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Apple Advantage Eroded as Google Closes on iPhone – Businessweek

Apple Inc. (AAPL), five years after
popularizing the term “app” and sparking a mobile-software
boom, is losing its advantage in smartphone applications to
Google Inc. (GOOG), diminishing one of the iPhone’s selling points.

Sales of applications from Google’s online store doubled in
the fourth quarter from the prior three months, while Apple’s
revenue climbed 20 percent, according to market researcher App
Annie. And some software firms such as Ngmoco LLC, which
historically wrote programs for Apple before Google, have put
the two operating systems on equal footing — in some cases
developing for Google first.

Apple was for a time the biggest smartphone maker and its
mobile operating system was the most widely used, in part
because of the company’s leadership in downloadable games,
magazines and productivity tools. It fell behind in software to
Google’s Android in 2010 and ceded the top hardware spot to
Samsung Electronics Co. last year. After trailing Apple for
years by number of apps available, Google caught up last year,
saying in October that its Google Play featured 700,000
applications, the same number Apple boasted that month.

“It’s growing exponentially — we’ve seen an inflection
point the past six months,” said Clive Downie, chief executive
officer of the Ngmoco unit at DeNA Co. (2432), which bought the apps
maker in 2010. “We treat Android and Apple the same. They are
equal partners to us and we put equal amounts of resources
toward both platforms.”

Trading Discount

Google’s gains are mirrored by the companies’ share prices.
Google closed at a record high on Feb. 1, while Apple’s stock
has tumbled 37 percent from its peak in September. Apple is
trading at a 55 percent discount (AAPL) to Google on a price-to-
earnings basis. That’s the widest spread since July 2006, about
a year before the iPhone was introduced.

Three of four handsets sold in the $260 billion global
smartphone market are powered by Google’s Android operating
system. To press the advantage, Google has been making it easier
for programmers to build apps and simpler for users to find and
purchase them.

As consumers increasingly turn to mobile devices to
complete computing tasks once done on desktop machines, Google’s
push into apps is helping sell phones that run Android software
from companies such as Samsung and HTC Corp. Google’s app
advance has been accelerated by Samsung’s Galaxy S III, the No.
2 handset behind the iPhone 5 in the fourth quarter, according
to Strategy Analytics.

‘App for That’

Apple has had measurable advantages since co-founder Steve Jobs introduced the App Store in 2008 along with the “there’s
an app for that” marketing campaign. The company limits iOS
mobile-software updates to once a year, making it easier for
developers to create new titles. It simplifies purchases by
using the millions of credit cards stored in users’ iTunes
accounts.

Apple has more than 800,000 apps in its online store, the
company said last month. More than 40 billion apps have been
downloaded from the App Store, generating more than $7 billion
for developers, Apple said in January. That’s up from $5 billion
in June.

“Google is definitely starting to catch up,” said Chris Carvalho, chief operating officer of video-game maker Kabam
Inc., whose “Hobbit” game is among the top sellers for
Android. “The gap is still there a little bit, but it’s
closing.”

BlackBerry, which ranks a distant third behind Apple and
Google with less than 5 percent of the smartphone market, said
last month that it has more than 70,000 apps for its new Z10
touch-screen handset. BlackBerry’s lack of apps helped devices
from Apple and Google usurp market share.

‘Standard Bearer’

While Google doesn’t disclose comparable sales figures, the
company said in September that at least 25 billion apps had been
downloaded since the Android app store started in 2008, with a
growth rate of about 1.5 billion a month. Google Play posted a
fourfold increase in payouts to developers last year.

Apple’s app sales generate 3.5 times the revenue of
Google’s, according to App Annie.

“It’s great to be the standard bearer, but it puts a lot
of targets on your back,” said Bob Bowman, head of Major League
Baseball’s interactive media group, which has a tool for
monitoring games that is one of the highest-grossing programs in
the App Store.

In its drive to chip away at Apple’s advantages, Google
hired Purnima Kochikar from Nokia Oyj in October to run business
development for Google Play. She’s working to make it easier for
developers to create and maintain apps for Android and
streamline payments.

Because Google provides Android free to an array of handset
makers, developers have been frustrated by the need to customize
apps for different devices. Lower payouts have also been an
impediment for Android.

Helping Developers

“Apps on Android can’t push the envelope as much,” said
Jeff Daniel, chief executive officer of StarMaker Interactive
Inc., maker of a karaoke app for the iPhone. Still, he said the
tide is turning as Android grows, and that his company is
working on an app for Android, too.

Google has started design workshops and video chats to show
developers simpler ways to manage apps and win more users,
Kochikar said. Android updates are also coming out less
frequently.

For more seamless payments, Google debuted in-app billing
in 2011 and then expanded that option to include subscriptions
last year. In some markets, Google has teamed up with wireless
carriers, such as SK Telecom Co. (017670) in South Korea and Verizon
Wireless in the U.S., to include app purchases on phone bills,
Kochikar said.

In Japan and South Korea, two countries with direct carrier
billing, Google developers have seen revenue jump almost 14-
fold, the company said. Almost half of Android users have access
to direct-carrier billing.

Developers Noticing

“We really took the time to understand how people buy,”
Kochikar said in an interview. “We took a very comprehensive,
complete life-cycle approach to really understand what it takes
to build a great app.”

Developers are noticing. Ngmoco was one of the first makers
of iPhone games, building up enough customers to eventually sell
for $400 million to DeNA, a Japanese games publisher. In 2011,
Ngmoco viewed Android as an untapped market and began making
games for Google’s platform.

Kabam’s Carvalho credits Samsung’s Galaxy S III, with
features matching the iPhone, for much of the surge in apps for
Android. Developers can also release Android software more
quickly because, unlike Apple, Google doesn’t review apps before
including them in its store.

‘Unbelievable’ Momentum

“The momentum is unbelievable,” said Google’s Kochikar.
“My job is getting easier every day.”

App developers are making as much as 40 percent of their
revenue from Google, compared with about 15 percent a year ago,
according to Jim Goetz, a partner at venture capital firm
Sequoia Capital.

“You have both the rate of growth and the overall economy
starting to have real merit,” said Goetz. “There are a number
of entrepreneurs who are looking to take advantage of that.”

Android still has room for improvement, particularly to
address the programming challenge posed by varied screen sizes
and graphics power among a panoply of handsets. Major League
Baseball, for example, has 2,400 versions of its app for
Android, while it needs just 40 for Apple. Google’s payment
system is also more complicated than Apple’s, according to
Bowman, the baseball executive.

“It’s getting better, but by inches and centimeters, not
leaps and bounds,” Bowman said.

Even so, any eroding of Apple’s leadership adds to the
pressure facing the iPhone maker, which last month reported the
slowest revenue growth in 14 quarters as the smartphone and
tablet markets become increasingly crowded.

“Competition is good,” said Ngmoco’s Downie.
“Competition makes the people involved deliver better services
to their customers. It’s as simple as that.”

To contact the reporters on this story:
Brian Womack in San Francisco at
bwomack1@bloomberg.net;
Adam Satariano in San Francisco at
asatariano1@bloomberg.net

To contact the editor responsible for this story:
Tom Giles at
tgiles5@bloomberg.net

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