The Apple Google Juggernaut - $66 billion - overtaking Microsoft?

If Apple and Google merge, the combined company will amass estimated revenue of $66.1 billion in 2009, thereby eclipsing Microsoft, whose estimated annual revenue in 2009 will be $62.4 billion. It will be a merger unlike any other in the history of mergers, and will create a powerhouse that might just topple the mighty Microsoft (NASDAQ: MSFT) from the throne. Google CEO Eric Schmidt loves Apple to say the least, and signaled that Google Inc. (NASDAQ: GOOG) is working more closely with Apple Inc. (NASDAQ: AAPL) at the Morgan Stanley Technology Conference this week. Schmidt joined the board of directors of Apple last year.

Apple, Google and Microsoft are three of the top 20 Innovators of The Innovation Index.

When Schmidt was asked by an investor on whether Google might be developing “Google phone” to compete with Apple's highly anticipated iPhone, Schmidt responded:

"I don't want to comment on rumors, I will tell you that Google and Apple are doing more and more things together through the normal course of communications ... We have similar goals and similar competitors."

Google and Apple are already working closely together; when Steve Jobs, CEO of Apple, announced the iPhone in January, it came packaged with Google Maps. (Apple Rising)

Apple and Google, or should we say AppGoogle, or GoogApple, will be a force to reckon with.

Market Cap Comparison

The current combined pre-merger market cap of Apple and Google is already $214 billion, compared to the market cap of $271 billion of Microsoft. Earlier in the year, when Google shares were hovering over $500 and Apple shares were over $95, the combined market cap of Apple and Google was over $240 billion. It is safe to say that a merged company will be within an earshot of Microsoft in terms of market cap, and will likely become the biggest market cap technology company a few years after merger.

2006 Comparison

Combined Apple and Google 2006 revenue comparison versus Microsoft's 2006 revenue shows Microsoft in the lead by a considerable margin of about $14 billion; Microsoft’s 2006 annual revenue was $44 billion, compared to Apple and Google’s combined annual revenue of $29.9 billion. Microsoft profits were more than double the combined outfit's profits of Apple plus Google – a whopping difference of $7.5 billion. Even the worldwide employees of Microsoft were more than double at 71,000 employees versus around 28,000 employees for the combined entities.

Growth Projections

However, a single year-end comparison is irrelevant; as analysts, investors, and key company executives will attest, it is the growth and the potential of growth that matters. And hence, when one compares the growth of combined Apple and Google versus Microsoft, the story truly unfolds. According to analyst mean expectations, Apple and Google will grow their 2007 revenue to $39.9 billion, 2008 revenue to $51.3 billion and through continued linear projection, grow the 2009 revenue to $66.1 billion. This projection does not take into account any post-merger impact to the business model and growth model on both the bottomline and topline. If even a positive increment of say 10% is tagged due to the merger, the revenue numbers of the combined business would be even greater and surpass the $66.1 billion target sooner. Compare this to Microsoft's revenue growth - $50.5 billion in 2007, $56.2 billion in 2008, and $62.4 billion in 2009. Conservatively, the merged Apple and Google will best the mighty Microsoft in total revenue in 2009.

Product Mix Comparison

How will the product mix appear post-merger? Which company will have an immediate edge post-merger in various product categories, and which company will eventually win? I have put together this Product Mix model for comparison between the combined Apple and Google products, and Microsoft products.

Out of the eight product categories, Microsoft currently wins in five including the Desktop, Business, Mobile, Software and Internet; and Microsoft wins by huge margins in Desktop, Business and Software categories. However, Apple and Google do win three out of the eight product categories, including, Search, Hardware, and Music & Entertainment. The Music & Entertainment is a close call, since Microsoft is doing extremely well with the Xbox gaming console; on the other hand, Apple is doing superbly with the iPod and iTunes. Apple is going to launch Apple TV this month, and the Apple iPhone in June of 2007 – both products are poised to create the type of hype, following and business akin to iPod’s smashing success. What happens three years from now? My projections are that in three years, the united Apple and Google will win in five out of the eight categories – in particular, Apple and Google will take over the Mobile and Internet, and win by huge margins in Search, Hardware and Music & Entertainment – so much so as to create the $66 billion plus revenue stockpile in 2009. To say that the Search and Mobile market segments are huge would be an understatement; to predict that Apple and Google will be successful beyond all the hype would depend heavily on the potential of iPhone, and Google's strategy and methodical execution to continually expand the market share in Search.

Bottomline

Apple and Google – could this be the beginning of a new guerilla? A new monopoly in the making in the consumer world? Already, Apple and Google are considered as the world’s top two innovative companies (BusinessWeek). What will happen if the two companies combined? Would there be an innovation juggernaut that nobody has ever seen or experienced, or even had the foresight to imagine? Or would the combined companies become complacent and chaotic? Who would be the new CEO? The flamboyant Steve Jobs, or the smooth Eric Schmidt? And what would be the future role of Google founders? Is Microsoft worried? Recently, Roy Ozzie, Microsoft’s top technical executive, said that watching Google Inc. rake in advertising revenue "was a wake-up call within Microsoft.” If Apple and Google merge, could this mean that Microsoft will have to forget sleeping altogether? Would Microsoft be “Sleepless in Seattle (or Redmond)”?