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Tuesday, January 26, 2010, 01:00 pm PT (04:00 pm ET)

Apple targets Google's mobile ads market with Quattro acquisition

Apple has signaled a clear intent to muscle its way into the mobile ad market using its recent acquisition of Quattro, a direct challenge to Google's Android-related ventures.

Google's Android has been viewed as a direct competitor to Apple's iPhone, even before the company officially released the details of its mobile strategy. Many originally even expected Google to launch its own hardware, rather than just partnering with other manufacturers as a software licensor and reseller. But few have recognized the potential for Apple to take on Google's virtual monopoly in online advertising and leverage its position with the iPhone and iTunes to rival Google as an ad broker.

To many observers, Google was simply destined to play the role of Microsoft in the 1990s, swooping in to remove Apple's unique product and replace it with a commodity device running a broadly licensed operating system. Since the release of the first Android phone in October 2008 however, Android hasn't come anywhere close to taking on Apple's hardware business or assembling a similar ecosystem of third party development. Instead, it has largely gobbled up Microsoft's stagnant Windows Mobile market share.

Google's Android strategy

Google's Android project developed years before Apple released the iPhone; it was originally aimed directly at Windows Mobile, not to sell hardware but to keep Google a viable contender in the mobile advertising space. Google had no reason to compete directly with Apple even after the iPhone's launch, because Apple's smartphone already used Google for its web search, maps, and other online services.

With Apple playing no role in online advertising, Google remained focused on creating an open source smartphone monoculture that would allow it to track and target mobile users with advertising. Google hoped its new operating system would largely be developed and managed by the community, and that third party hardware developers would take over the details of building handsets.

This strategy was expected to enable Google to simply expand its advertising monopoly into mobile devices and become the next Microsoft of smartphones, except that it would be collecting revenues for ads and paid search results rather than licensing software as Microsoft had.

Apple signals an intent to join the ad market

Shortly after Google acquired AdMob for $750 million to expand its mobile ads expertise last fall, it was discovered that Apple had also bid on the company.

Earlier this month, Apple acquired Quattro Wireless for a reported $275 million. While that acquisition is smaller, Apple also has a rich repository of information on its 500 million iTunes users that Google can't access.

Apple also has a tight relationship with its iPhone developers, who can only publish their apps through iTunes. By offering its developers integrated advertising services, Apple can get started in the mobile ad business and quickly catch up with Google's own fledgeling mobile efforts.

When asked about the company's recent acquisitions of Quattro and Lala after yesterday's earnings report, Apple's chief financial officer Peter Openheimer answered, "In terms of Quattro and Lala we acquired Quattro because we wanted to offer a seamless way for developers to make more money on their apps, especially free apps. We acquire companies from time to time for their technology and talent, that's why we do it."

Apple has never run an ad business before, but it has also never really had a captive platform to sell any advertising before either. The company briefly flirted with adding banner ads to its Sherlock search app a decade ago before abandoning the idea. Since then, it has focused on selling its own applications and its iTunes media partners' content as ad-free rather than chasing the idea of ad-supported media models as Google, Hulu, and Microsoft have been experimenting with recently.

Paid vs. free (with ads)

Microsoft in particular has worked to develop ad-supported, online versions of its Office suite to compete against Google's comparable offerings, as well as mobile games for its Zune HD device which are intended to be subsidized by ads.

However, even with iPhone apps, Apple has worked to encourage its developers to charge very little and profit in volume rather than give their apps away and try to monetize them with ads. By leveraging its Quattro acquisition, Apple appears ready to augment its favored, paid iPhone app model with options for developers that allow them to earn revenues on free apps.

Apple may also leverage its new mobile ad savvy to subsidize new video and multimedia content for its upcoming tablet product, although it's also likely that the company will continue to push its micropayment model that has proven to be wildly successful on the iPhone and iPod touch and throughout iTunes in general.