Why Apple May Dump Google

The rift between Apple (AAPL) and Google (GOOG) looks like it could get a whole lot wider. Apple is considering replacing Google as the default search engine on its iPhone with Microsoft's (MSFT) Bing, according to two people familiar with the matter. Discussions between Apple and Microsoft have been going on for weeks, say the sources, who caution that a deal with Microsoft is not imminent and may never be reached.

Why would Apple consider replacing the world's most popular search engine with Microsoft's Bing? Apple will probably get more money from Microsoft. But the real advantage of a Bing tie-up for Apple is that it would cut Google off from some of the search data that's the lifeblood of its business. Google has grabbed 65% of the traditional PC-based search market in large part because it has had far more information about what people are looking for and could use that to refine its search algorithms. If it can't get the same kind of data as people shift their computing to the iPhone and other mobile devices, Google risks losing its edge in search. "This would be a significant blow," says Jonathan Yarmis, analyst at the research firm Ovum. "Google would be cut off from the most important platform on the mobile Web."

Broader Battle

The discussions over search are part of a broader battle between Apple and Google. The once-close allies have been clashing on an increasing number of fronts. In January, Google unveiled the Nexus One, a smartphone powered by the company's Android operating system that competes with the iPhone. The same day, Apple acquired Quattro Wireless, which three sources have said is part of a broader effort to compete with Google in advertising.

Of course, Microsoft and Apple have a long history of their own clashes. Yet Microsoft is considered less of a threat in the emerging world of mobile computing, and its search technology is viewed as a strong alternative to Google's. Microsoft may also give Apple favorable terms simply so Microsoft can grab a big chunk of the mobile search market and gain ground on Google. "If you have to do deal with the devil," says Forrester Research (FORR) analyst James McQuivey, "you might as well deal with the one that needs you the most."

The disputes between Apple and Google over data escalated last year, say four sources close to the companies. Apple had agreed to make Google's search the default on the iPhone years ago, when the two companies were on good terms, and as part of that deal Google got access not only to search queries but also GPS data that helped pinpoint where iPhone users were at any given time. That allowed Google to create a virtual map of the U.S. and a real-time view of where people are using their phones. Last year, Apple told Google it wanted to stop sharing location data, say the four sources. Apple spokeswoman Katie Cotton and Google spokeswoman Katie Watson declined to comment.

More Targeted Ads

Such location data is sure to be crucial in the future, experts say. Knowing how many smartphone users are driving on a particular highway is the best way to predict traffic conditions, says George Fink, the former president of digital map-provider Tele Atlas. Location data could also be used to make mobile advertising more targeted and useful. General ads for, say, a Cadillac or mortgage broker may not be very effective if they show up on a mobile phone, but ads for a sale at a store around the corner or for cheap beer at a nearby bar may prove more appealing. Danny Sullivan, founder of the blog Search Engine Land, says such an advertising approach is a "no-brainer."

Microsoft does have valuable attributes other than not being Google. It's got excellent mapping technology and is a leader in voice technologies, which are becoming increasingly popular as a hands-free way to control smart devices. Still, Apple may only be looking for a short-term relationship. One source close to the company says it is considering developing its own search technology. "If Apple does do a search deal with Microsoft, it's about buying itself time," the person says.

Whatever the long-term strategy, Apple is taking a big risk. Google's name is practically synonymous with search. After Microsoft signed a deal last year to pay millions to unseat Google as the default on certain BlackBerry (RIMM) devices on Verizon Wireless's network, the carrier got so many complaints it issued a press release showing consumers how to switch back to Google. "While there may be good reasons for Apple consorting with Microsoft, this is consorting with an inferior competitor," says Larry Fox, founder of a long-running Apple user group. "Bing is inferior to Google."

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