How Apple could grow to dominate tech sector

By Peter Burrows

updated 12:34 p.m. ET Aug. 13, 2009

Now that Apple has once again passed Google in market value, can the consumer-electronics maker maintain its lead?

While Apple's capitalization has risen above that of Google for short bursts in the past, it has remained higher since July 22. As of Aug. 11, Apple was worth $145.87 billion, compared with Google's $143.40 billion. This could be a momentary shift in Wall Street's whims — like when Cisco Systems briefly surpassed Microsoft to become the world's most valuable company in 2000.

More likely, Apple has more solidly unseated Google as tech's No. 2 powerhouse and is now on track to one day challenge Microsoft for the crown. While both Apple and Google are likely to remain highly valuable in the coming years, there's reason to believe that Apple may outshine Google in the eyes of investors.

(Msnbc.com is a joint venture of Microsoft and NBC Universal.)

Google has an incomparably profitable Web-search operation, but it incurs losses in scores of other businesses. Apple, on the other hand, makes money on everything it does — even the music and applications sold in an effort to get people to buy the hardware devices that are its true business.

And Apple has far more room to grow based on its core businesses. While Google gets about 70 percent of the revenue from the $14 billion online advertising business, Apple has well under 10 percent of the computer business, and about 8 percent of cell-phone revenue.

What's more, Apple's profit machine may be more protected from competition than Google's. As Google executives are quick to tell antitrust regulators, consumers are just clicks away from switching search engines. But Apple has its fingers all but sewn into the wallets and purses of the millions of people who have purchased billions of songs and almost 2 billion iPhone applications from the AppStore. More than 75 million people have credit cards on file with Apple, and have invested to build libraries of songs, movies, and applications. The more they spend, the less likely they are to jump ship to other products.

It's not hard to envision ways for Apple to grab a larger slice of consumer spending. For all of its success in digital music — it long ago passed Wal-Mart to become the world's leading distributor of music — still only about 30 percent of music is sold via iTunes. And with thousands of new apps showing up in the App Store, the reasons to buy an iPhone or iPod Touch — say, to use it as a GPS navigation system, as a level, or for making bank deposits — are expanding. And if rumors pan out that future versions of iTunes will incorporate more social networking, it will be even easier for Facebook and Twitter users to recommend Apps to friends.

Apple likely will have a big leg up as it weighs entering new hardware markets — take the tablet PC for example. A raft of these computers is expected to flood the market in the coming months, thanks in part to support from Microsoft's new operating system, Windows 7, due to hit shelves Oct. 22. Analysts see little chance of a major hit emerging from any of these devices. Yet some percentage of iPhone users will undoubtedly want a device that lets them play their App Store games and watch their movies on a larger screen. "Apple's already created demand (through iTunes)" for the tablet, says Gartner analyst Paul Jackson.

MORE FROM BUSINESSWEEK

BusinessWeek Section Front

Google's Display-Ad Sales Should Top $1 Billion Stock Picks: Amazon, Exxon Mobil What SAP Needs After Apotheker Apple's Hard iPad Sell U.S. Wage Growth: The Downward Spiral Stocks: How Investors Might Play the Pullback Addressing the Dearth of Female Entrepreneurs Exchanges Face a Daunting 2010 Social Investing Gathers Momentum Stock Picks: Time Warner, Polo Ralph Lauren BusinessWeek Section Front