Hot Stocks: Apple's Acquisition of Quattro Puts It on a Collision Course with Google

With its acquisition of Quattro Wireless, Apple Inc. (Nasdaq: AAPL) has opened the door to competition with Yahoo Inc. (Nasdaq: YHOO), Microsoft Corp. (Nasdaq: MSFT), and especially Google Inc. (Nasdaq: GOOG) in the mobile advertising market.

And Apple's venerable App Store will play a key role in the company's expansion.

All Things Digital, a tech blog affiliated with The Wall Street Journal, reported the deal's value at $275 million, citing several anonymous sources. It is the 24th acquisition in Apple's 34-year history, and is characteristic of the previous 23: buying a small company that can easily be integrated into its existing projects.

In this case, Apple can use mobile web ads developed by Quattro to generate income from outside advertisers.

Consumers have downloaded more than 3 billion applications to their iPhones and iPod Touch units since July 2008, according to Apple. While some of those downloads cost money, most of the downloads were free. Developers of free apps generate revenue from ads provided by companies like Quattro, which has roughly 7% of the mobile ad market share, according to Interactive Data Corp. (NYSE: IDC).

Once Quattro is in Apple's fold, Apple will be able to implement a clause for aspiring app developers that requires ads be integrated into free apps, with Apple taking the lion's share of the revenue.

Quattro also develops ads for mobile Web sites, and consumers are increasingly browsing the Web through mobile phones. More than 1 billion mobile devices - be it a phone or iPod Touch - will access the Internet this year, IDC says. That's catching up to the 1.3 billion users that use a PC to go online, and the rate of growth for mobile users is 2.5 times the rate of PC users.

Apple will have a much better shot against the likes of Google in the mobile ad space than it would on ads served to Web browsers on computers. In fact, once it finishes its $750 million acquisition of mobile ad firm AdMob Inc., Google will have the leading market share with 24%, well below its almost 70% share via computers.

"Clearly Apple and Google continue to run down parallel paths ... it's all about mobile advertising on smartphones, they're trying to maximize the dollars they create online," Broadpoint Amtech analyst Brian Marshall told Reuters.

And while paid apps are an unknown minority of the apps served by Apple, the increasing popularity of video games on both the iPhone and iPod Touch will add to the staggering growth Apple has experienced in the past year.

Most of the game industry's major players, including Activision Blizzard Inc. (Nasdaq: ATVI) and Electronic Arts Inc. (Nasdaq: ERTS) already contribute a plethora of games based on well-known franchises, such as EA's "Madden NFL " series.

Apple takes 30% of the revenue generated by paid apps sold in the App Store. The App Store generates $1 million in revenue daily, CEO Steve Jobs told The Journal, which would mean his company makes about $300,000 from the App Store daily.

And that was in August 2008, just a month after the introduction of the App Store.

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