Closed (Apple) or Open (Google)

by | Jun 11, 2013 | General

We think there’s room for both

Last month a client asked about an interview with the Chairman of Google, Eric Schmidt. During the interview Schmidt referred to Apple’s “closed” system in contrast to the Android mobile operating system offered by Google. He also suggested that Google was more in tune with the “Cloud”, which is the biggest trend in technology.

Skipping to our conclusion: We own both stocks, we think they both have wonderful businesses, and both will end up succeeding in their own way. 

In order to deal with the complexity of these issues, we are forced into a much longer form of letter than usual. And to avoid interrupting our thoughts to explain various technical terms, we have included a Tech Glossary at the end of the note. Knowing what these terms mean will help your understanding of the world in which these businesses operate.

Here’s how we view the two businesses and Schmidt’s comments.

First, what is the “cloud”? It is the term that has been invented to describe thousands of data centers around the world, which are filled with millions of computers (servers) storing and presenting data in various forms. We store our photographs there when we use Tumblr. We store our music there when we use iTunes. And our emails and email addresses are there when we use Gmail.

The Cloud is replacing locally based computers and servers for the storage of all kinds of data. Four companies have built the largest data centers: Google, Apple, Amazon and Microsoft. All use it in slightly different ways, but not one company “dominates” the Cloud and we would argue, no single company ever will.

So what’s “closed” about Apple? Apple packages its software in physical products and derives its revenue from the sale of those products. The only way to use the Mac operating system is to buy a Mac. The same goes for iOS, the operating system inside an iPhone or an iPad.

And what’s “open” about Google’s Android operating system? Google has chosen to give away it mobile operating system and allow it to be used on hundreds of different smart phones and tablets. They have done this in the hope that their advertising tools will become as dominant on mobile devices as it has on computers. Google makes virtually all of it’s money through advertising.

Both companies have significant advantages, but they are increasingly competing against each other in the mobile device market. 

Apple’s competitive advantage is its “closed” system. Since they control the product both physically and through software they can offer consumers a more predictable and in some ways simpler experience. Apple products are “consumer products” in the sense that less computer knowledge is required to operate them and enjoy them. Apple products do not come with manuals for a reason—most people can operate them out of the box without much instruction. Of course learning more can mean getting more out of the device, but it is not necessary.

Google’s advantage is the long term growth in Internet based advertising. Having conquered the desktop and the laptop they now plan to do the same thing in mobile devices. By giving away the Android operating system they are copying the Microsoft model—put your software on lots of devices. The difference is that Microsoft is paid for it’s software and Google is giving it away in the hopes of attracting eyeballs for advertising. 

Android products offer more flexibility for the user than Apple products, thus the term “open”. However, with flexibility comes a certain amount of complexity, which requires a certain amount of computer knowledge. The differences between the Apple and Android experiences are narrowing, but the fact that hardware manufacturers can tweak Android means there are many Android experiences, not just one as in the case of Apple.

Interestingly, this debate over open and closed systems goes back to the original partnership of Steve Jobs and Steve Wozniak when they built the first Apple computer. Woz (the geek) wanted users to be able to play with the guts of the machine and change anything they wanted to change. Jobs (the consumer product guy) wanted to limit what users could do in the interest of making the machine easier to use. 

Windows, created by Microsoft, produced a more “open” world of computing, where users could configure their machines using third party software. Millions of people have learned how to use PCs and many of them enjoy the flexibility and even the complexity of that system. One recent Android phone buyer summed it up well, “the iPhone is great, but I’m a Windows guy.”

We believe there are more “consumers” out there than “windows guys”. Or at least there are enough of them that Apple continues to have a tremendous opportunity. Apple has never had a dominant market share in computers or phones, but its products appeal to a wide audience.

Google is only interested in clicks on ads, and they know that computing is moving toward mobile devices, so they need to be there. But Google could win whether the iPhone or Android phones dominate. Apple devices account for a majority of all web traffic on phones and tablets—something Google understands all too well. Google doesn’t like being dependent on Apple devices for it’s clicks and for that reason we have Android.

Both Apple and Google are the best at what they do. We believe they will be the dominant tech companies of the foreseeable future.

Best regards,

Daniel A. Ogden



Disclosure: Dock Street Asset Management, Inc. and our clients may own securities. This article is not intended to be used as investment advice.

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