
And if you’re going to use Chrome, it would only make sense to have it tied to a gmail account — stored passwords, browsing history, and bookmarks are synced to gmail. This makes browsing the Internet across different devices a better experience — a user can bookmark a page on their mobile phone, then easily pull it up later on their desktop.
From there, all gmail accounts are tied directly to Google Docs — the company’s cloud storage service and free alternative to Microsoft Corporation (NASDAQ:MSFT)’s Office. And once you have a gmail account, creating a Google+ account is a simple click away.
Then, there’s Google Music, which lets gmail users upload their own songs to be streamed from the cloud. There’s also Google Hangouts, a messaging app tied to gmail and Google+, and an alternative to Skype or WhatsApp.
In short, Google Inc (NASDAQ:GOOG)’s ecosystem surrounds what people do on the web — how they access it, how they find things, and how they talk and interact with others.
The future is big data
Unlike Apple’s ecosystem, Google Inc (NASDAQ:GOOG)’s is completely free. This is because Google has a different objective — rather than profit off device sales like Apple Inc. (NASDAQ:AAPL), Google is building a database.
For example, Google can give gmail away because it finances it through ad sales — scripts read a user’s email, then display ads based off key words within that email. Ultimately, as more of a user’s data comes to flow through Google, that ecosystem becomes more powerful.
What the future may hold for this “big data” isn’t clear, but there’s reason to be optimistic. Former hedge fund manager Stanley Druckenmiller said last week Google was one of his largest personal holdings, based primarily on the potential for big data.
A 2011 McKinsey report detailed this opportunity:
“The use of big data will underpin new waves of productivity growth and consumer surplus. For example, we estimate that a retailer using big data to the full has the potential to increase its operating margin by more than 60 percent. Big data offers considerable benefits to consumers as well as to companies and organizations. For instance, services enabled by personal-location data can allow consumers to capture $600 billion in economic surplus.”
Microsoft has spent billions trying to catch Google
For the last several years, Microsoft has invested billions in trying to catch up to Google in this realm. Notably, this includes the company’s investment in Bing, but also the significant upgrades the company has made to its email service and browser.
Office, unlike Google Docs, remains a paid service, but Microsoft Corporation (NASDAQ:MSFT) has created and integrated it with SkyDrive — its online storage system.
Of course, since these efforts have borne little fruit, the company has received a lot of criticism over these initiatives in the investment community. Yet, Microsoft Corporation (NASDAQ:MSFT)’s management remains undeterred.
Last November, Steve Ballmer addressed the subject, stating that even though the company has yet to see much in the way of profit, he remains glad that they made the investment.
Obviously, Microsoft understands the power of Google’s ecosystem — and that’s why they’re happy to sink billions in a quest to replicate it.
Investing takeaways
Based on Thursday’s closing prices, Google Inc (NASDAQ:GOOG)’s stock is trading with a price-to-earnings ratio near 27, while Apple Inc. (NASDAQ:AAPL) trades with a PE just over 10. Although Google appears relatively more expensive, the potential its online ecosystem holds justifies this high multiple.
If big data becomes the next great tech trend, there is no company better positioned to take advantage of it. Through its ecosystem, Google captures a tremendous amount of data, and that data capturing could prove to highly profitable.
The article Google’s Ecosystem Could be More Profitable Than Apple’s originally appeared on Fool.com and is written by Salvatore “Sam” Mattera.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
