With the rivalry between Apple and Google reaching new levels of intensity, rumors are swirling about plans for a proprietary search engine for the iPhone, iPod touch and iPad.

Gene Munster, senior research analyst at Piper Jaffray & Co., estimates that there is a 70 percent chance Apple will launch a mobile search engine for the iPhone OS, protecting the company?s App Store data from its archrival, Google, which is currently the default search provider for the iPhone and iPad. Now that the two companies are competing in both the mobile advertising and smartphone spaces, it would make sense for Apple to horde valuable iPhone user data.

?Search is an important component of the revenue picture, and Apple setting itself up for the future of mobile search,? said Josh Martin, senior analyst of wireless media services for the global wireless practice at Strategy Analytics, Newton, MA. ?To figure out the reason for Apple to get into the search business, you have to ask, ?What is the future of search, specifically on a mobile device? Through maps and applications??

?The acquisition of Quattro Wireless will be generating money through advertising within applications, so I?m not sure if there?s a need for Apple to launch their own search engine,? he said. ?It is lost revenue, but Apple has let third-party companies do what they do best why on its devices, which is why we?ve seen Google on the iPhone so far.

?Apple certainly has a lot to gain, but the question is, at what cost??

Strategy Analytics estimates that in 2009 mobile search generated $627 million in revenue. The firm projects that number will rise to $7.3 billion in 2014.

?That?s an important indication that this is a good, strong, very large market, but that being said, what is the cost of creating a search engine, and how can you create something that?s better than what?s out there?? Mr. Martin said. ?There possible antitrust issues, but the key question is ?How do you differentiate it??

?Apple can differentiate itself in so many other ways, so to go down the well-worn path of search would be a mistake,? he said.

The rumor mill has also been buzzing about Apple?s alleged discussions with Microsoft to potentially make Bing the default search engine on the iPhone, which would be a less daunting proposition than creating a search engine from the ground up (see story).

Piper Jaffray sees a 25 percent chance that Apple will switch from Google to Bing in 2011.

However, that would bring Apple back to the same problem of sharing valuable user data with a rival, in this case Microsoft.

Mobile advertising
Ultimately, the issue comes down to monetization, and the more data you have on a lucrative demographic such as Apple users, the better you can target products, services and ads to them.

Mobile search advertising is one aspect of that strategy, advertising across the mobile Web and within applications is another.

With Apple responding to Google?s pending acquisition of mobile ad network AdMob with the acquisition of Quattro Wireless, the companies will be competing for relationships with brand advertisers, publishers and developers.

?Apple could potentially offer enticements for app developers that use the Quattro network, but I don?t think they?ll completely shut out AdMob,? Mr. Martin said. ?I think they can make it worth the while of app developers to go with Quattro and protect their information from Google.

?Apple has to take a defensive position there to protect their data,? he said. ?The mobile device more personal than any other device people own?it contains sensitive information, and it is a very powerful advertising platform.

?The global mobile media market, including advertising, is growing exponentially?the number of smartphones will exceed the number of PCs in the next few years?so there?s unbounded opportunity, and as Google and Apple take stances to defend their information, the market should get very interesting very quickly.?

In addition, Apple is engaged in a legal battle with HTC, which manufactures several Android-based touchscreen smartphones (see story).

Apple iSearch?
On the search side, Piper Jaffray?s Mr. Munster believes Apple needs to develop its own search technology to protect the data generated on the iPhone.

Mr. Munster suggested that Apple could use data unavailable to Google, data generated by the company's App Store, to create a mobile-centric search engine, which would be a unique offering to Google's search engine.

An iPhone-specific search engine could be a difficult undertaking, but Mr. Munster feels that Apple could make a minor acquisition of a search company that has built a Web index, for example Cuil, and use the index as the base for building its own engine.

One hurdle for Apple in developing its own search engine would be generating enough advertiser interest to form a competitive marketplace?however, the rationale for an Apple search product is to protect data rather than generate profit.

The company could likely entice enough major advertisers and local resellers like ReachLocal to use the Apple search platform to make a meaningful market place and potentially operate a search product at break even, according to Piper Jaffray.

Mr. Munster wrote that he would not expect an Apple search product to generate meaningful profits for the company.

The bottom line is that protecting the data generated on the iPhone OS platform must become an increasing priority for Apple and Mr. Munster believes the company has the resources to develop its own products in both maps and search in the next five years.

?What Apple has to weigh is the importance of data sanctity, not sharing what is now perceived as valuable data with a competitor, versus the ability to attract users, the ability to provide as strong an experience as Google currently offers," said Noah Elkin, senior analyst at eMarketer, New York. ?I understand the goal wouldn?t be to create a rival to Google, just to offer something that provides the same quality of results that Google provides for the iPhone, and I assume it would also apply to the iPad and all other devices Apple offers.

?The idea would be to protect the user data and the behavioral data that Apple may perceive as valuable to a competitor,? he said. ?Assuming that this is something of a medium- to long-term prospect, assuming in the next three to five years Apple decides to go that route?

?Apple has a big portion of the browser market share currently, but Android devices are growing fastest in terms of market penetration?there are so many new ones coming on the market on multiple carriers?so over that period of time it won?t have a dramatic impact on Google?s market share.?

In addition, many smartphone users, whether they have an iPhone, a BlackBerry or a Palm Pre, will simply type in Google.com into their device?s browser.

?Think about the carrier portal for on-deck search, when users realized they could go to Google.com on their browser, they started sidestepping carrier portals and went straight to Google,? Mr. Elkin said.

?Carriers realized that their white-label solution was not finding an audience because people were so used to going to Google on their desktop, that?s where they went when they starting using mobile search as well,? he said.

Gartner's take
Sandy Shen, China-based analyst at Gartner, chimed in with her take on the issue:

I think it doesn?t make sense for Apple to develop its own engine. They are better off to partner with an existing player rather than try to recreate the wheel.

The chance that their own engine can outperform its competitors is very slim at least in the next five years, due to its lack of experience in search algorithm.

If it happens, it will only make an impact if it does a strong job in a particular area such as search for music, picture, local businesses etc. Otherwise, it is likely to be lost in the market.

That?s very likely that people can manually set Google as the default. Since people have preferred search providers and established search behavior on mobile, they won?t easily switch unless the new one has stellar performance.

If Apple cannot grab people?s attention at their first attempt, they are likely to get lost.

The iPad will be more like the PC environment rather than phone.

Those mobile ads businesses will be device- and platform-agnostic, and this is the only way to achieve scale which is important in the ad business.

Though I think Apple?s will be more geared towards the iPhone/iPad/iPod platform. They will compete with scale, reach and effectiveness, and the control over the ad value chain.