Inside Google

Google CEO Eric Schmidt’s resignation today from Apple’s board underscored that it when comes to business, competition is thicker than friendship.

Apple and Google’s collision course in the mobile phone and operating system markets trumped the friendship between Schmidt and Apple CEO Steve Jobs. It is a familiar script for Silicon Valley, where companies expand into new areas and challenge former allies in the constant scramble for increased revenue. Earlier this year, Cisco Systems unveiled an aggressive plan to move beyond its core business in Internet switches and routers into the market of servers, placing it in direct competition with long-time partners Hewlett-Packard and IBM.

Schmidt’s role at Apple has been scrutinized by analysts for many months as the companies increasingly set courses that would lead to direct clashes with each other. Meanwhile, the relationship between Google and Apple has drawn inquiries from federal regulators.

"It’s about time," Needham & Co. analyst Charles Wolf said of Schmidt’s departure. He noted that the iPhone is only going to become more significant to the Cupertino-based business while Google’s Android mobile phone operating system is expected to show up on more and more devices in coming months. Schmidt had said he recused himself during board discussions about Apple’s iPhone business.

"The topics of conversation (between Apple and Schmidt) is getting narrower and narrower," Wolf said.

Said Citigroup analyst Mark Mahaney: "It seemed like there was increasing levels of competition between the two companies. It seemed almost inevitable he had to leave the board."

Schmidt’s decision to step down, which Apple said was mutual, came amid a months-long inquiry by the Federal Trade Commission into whether the companies’ close relationship violated antitrust laws. And the resignation was announcement three days after the Federal Communications Commission said it was looking into why Apple rejected the Google Voice application for the iPhone, which would allow users to communicate with voice over Internet (VOIP) technology, sidestepping AT&T’s cellular network. AT&T is Apple’s carrier partner in the United States.

The U.S. Justice Department is also investigating whether Google, Yahoo, Apple, Genentech and other tech companies conspired to keep others from stealing their top talent.

As much as anything, Schmidt’s departure is tied to the changing competitive environment between the Google and Apple. Google’s Android mobile phone operating system is a growing challenge to Apple’s iPhone. Google’s Chrome browser operating system bumps up against Apple’s Safari browser. And the Mountain View company’s Android operating system is being deployed on low-cost laptops by companies such as Acer, a potential competitor to Apple’s Macintosh computer line.

"Telling Google what Apple plans to do two years from now — it makes no sense and it hasn’t made sense for a year," Wolf said.

In a recent interview with the Mercury News, Schmidt, who joined the Apple board in August, 2006, maintained certain steps could be taken to avoid conflicts of interest.

"The board question can be solved by recusing yourself, which I do with the iPhone," said Schmidt, who is also Google’s chairman. "It is also important to remember that unlike Microsoft and Google, Apple and Google have a lot of technical partnerships. The underpinnings of Chrome are the same as that of Apple’s Safari browser. There is a lot of collaboration around Web standards. We collaborate on the maps area. We have a large number of iPhone apps. There are significant benefits to Apple and to Google for me to be on both boards with the caveat … that you have to be very careful."

Ultimately, both sides decided the relationship was too close for comfort.

"Unfortunately, as Google enters more of Apple’s core businesses, with Android and now Chrome OS, Eric’s effectiveness as an Apple board member will be significantly diminished, since he will have to recuse himself from even larger portions of our meetings due to potential conflicts of interest," Jobs said in a statement. "Therefore, we have mutually decided that now is the right time for Eric to resign his position on Apple’s board."

Schmidt had no choice but to leave the board, said Charles Elson, director of the Center for Corporate Governance at the University of Delaware.

"If you believe there is a potential that conflict could exist, you should leave," he said. "It makes sense for him to resign."

Meanwhile, a consumer group, Consumer Watchdog, on Monday called on Genentech Board Chairman Arthur Levinson, who sits on the boards of Google and Apple, to quit one of them to avoid antitrust violations.

In addition to conflicts that could arise from sitting on the boards of competing companies, Genentech is an investor with Google in the genetic testing company 23andMe run by Anne Wojcicki, wife of Google co-founder Sergey Brin.

Contact John Boudreau at 408-278-3496 or [email protected]