Could Android’s Biggest Success Become Its Biggest Liability?

In his newest book, David and Goliath, noted author Malcolm Gladwell explains why underdogs sometimes win. Normally the cause is a combination of dedication and, more importantly, a fundamental misunderstanding of each competitor's advantages and disadvantages. In short, what often appears to be a source of strength is actually a source of weakness. Looking at the mobile phone operating system space, it appears Google's (NASDAQ: GOOGL  ) Android could make it a Goliath -- an unenviable position in this story.

A little history is in order here. Yes, technically Apple (NASDAQ: AAPL  ) is a larger company. However, in the smartphone operating system space it has ceded tremendous market share to Android over the last few years. In fact, Apple has watched its market share erode from 23% in the first quarter of 2012 to under 13% as of the third quarter of 2013.

More isn't always better
Android has succeeded in poaching Apple's OS market share because it is a mostly open source platform, so any handset maker that wants to produce an Android product is welcome to do so. Google is more concerned with maintaining its dominant position in mobile search by trapping customers in its ecosystem. Partnering with multiple handset makers allowed it to attack Apple on both price and feature fronts, relegating Apple to a David-like status in the market share category.

However, the strength that allowed Google's Android to increase market share could be undone -- not with a slingshot, but with a fork.

Fork: A four-letter word for Google
Forking has many definitions in software circles; simply defined, forking leads to the development of different versions of a program. One can see how this is problematic for Google's mobile phone business model: Since it relies on the current version of its operating system, any wholesale changes of its format are a risk to its dominance. Thus what was initially a source of strength in its market share acquisition phase could quickly become a weakness.

Google is aware of this, but so are its handset partners: The most profitable Android manufacturer, Samsung (NASDAQOTH: SSNLF  ) , is rumored to be working on forking Android's operating system. The company obviously understands the importance of an operating system: It has spent valuable resources working on open-source Tizen with chipmaker Intel.

And any discussion of a forked Android operating system would be incomplete without discussing Amazon's (NASDAQ: AMZN  ) Fire OS. From the time Amazon released its Kindle tablet, it unabashedly forked Google's operating system. Now, with the official introduction of Fire OS 3.1, they conspicuously omitted one word -- Android. Of course, this is a tablet, not a phone – but it does provide a blueprint for phone makers hungry for operating system revenue.

An Android exodus?
As you can see, all it takes is one successful handset maker to lead an exodus from Android to a forked OS model. In the short run, Google could probably threaten smaller manufacturers into keeping its version of Android. However, if a major manufacturer like Samsung decides to fork Android, Google would have a poor bargaining position. Matter of fact, Google executives have already expressed concern about Samsung's dominance among Android-based manufacturers.

Apple, on the other hand, doesn't have this problem. And while it's true that Apple derives more profit from its hardware (iPhone, iPads, and MacBooks), it would be unwise to dismiss its closed operating system as a weakness. Sure, this has resulted in decreased market share from a smaller phone product line. However, this ecosystem has allowed Apple to maintain its premium pricing strategy while other handset makers are forced to compete on price levels. In fact, at the high end of the market, Apple really only has one competitor: Samsung. And while the David comparison is an apt one in market share, it doesn't work as well in terms of market capitalization -- Apple is the largest company in the world.

Final Foolish thoughts
It is obvious that Google's Android is the Goliath of operating systems, boasting over 80% of that market. Its reliance on operating system profit instead of hardware profit allowed Google to quickly knock iOS off of the perch as the dominant OS. However, its reliance on operating system revenues could quickly come back to haunt the search giant. If a handset maker decides to fork the Android operating system, it could be a huge risk to Google as an investment.

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Read/Post Comments (11) | Recommend This Article (4)

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 November 19, 2013, at 10:37 AM, st0815 wrote:

    Samsung understand the importance of the OS, but they don't seem to be willing to bet the farm on one particular OS in the way Nokia has done (and lost). They'll keep trying, but Tizen doesn't realistically have much of a chance - not anymore than Bada or WP which Samsung also tried.

    How big is the risk for Google that another manufacturer will succeed though? While Samsung is excellent in bringing well-built products to the market quickly (no aluminum does not equal well-built), they are almost comically bad at building ecosystems. The homesync server only works with the S4 and newer models, the Gear only works with the Note 3, Allshare cast for phones doesn't work with Allshare on Samsung Smart TVs and so on. Nobody would look at this and trust Samsung with an ecosystem, and nobody does: the Samsung hub is notoriously unpopular, even promotional give-aways are largely ignored.

