Apple's iPhone and other smartphones are generally good for Google: Anything that gets more people using the internet on their cellphones -- and using Google, the web's dominant search engine -- is going to help Google someday make a market in mobile advertising. (That is, as long as it's not cutting down on the amount of time they use the web and Google on their computers.)
But Apple's iPhone App Store -- a huge hit -- is not as good for Google. While Google has a tiny business displaying in-app ads, the rest of the movement toward mobile apps and app stores is currently bad for Google. Why?
Time spent in apps is competing with (and replacing) time spent on the mobile web. There are some Google display ads in iPhone apps, but no direct line to Google Search or search ads, where Google stands to make the most money. (The good news is that Google doesn't make much money yet from the mobile web, so this isn't immediately disruptive.)
Time spent in apps is competing with (and replacing) time spent on the real web. This is probably the scariest scenario for Google. If I am sitting on my couch playing iPhone games or reading an article in Instapaper Pro -- instead of goofing around on the web on my laptop -- that is potentially real lost revenue for Google. (Similarly, even if I'm using my iPhone's web browser, using the mobile web and Google search, Google is probably not monetizing those searches nearly as well as they do on the computer.)
Users are learning to go to an app to find the information they need as opposed to going to Google or the web. For example, if I want a restaurant review, I don't go to Google to type in the name of the restaurant. I go to the Yelp app. Or Urbanspoon. Or whatever. Either way, no Google there.
The App Store search engine built into every iPhone is becoming a very important search engine. One billion apps downloaded means hundreds of millions (or billions) of searches conducted. Google doesn't power it or sell ads there.
The upshot for now is that mobile advertising -- especially in iPhone apps -- is still too small to matter to Google. Instead, even a small improvement to Google's main search advertising business would be more lucrative to the company than spending that effort on iPhone ads.
But eventually, it's possible that the mobile web and mobile apps will be important enough for a significant amount of Google's attention. At which point they'll either have to roll out an awesome ad model -- the way they did for web searches -- or buy one of the leading mobile advertising companies.
(And yes, Google does publish some iPhone apps of its own. But on the iPhone, the most important Google-powered apps -- Maps and YouTube -- are built by Apple, and don't include any ads today.)
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Dan Frommer is a senior editor at Business Insider.