With the release of the iPhone5 and iOS6, attention has become focused on the competition between Apple and Google for local and hyper-local search dollars. The iPhone has relied for years on Google’s mapping service and data, but with iOS6 they have introduced their own Apple Maps service. The problem is that Apple’s alternative is suffering from some highly publicized and severe flaws. The kicker is that maps have emerged as a key part of the mobile ecosystem with huge amounts of advertising dollars at stake.

“Local is a huge thing for Google in terms of advertising dollars, and search is very tied to that,” says Barry Schwartz, an editor at Search Engine Land, an industry blog. “Knowing where you are, when you search for coffee, it can bring up local coffee shops and ads that are much more relevant for the user.”

40% of mobile searches on Google are for local services and half of those searches are from iPhone users. These translate into potential sales for local businesses, as Google’s search results push much coveted traffic.

Google’s Executive Chairman, Eric Schmidt, said publicly this week that, “Google has made no move to provide Google Maps for the iPhone. We have not done anything yet,” he said, “but any decision on whether Google Maps would be accepted as an application in the Apple App Store would have to be made by Apple.”

Given Apple’s reputation for delivering applications that just work, no doubt they are scrambling to update and improve their own Map app, but it is hard to see how they can catch up with Google who has a 10 year head-start and a 7,000-strong workforce dedicated to Google Maps development.

Perhaps more importantly, will Apple be able to monetize maps as well as Google? Google has a huge and cohesive dataset of businesses and locations in the US, whereas for business listings Apple is having to try to integrate data from Acxiom and Localeze (a division of Neustar), supplemented by reviews from Yelp. Integrating information from these three completely different sources will be problematic at best. And every glitch in the data, and every local business that does not show up, or shows up in a completely wrong location, will result in both lost ad revenue and a hit on Apple’s hitherto stellar reputation for quality products.

Google has the ability to mine vast amounts of consistent, local search and mapping data that is has been aggregating for years, and can combine it with auctioned keywords matched to people’s search queries. Google knows this kind of monetization. Does Apple?

In the short term, it may not matter to Apple too much, given the loyalty of their users. It seems clear that people want their new iPhone5, even though the mapping application may suck a little. Apple has time to get it right.

So the question is not who is going to win this war, right now. The question is will mobile advertisers be forced to choose from which Map service they will purchase ads, and will they have to spread their advertising dollars as each techno-giant ends up taking half the market?