What the Apple-Google War means for startups

Tim Chang, Norwest Venture Partner’s mobile guru, says the giants are hungry for cloud technology.

If you’re a mobile entrepreneur and haven’t yet met Tim Chang, you’re not going to enough conferences. Ever since his firm, Norwest Venture Partners, raised a whopping $1.2 billion fund last year, Chang has been active on the speaking circuit (he even sported a bass guitar on the bandstand at Vator Splash this month).

Chang focuses on mobile, gaming, and digital media investments for Norwest and leads NVP's investment practice in China and Asia-Pacific. He previously spent 5 years living in Japan where the gaming and mobile markets are lightyears ahead of the U.S. in many respects.

All of that means Chang knows his stuff when it comes to the future of mobile. I got him on the phone on January 25 (ie, before the iPad launch) to talk about Apple’s newfound appetite for startups (Quattro Wireless and Lala being the most notable acquisitions in recent months), and how the Apple-Android wars are affecting his investment strategy. Chang says that Apple, Google, handset makers and carriers are all hungry for cloud technology that is not currently in their DNA, including ad networks, geolocation and social graph analytics.

His insights on how much Google will actually be able to penetrate the Chinese mobile market are also worth a read…

MB: It seems Apple is becoming more acquisitive. What kind of companies do you think they’ll go after? What’s their strategy?

TC: I think it’s pretty clear we’re seeing two new giants go head-to-head: Apple and Google. The way I see it, we’re starting to see large companies engage in cloud warfare. Every company needs a piece of the cloud. There are several strategic assets within cloud warfare: there’s the address book, the public relations with the customer, there’s the digital locker in the sky.... There’s a variety of assets and it’s pretty clear all of these large companies will need to play in these spaces, whether it’s carriers—and you’re going to see carriers being acquisitive—whether it’s Google, which starts from more of the search and data side, or Apple that starts from the device side and realizes we are no longer in a age of just selling consumer electronics. That’s a pretty dead market. It’s all about what I call the device-as-a-service. IPhone is a device built for cloud connectivity out of the box. Kindle is the same. I think one of the clear messages from CES this year is that going forward, most devices will be architected for a device-as-a-service type of experience.

The hardware was commoditized long long ago and while design is differentiating some new products, in general, it’s the connection to the platform—the app store, the cloud, all those kinds of services—that really makes the difference, so every hardware company needs to figure out how to be very good at being a cloud service and software company as well. That’s not normally in their DNA, so you can expect a lot of acquisitions. Apple is the first, but it’s not surprising that guys like Nokia a couple years ago acquired Navtec on the map side, and if Samsung, Motorola and all these other guys are smart, they’re going to be acquiring similar assets to become ready to be software-as-a-service companies just as much as they are hardware companies.

MB: We’ve seen mobile ad neworks and a couple geo-location companies get bought up. Any other types you expect the corporate buyers to target?

TC: I think social graph is a huge important part. I think companies that have data-mining, analytics, or own the social graph itself will be very important. Arguably, Facebook’s already locked up the social graph, so it’ll be hard to replicate that. However, any other startups that have been able to scrape that or get pieces of other social graphs from other companies will be very important. I think companies that scan and can analyze social graphs, scan news feeds and social feeds will be pretty important.

You’ve already started to see some of this. Carriers are starting to some acquisitions of connected cloud address books types of things. You know, Apple tried the Mobile Me service that at first launch didn’t work so well, and in my opinion, Apple’s never really understood the social net well, so that can be an area that they bulk up in, just like they purchased advertising so they can have ad infrastructure going forward.

MB: Does acquisition in the social graph space mean buying media companies like social networks?

TC: Nah, probably not. My guess is it’s going to be more social graph analytics and data companies: companies that have metadata around the social graph. That’s probably more important than buying some would-be runner-up to Facebook or something.

MB: Does the battle between Apple and Android affect how you invest in games, or does that not really matter?

TC: I think it’ll be pretty important, because 2008-2009 was really the year of the app store taking off and then 2010 I think will be the year of Android really taking off, especially overseas. What’s really important is that companies that want to play in smartphone gaming 2.0 have to be ready for three things: the first is expansion beyond just the iPhone platforms, so prioritizing the Android platform and potentially also RIM and others. I think they’re de-prioritizing Microsoft and Palm right now. I think it’s clear, every developer needs iPhone, needs Android and maybe RIM—those have become the top three.

Second, it’s going to be a global market; it’s not just the U.S. As Android spreads into China and other regions, companies should be looking at internationalizing.

Third, these companies have to be ready for the shift to free-to-play with in-game microtransactions. Mobile smartphone gaming is going to mirror what’s happened with online social games like Zynga and Playdom. The natural pricepoint for most of these should be free. It should all go to free and be monetized through in-game transactions as well as potential upsell to premium, whether that’s subscription, or something else.

MB: Google recently had a run-in with China. Will that hurt their ability to tap the mobile and gaming market there?

TC: It’s interesting, China Mobile rolled out their Ophone platform, which was their answer to iPhone, and the whole thing’s built on Android. That said, Android is a weird variant because it’s built for customization. It’s meant to be tweaked and skinned however you want it, almost like an opne-source kind of thing, so I think you’re going to see the fragmentation of Android in 2010. Every carrier, every handset maker wants their own flavored custom version of Android. One of our portfolio companies called Borqs in China is the leader in this area—they’re almost the de facto Red Hat of Android now doing all these custom integrations for the system rollouts. You know, it’s interesting to see—after you customize to a certain point, is it still Google anymore, or is it a kind of successor to Linux Mobile as the true open-source framework.

The Google question will be an interesting one. I think it could potentially hinder vanilla Android launches in China where Google is the default search, but I think we’ll continue to see customize Android rollouts, where they’re heavily reskinned and it doesn’t feel like generic Android.

MB: In these reskinned offshoots of Android, how much access and monetization capability does Google have?

TC: The Google Search experience and other Google apps are heavily integrated into Android, but carriers have the ability to replace big chunks of those things or pick preferred solutions or pieces and modules in their customized Android rollouts, so that’ll be an interesting battle to see.

At some point some of the Chinese folks could say, you know, I don’t want Google Search to be the default search engine; I want something else. But the best hook for Google into China is search, not just online where Baidu is number one, but especially in mobile. Mobile’s always been a potential Trojan horse for Google to really win a lot of market share on search in China.