Google Inc (GOOG) and Apple Inc. (AAPL) Want You to Keep It in Your Pants

Published on July 9, 2013 at 2:43 pm by The Motley Fool in News

The days of fishing in your pants or purse every time your smartphone beeps or buzzes will soon be a thing of the past. Here’s a Foolish overview of why wearable technology will transform mobile computing, and which company is best positioned to profit from this new category.

The Increasing Flood of Information to Your Smartphone

Smartphone users are already familiar with the problems of keeping up with push notifications: text and email messages, social media updates, phone calls, stock and sports updates

The situation will only get worse. With the cost of sensors and controllers coming down, more everyday devices and services are being connected to the internet and accessible from your smartphone. The result? Push notifications will increase, and user search will become more frequent.

Wearables tethered to smartphones are seen as a solution to the increased information flow. With a quick glance, wearable users could review, reply, store, or ignore push notifications without fishing around for their smartphones. At the same time, ongoing improvements in voice recognition would allow wearables to become an easy access point for mobile search.

The Wearable Warriors

So what companies are likely to profit from wearables? I’ve taken a look at both Google Inc (NASDAQ:GOOG) and Apple Inc. (NASDAQ:AAPL) based on the following criteria:

Assets: Does the company have the technology to provide a compelling wearable solution?

Materiality: Is the wearable business likely to drive sizable, incremental profits?

Risks: What are the key risks facing successful implementation?

Google

Google Inc (NASDAQ:GOOG) is the undisputed leader in online and mobile search. With its existing apps (Gmail, Google Maps, Google Search and Google Now) and excellent voice recognition technology, Google Inc (NASDAQ:GOOG) is able to provide a compelling, integrated wearable product. (Google has already launched a wearable beta product, Google Glass, and there are recent reports of the company’s plans to launch a smartwatch.)

However, it’s been reported that Google plans to allow manufacturers to use Android in their own wearable devices. Previously, only smartphones and tablets could be promoted using the Android name. Google’s willingness to open Android to wearable manufacturers is clear sign that the company plans to extend it’s mobile Android strategy into wearables. (Android is free to OEMs, while Google collects mobile ad and search revenue from Google Inc (NASDAQ:GOOG) search on the Android platform.) Hence, as in mobile, wearable hardware sales for Google are likely to be too small to affect the company’sbottom line.

Gartner estimates that mobile advertising and search will increase from $11.4 billion in 2013 to $24.6 billion in 2016. With a dominant position in mobile search, Google Inc (NASDAQ:GOOG) likely views wearables as another way to protect its share of mobile advertising and search. Since much of this anticipated growth in mobile advertising and search is already built in to Google’s valuation, wearables are unlikely to have a large impact on the company’s stock price.

The primary risk to Google Inc (NASDAQ:GOOG) in wearables, is the same it faces in smartphone/tablets. Android OEMs can modify Android as a way to capture advertising and search revenues. (Amazon.com‘s Kindle was built on Android, but operates as a separate platform, shutting Google out from search, advertising and service revenues. And, the majority of Android advertising and search revenue in China is being captured by Baidu.com, Inc. (ADR) (NASDAQ:BIDU))

Apple

Apple Inc. (NASDAQ:AAPL) appears to have been planning for a move into wearables for some time: The purchase of Siri in 2010 provided Apple with advanced voice recognition/search technology. The company is also building strong search partnerships with Microsoft (Bing), Yahoo! Inc. (NASDAQ:YHOO) and Yelp for use in Siri search.

Throw in the Apple Inc. (NASDAQ:AAPL)’s inventory of mobile “iWatch” patents, and its leadership in mobile hardware, and it stands to reason that the the folks in Cupertino are moving aggressively into wearable technology. Of particular advantage to Apple is its closed iOS ecosystem which allows for a tightly integrated solution, protecting its products from 3rd party competition.

Unlike Google, Apple Inc. (NASDAQ:AAPL) has the opportunity to capture significant incremental revenues from wearables through hardware sales. Estimates show 294 million iPhones currently in service. A 30% adoption rate for wearables by iPhone users, a low rate for Apple, would equate to sales of 88 million wearables to existing iPhone users.

Furthermore, Apple stands to capture significant service revenue through wearables. Many see wearables as part of Apple’s plans to expand into the mobile payment category, estimated by Gartner to reach $617 billion in 2016. With over 600 million active credit cards in iTunes accounts, Apple may use wearables as a way to capture a significant share of the mobile payment business.

The primary risk to Apple Inc. (NASDAQ:AAPL) is the question facing all new categories. Will an Apple wearable be widely adopted? Clearly, Apple has more at risk in this category, since wearables are seen as a way for Apple to build its hardware revenues in the face of what’s considered a maturing smartphone category. A failure in wearables could put even more downward pressure on the company’s stock.

Foolish Bottom Line

Evolving technology in wearable computers may be an under appreciated revenue catalyst in mobile category. Of the mobile OEMs currently in the market, Apple Inc. (NASDAQ:AAPL) appears to be positioned to capture significant incremental revenue if wearable technology is widely adopted. Foolish investors should pay close attention to the success of Apple’s launch of a wearable; it could be a sign of upward movement for the company’s stock.

The article Google and Apple Want You to Keep It in Your Pants originally appeared on Fool.com and is written by Bill Shambllin.

Bill Shambllin owns shares of Apple and Google. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Bill is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

NASDAQ:AAPL NASDAQ:GOOG Apple Inc (AAPL)Google Inc (GOOG)

Google Inc (GOOG) and Apple Inc. (AAPL) Want You to Keep It in Your Pants

Published on July 9, 2013 at 2:43 pm by The Motley Fool in News

The Increasing Flood of Information to Your Smartphone

The Wearable Warriors

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