Content Matters

Looking at yesterday's market close, the market cap for Google (NASD:GOOG) and Apple (NASD:AAPL) are roughly the same, with Apple at $82 billion and Google $81 billion. So, in the current environment, which would you rather own?

Recent months have shown that Google is not recession-proof. Click-thru rates on ads have declined (1.9% for Q3 2008 vs. 2.4% Q3 2007), while prices for keywords have dropped since last quarter. Key online categories such as housing, credit and automotive are all taking huge hits, although the impact is much greater on display advertising than on search advertising.

Yet the long-term trends are in Google's favor.  Search advertising has continued to gain against online display advertising, even during the downturn, which should translate to increased market share for GOOG. SEM may continue to be depressed for the next 12-18 months, but as the economy comes back, I'd expect performance-based search advertising to be one of the first beneficiaries. Google still has its challenges - deciding how to monetize YouTube, for example, but that also points to new opportunities for the Company. Google also has opportunities on the cost side; having never really focused on cost management, they should have plenty of room for belt tightening.

Many people believe that in down markets, quality wins out. I will give up many things but my iPhone is not one of them. So, how will Apple ride out this storm?

I think Apple may have a tough time over the next 12-18 months.Tech enthusiasts have already bought their iPhones, and a two-year old Nano is probably good enough to get most consumers through another year of music. We've heard recent warnings of diminished consumer demand from both Intel and Best Buy, while Circuit City has declared bankruptcy. Meanwhile, new Netbooks, priced in the $200-400 range are bound to put pricing pressure on Apple. Taken together, these are not good signs for Apple.

International sales of iPhones should be one bright spot for the company. According to Piper Jaffray analyst Gene Munster:

According to our checks on the iPhone international website, availability will grow from a subscriber base of about 660m subs in 44 countries in late Aug. to about 989m subs in 73 countries by the end of the year. This represents 50% growth in addressable subscribers ahead of or during the holiday quarter.

Munster also expects Apple to respond to the Netbook entries with a product in between the iPhone and MacBook - perhaps a smaller MacBook Air or a tablet Mac.  

So, in this market, which would I be buying?  I think that Google has more flexibility to ride out the storm and will be an early winner as the economy strengthens, hopefully in 2010.  As a manufacturer, Apple  has a more complex cost structure than Google, so managing inventory remains a challenge. When the market starts to come back, I think there may be a lag before luxury products recover, so while both companies are good long-term buys, my bet right now is on Google.

Disclosure: I am long GOOG.