Silicon Valley tech giants Apple Inc. (NASDAQ:AAPL) and Google, a subsidiary of Alphabet Inc. (NASDAQ:GOOGL), may operate in similar consumer electronics and software sectors but their business models are rather different and quite interesting to contrast. At Apple, the spectre of Steve Jobs still looms large and the company remains very guarded about the few consumer products it develops in-house. Google’s corporate restructuring into the Alphabet holding company, on the other hand, is a clear acknowledgement of attempts to spread Google from its search engine beginnings to further investments in life sciences, robotics, home appliances and much more.
On February 24th, online business and design blog Co.Design, a feature published by tech business news outlet Fast Company, released visualizations of “innovation signatures” for Apple and Google. These blob-like formations indicate both how many patents have been earned by individual employees as well as the number of connections with co-inventors from within each company. The innovation signatures render some interesting discoveries, notably that innovation at Apple is more highly concentrated in the hands of fewer inventors. Despite that, on average, Apple still lists more inventors per patent than Google does.
The conclusion: “Google has a more distributed, open-source approach to new products.” That is one way to characterize the findings, but if you scratch even lightly below the surface there is far more to be told.
Apple has long utilized a business model with a heavy focus on research and development, investing in innovation to improve its successful consumer electronics products, obtaining patents and then dominating an entire sector. In the past we have referred to this Apple business model as innovate, patent, dominate, repeat. By contrast, Google has operated in more of an open innovation environment. For example, Apple sells more smartphones than Google, but more Android phones are sold overall because more companies are selling Android phones. This is not surprising for those familiar with Apple’s long history of tightly controlling its products, which dates back to the early days of the PC movement.
Given the growing tide of efficient infringement among tech businesses, it is no doubt much easier for a company such as Google to operate in an open innovation way, applying open source principles to patented technologies from outside of the company as well as from those inside the company and partners. In fact, these excellent visualizations almost certainly show why Google has for so long pursued an agenda to weaken the U.S. patent system. When you have such disparate innovation that lacks focus you simply cannot afford to license all the rights you will trample. Ignoring rights as if they don’t exist seems to be the Google solution.
One way to characterize Google’s disparate innovation based activities is to say that the company engages in wide ranging innovation activities in a variety of different technology areas. Another way, and perhaps a far more accurate way, is to notice that Google’s innovation activities are rather scattered and lack focus. As a result of their different R&D operations, both Google and Apple may be financially successful in the current moment but Apple has a more diversified portfolio of successful products, seemingly ironic in the face of a higher concentration of patents among inventors.
Before anyone challenges the previous statement about Apple’s diversified portfolio, let’s go to the numbers.
Alphabet’s earnings report for 2016’s fourth quarter shows that revenues from its Google segment brought in $89.5 billion of the $90.3 total revenues earned by the company during the quarter and nearly $80 billion of the Google segment revenues came from advertising. By contrast, Apple’s earning report for the first quarter of 2017 does show that iPhone sales outpace all other sectors, contributing $54.4 billion to quarterly net sales, but Apple’s iPad, Mac and Services sectors each contributed between $5.5 billion to $7.2 billion to net sales on the quarter, and other products such as Apple TV, Apple Watch, Beats® products, iPod and Apple-branded and third-party accessories collectively contributed just over $4 billion to net sales. See page 23 of Apple’s earning report.
The meaning of this comparison couldn’t be any more clear. Google revenue, and therefore the revenue of Alphabet, is almost completely dependent upon Google search and the advertising revenue it creates. Only $800 million in revenue came into Alphabet that was not attributable to Google, which hardly seems possible given Alphabet’s far reaching operations. To call Alphabet highly leveraged on Google would be an extreme understatement. But it just isn’t leverage on Google, Alphabet is highly leveraged on advertising revenue.
Given Alphabet’s extraordinarily heavy reliance on Google’s advertising revenues, a corporate regime that is friendlier to open source ideals should leave investors asking serious questions. What does this mean? What explains Google’s choices? Are they engaging in a form of scatter-shot innovation that throws things up against the wall to see what sticks? Is there any coherent strategy, or is the company just aimlessly looking for the next revenue stream before search advertising revenues eventually begin to fall?
For the moment Google dominates searching, but as de facto defunct search engines like HotBot, Dogpile, Altavista and MetaCrawler can attest, you are never more than a couple genius geeks, a dorm room and a beautiful algorithm away from the next tech revolution taking over.
If it were not for efficient infringement it would be impossible for one company to be involved in as many different areas of endeavor as Google/Alphabet have attempted. The only feasible way for them to hunt for the next revenue stream seems to be to scatter-shot innovation by going in numerous different directions without any real focus. Of course, that requires them to ignore the rights of others and pretend we live in an open source world without any patent rights. Ironically, it is this disparate and uncoordinated approach to innovating that is also preventing Google from developing any kind of mastery outside of their core search competency and revenue generating model.*
Open source is a path to destruction for any company unless you want to be a service company, and as a service company you are always (and significantly) limited because there are only so many hours in a day you can sell and only so much scale you can achieve. Perhaps the open source focus innovation focus Google pursues will be successful, but if history is a guide the future may not appear all that rosy. One need only to look at the example of Sun Microsystems, which decided in 2006 to make its Java software platform an open source platform. Within a few years Sun’s corporate struggles grew because revenues from services sold through open source platforms are limited compared to what can be earned from leveraging patented technologies.
What this all means for the future depends on your time horizon and a number of events that cannot be predicted with any real accuracy. Google will still dominate search tomorrow, and the day after that, but you are never that far away from what’s next, which can appear suddenly and rip through an industry like a tornado. While Apple has their struggles with respect to putting what are best considered beta products into the streams of commerce since the death of Steve Jobs, their tight innovative focus based on proprietary technology seems better poised to win the future than does the Google approach, which looks a lot like a rather desperate technology giant noticing the early stages of decline and not seeing a future without the cash cow that is advertising revenue.
* Some will no doubt point to Android as a great success, but let’s be honest. Google has failed at virtually everything they try other than search, and Android was pretty clearly a knock-off of the iPhone.