    It seems that building ecosystems is a skill not many companies have - something Google appears to be quite good at that. Other handset makers but Samsung are lacking the leverage - their device sales are too small to attack the current Google/Samsung setup, and realistically - not even Amazon is much of a threat there.

  • Report this Comment On November 19, 2013, at 11:23 AM, TMFJCar wrote:

    @st0815,

    Thanks for the comment.

    <<They'll keep trying, but Tizen doesn't realistically have much of a chance - not anymore than Bada or WP which Samsung also tried. >>

    I agree, but it does show that Samsung is interested in an OS of its own.

    <<How big is the risk for Google that another manufacturer will succeed though? >>

    IF a manufacturer succeeds, the risk could be high.

    <<their device sales are too small to attack the current Google/Samsung setup, and realistically >>

    You assume that Samsung won't be the one developing a new OS?

    <<not even Amazon is much of a threat there.>>

    I agree, but it does show that Android can be forked.

    Thanks for reading!

    Jamal Carnette--the author

  • Report this Comment On November 19, 2013, at 12:45 PM, jdmeck wrote:

    No pun intended. Apples and oranges. Tired of these stupid comparisons. Except for it's crappy Motorola division, all they do is sell adverting and give away programs. That's it, end of story.

  • Report this Comment On November 19, 2013, at 1:11 PM, symbolset wrote:

    "Trapping"? Emotionally laden null content. Scare word. Fear mongering. Google's users are not trapped by Google's great services; they are attracted by them.

    "Poaching" - A criminal act. Another scare word.

    Now let's talk about the premise of the article:

    Fork - No fork is going to have the million apps in the Google Play Store that makes up over half the real service value of the Android device to the end user. Nor the music, books, movies and TV shows.

    It's not going to integrate the desktop browser, phone, tablet and ultralight laptops with one cloud-backed platform that remembers all the stuff you have and like, provisions that for you across every domain and device.

    Android is designed to be forked and Google encourages it because every fork draws developers who become skilled in the ways of Android. Then they come back to sell their apps in the Google Play store that has one billion customers. Forking gives more end users a taste of Android's diminished derivatives and given a sample they find they want the whole meal. Amazon's Kindle sells a lot of Android phones. Fork? Knock yourself out.

  • Report this Comment On November 19, 2013, at 1:24 PM, TMFJCar wrote:

    @jdmeck,

    First of all, thanks for reading. Advertising dollars follow advertising eyeballs. Therefore if Tizen (or another OS is successful, ad dollars will follow). Tizen has gotten cozy with Windows, perhaps this is a win for Bing (if it succeeds -- a very unsure proposition). I think if a new OS succeeds it will implement a new search system. Will that work, who knows? But for you to dismiss a new OS and say "all the do is sell advertising" without thinking about ad dollars flowing to that new OS is naive.

  • Report this Comment On November 19, 2013, at 1:42 PM, terradistas wrote:

    I don't see what the fuss is about, Google never had the intention of making Android successful. The purpose of developing Android was to stimulate competition in the sector, not to win it. Google's primary focus was, is, and as far as anyone can tell always will be search. Despite Apple's falling market share, Google still makes more money off the Apple IOs than it does off Android. The OS is a means, search is the end. whichever OS winds up winning in the end, as long as Google Search and Google AdWords remains dominant, Google wins.

  • Report this Comment On November 19, 2013, at 7:10 PM, FoolinSD wrote:

    @TMFJCar , you need to research on Google's api strategy. If you want to port your app to Amazon, then you have to either write own code to replace Googe's api or find a replacement. It is "2 prong" in that they make api's available on iOS to streamline porting to android. API's save time to market but since api's are close source, Google is in control here.

  • Report this Comment On November 19, 2013, at 7:39 PM, TMFJCar wrote:

    @FoolinSD,

    Thanks for the heads up. The issue is that Amazon has successfully forked Google's system. Amazon (generally) wants to make money as a retailer. If handset makers want to, it will be for the purpose of making OS revenue. I'm sure they would find a replacement API. The crown jewel here is search, and I'll freely admit that nobody (including Bing) is up to the task of taking on Google.

  • Report this Comment On November 20, 2013, at 12:30 AM, TMFAeassa wrote:

    Great article, Jamal!

  • Report this Comment On November 20, 2013, at 9:28 AM, yahoouser4529 wrote:

    When I see bigger screens and More apps for free on other ecosystems, I'd give up on android.

  • Report this Comment On November 20, 2013, at 10:07 AM, TMFJCar wrote:

    @asassa,

    Thanks man! I appreciate it.

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