Are Apple and Google Reshaping Mobile Phone Competition?

At a deep level, the developing contests in the high-end smartphone business are less about the devices, and more about the applications and business ecosystems the devices will help to support.

Mobile app stores have become the surprise success of the smartphone business. Unfortunately, it isn't a business for most, as most of the apps available on popular app stores are offered free, and most sell for less than a dollar.

And that's where advertising might be important. If developers cannot profit at all, or not much, from direct app sales, perhaps advertising might develop as a key revenue model. Some skeptics will note, rightly, that "advertising" is the magical business model many free Internet app providers have claimed would be their ultimate revenue model.

Some will make it work, but most will not. On the other hand, who would want to bet against Apple and Google being at the very forefront of firms that could find a way to make it work?

So how could Apple or Google make advertising work much better? By vastly improving the relevance of every message, using location and existing profiles of user behavior, and by making "advertising" a more entertaining experience.

To do so, Apple needs a network of advertisers and the technology to target ads to customer behavior, which most observers would say Apple now has with its purchase of Quattro.

Nor might Apple necessarily be thinking of "out-Googling" Google in mobile search. That isn't the way Apple's executives think. Rather, they think about creating whole new businesses, not improving existing businesses.

That is the thinking many have in asserting that mobile apps might someday replace search in a mobile context. The reason is partly the chores of interacting with small screens and text input. Apple will be looking at that, and so will Google. The whole idea will be to automate the process of finding things, so it is a more natural, certainly more easy process.

The other angle is simply screen real estate. Some would argue display ads work better on small screens, as the ad might sometimes occupy the entire screen. Users are likely to see such approaches as intrusive.

Oddly enough, the new shift to app stores and mobile advertising might lessen the value of hardware ingenuity, because the new game is monetizing applications and creating commercial transaction potential using location. There is a sense in which the mobile device battler is shifting from hardware to software.

Right now, it would be hard to argue that Apple and Google are in the strongest positions where it comes to software and advertising.