Like Apple, Should Google Be Worried About Samsung?

Mobile is quickly becoming two duopolies in hardware and software. On the hardware side, Apple (NASDAQ: AAPL  ) and Samsung continue to gobble up all of the industry's gross profits while shipping over half of all smartphones. Within operating system platforms, Apple iOS and Google (NASDAQ: GOOGL  ) Android are leaving very little for the other players.

A tale of two duopolies
Here are IDC's estimates on both fronts for the fourth quarter, starting with smartphone vendors:

Smartphone Vendor

Q4 2012 Unit Shipments

Q4 2012 Market Share

Samsung

63.7 million

29%

Apple

47.8 million

21.8%

Combined

111.5 million

50.8%

Source: IDC.

Here's the software side:

Smartphone Operating System

Q4 2012 Unit Shipments

Q4 2012 Market Share

Android

159.8 million

70.1%

iOS

47.8 million

21%

Combined

207.6 million

91.1%

Source: IDC.

While Samsung's rise is a clear threat for Apple, you'd think it's all good news for Google, as the South Korean conglomerate is Android's most successful champion right now. If you cross reference the figures above, you'll notice that Samsung is now shipping roughly 40% of all Android devices worldwide -- a huge figure for a commoditized OEM selling devices with open-source software.

Samsung does ship Microsoft (NASDAQ: MSFT  ) Windows Phone devices, but the vast majority of its product portfolio runs Android. There were only 6 million Windows Phone or Windows Mobile devices shipped during the quarter, and we already know 4.4 million of those came from Nokia (NYSE: NOK  ) , leaving only 1.6 million units from other OEMs like Samsung and HTC. Samsung's success is very much predicated upon Android, and more importantly for Google, vice versa.

A tale of two vendors that Google over-relies on for mobile ad revenue
Since Android is open source, an OEM could theoretically gain too much power over the platform. That's something that's been troubling Big G of late, according to a recent Wall Street Journal report. The next most prominent Android vendor is Huawei, which ships just 6.6% of all Android devices. The fear is that Samsung could leverage its dominant position to extract more out of Google, in the form of higher ad revenue sharing agreements.

Android chief Andy Rubin reportedly expressed concerns in an internal meeting that Samsung could pose a threat and that the search giant's controversial acquisition of Motorola helped somewhat mitigate this risk. That's one reason why the "X Phone" that Motorola is working on is so important.

However, Samsung could also shift the dynamics of the broader Android army if it demands earlier access to new software updates before rival hardware vendors, which would make the playing field rather uneven.

As it stands, Google relies primarily on both Apple and Samsung for mobile ad revenue as the two dominant vendors. Analysts estimate that Google will also pay Apple more than $1 billion next year in traffic acquisition costs in order to be the default search engine on iOS, up from an estimated $877 million this year.

A tale of two partners that could see a falling out
Samsung has also expressed interest in other platforms, not only with its launch of new Windows Phone 8 devices, but also with its transitioning its Bada platform into Tizen, another open-source platform made from Nokia and Intel's Meego platform of years ago that Samsung also backs. Samsung is planning on launching new Tizen devices this year.

While Google and Samsung have been quite cozy for the past couple years as they jointly ride Android to success, they each have different incentive structures in place that could create tensions in their relationship. Both companies are well aware of the risks that they face by relying too heavily on one another.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 27, 2013, at 5:28 AM, H3D wrote:

    Forget Google

    Its Apple and Samsung.

  • Report this Comment On February 27, 2013, at 6:10 AM, RandomMeaning wrote:

    The risk for google is the possibility that Samsung removes or minimizes Google services. Without the revenue from those services, Android becomes a charity project.

    If Samsung is smart, they will come up with a way to still include Google services but make them entirely secondary to Samsung's own services (if they can create competitive ones). That way they would still be adhering to the letter of the agreement so they continue to stay on the update path but syphon away revenue for their own coffers.

  • Report this Comment On February 27, 2013, at 1:14 PM, stefna wrote:

    Google's completely asleep at the switch, and Samsung is milking Android for all it's worth. And it's using those billions to build its own brand at Google's expense. Can a Samsung OS and search be far behind? Google has a tiger by the tail. It's a highly unstable relationship, more so than the Apple and Samsung competition, which is pretty well sorted out. And both Google and Samsung have proven to be duplicitous. Remember the iPhone.

    Five years from now, the mobile market will include Apple, Samsung, and Google, in that order. And that's on a good day. Without its own hardware to compete with Samsung, Google will end up like Adobe, begging to get on other hardware platforms. Larry better stop reading his own publicity notices and get on with the hard work of business.

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