There are three major smartphone operating systems left standing. Apple (NASDAQ:AAPL) has iOS, Google (NASDAQ:GOOGL) has Android, and Microsoft (NASDAQ:MSFT) has Windows Phone. Currently, Android is number one worldwide with a whopping 79% market share. iOS is number two with 13.2%, although it's much stronger in the United States. And Windows Phone is a distant number three with just a 3.7% share.
But what will the market look like a few years from now?
Why Google's Android will remain number one
Android is completely free for OEMs to use in their devices, making extremely low-cost phones possible. Much of the volume growth in smartphones going forward will be in the low-end, as emerging market customers increasingly begin to use mobile devices. With the cost of traditional PCs putting them out of reach for many, an inexpensive Android device could act as the first computing device for hundreds of millions, possibly billions, of people.
Google doesn't make any money directly from Android, but more people using the OS and the company's various web services will lead to higher advertising revenue. Advertising is Google's bread and butter, and locking in as many people as possible to the Google ecosystem ensures that the core advertising business continues to grow.
It's hard to imagine any OS overtaking Android at this point, especially given the popularity of the platform. It's hard to compete with free, and with all sorts of devices running Android, like tablets and game consoles, it's clear that the OS is here to stay.
Why Apple's iOS will fall to number three
The only smartphone that runs iOS is the iPhone. Unlike Google, Apple doesn't allow anyone else to use its OS, keeping with its PC strategy. This helps Apple protect its brand by preventing cheap, low quality devices from hitting the market. While there are plenty of high-end Android devices, there are even more cheap pieces of junk.
Apple has always focused on marketing itself as a premium brand. This allows Apple to charge high prices, and maintain high margins, at the expense of market share. An example of this is the PC market. Apple has just a 7% market share in terms of unit volume while accounting for a staggering 45% of the profits. Larger manufacturers, like Dell and HP, sell far more units but make very little money doing it.
The smartphone market will likely follow a similar path for Apple. Because the company refuses to sell low-end devices, Apple is destined to see its market share slip further and further. Profits will remain high, but iOS will make up a decreasing portion of the overall smart phone pie.
The alternative would be for Apple to introduce a cheap version of the iPhone in an effort to pick up sales in emerging markets. The problem with this strategy is that it tarnishes the brand, with the worse case scenario being that Apple loses its appeal and, more importantly, its ability to charge high prices. Imagine if a cheap MacBook was released in order to compete with low-end Windows laptops. It would very quickly destroy years of work building up the cult following which surrounds Apple's products.
A cheap iPhone would have the same effect, and is thus not a very good idea for the company. Apple did release the iPhone 5c, which is less expensive than the iPhone 5s, but the 5c is essentially just the previous version wrapped in a plastic casing. It's not a true cheap iPhone, and I doubt that there will ever be one.
Why Microsoft's Windows Phone will become number two
Windows Phone has had a tough time gaining market share in the U.S., where the iPhone and Android are essentially neck to neck. But performance in some international markets has been fairly strong. Windows Phone has a nearly 10% market share in Italy, 8% in the U.K., 8% in France, and 6% in Australia. Windows Phone is even stronger in Latin America, where it has already surpassed iOS to become the number two mobile operating system.
Microsoft's proposed acquisition of Nokia, which accounts for a large part of the Windows Phone market, frees the company from total reliance on OEMs to use its OS. Microsoft can thus ensure that quality Windows Phones are being made, and putting hardware and software under one roof should create efficiencies which didn't exist while Nokia was a separate company.
One advantage that Microsoft may have is that OEMs like Samsung aren't too happy about being completely dependent on Google. Samsung is actively developing an alternative OS, Tizen, which could start finding its way onto smartphones. An alternative to attempting to launch a no-name OS, though, would be for Samsung to begin putting Windows Phone on some devices. The resistance to Google gaining too much of a stranglehold on the market could help Microsoft gain more market share.
Another thing that Microsoft has going for it is its dominance of the enterprise PC market. It stands to reason that, since most companies and organizations run Windows on their PCs, Windows Phone is a natural fit. Windows Phone was recently granted FIPS 140-2 accreditation, which essentially means that the OS is secure enough for government use. As BlackBerry fades away, Windows Phone could very well take its place among both government and private sector employees.
The bottom line
Google's Android will likely remain the dominant mobile OS for the foreseeable future, but the number two spot looks like it will belong to Microsoft. Apple will see its market share shrink, although its lush profits will probably remain, as Windows Phone eventually overtakes it to become the number two mobile OS in the world. This seems like the most likely scenario, and while putting a time frame on it is difficult, I think that five years from now Windows Phone will have proven itself to be a successful and profitable endeavor for Microsoft.
Timothy Green owns shares of Microsoft. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.