Is Android's KitKat Good News for Apple Inc?

With the release of KitKat, the latest version of the Android operating system, Google  (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) has taken a big step toward a single OS solution for all Android smartphones. Made more efficient, KitKat increases the number of smartphones that can run the new Android release, a strategy that Google hopes will reduce Android fragmentation and increase its appeal in emerging markets. 

But, is there a risk that Google's new strategy will reduce the appeal of higher-priced Android smartphones and cede a larger share of the premium-price smartphone market to Apple (NASDAQ: AAPL  ) ?

The Android mobile operating system is Google's conduit for mobile search revenue. Android, provided at no cost to smartphone OEMs, increases the reach of Google's apps-generating mobile search revenue for the folks at Mountain View.

KitKat, requiring only 512MB of RAM, provides Android smartphone OEMs with an operating system that runs well on all Android smartphones, regardless of the power of the device's chipset. This "one-size-fits-all" operating system is intended to provide a robust OS solution for budget smartphones in emerging markets, while increasing the value of Android to the app developer community.

Android fragmentation
Android fragmentation can, in part, be attributed to the wide-range of chipsets found in Android smartphones. Premium-priced Android devices take advantage of their sophisticated chipsets by running the latest version of Android. While budget devices, popular in emerging markets, use older versions of the OS to maximize the performance of their older, slower chipsets.

Budget Android smartphones continue to ship running 2010's version of Android. Because each Android version has unique specifications, Android app development is more complex in comparison to Apple iOS, where 87% of iPhone users have adopted the company's latest operating system, iOS7..

Emerging markets
Emerging markets represent the fastest growing market for smartphones, and Google's competition has taken note. Mozilla is targeting emerging markets with Firefox OS, Mozilla's mobile operating system. Firefox smartphones use web-based apps, significantly reducing a smartphone's chipset power requirements and price. Mozilla recently announced the planned release of a $25 smartphone for emerging markets.

KitKat is Google's strategic response, providing Android's latest user interface and apps on budget smartphones. Google feels it can provide a more valuable smartphone experience to users in emerging markets.

Are premium Android smartphones at risk?
However, is there a risk, as the Android user experience becomes more consistent across smartphone price segments, that Android users will increasingly opt for lower-priced devices? While OEMs have the flexibility to differentiate their devices with customized features and interfaces, with KitKat, budget OEMs have the ability make their lower-priced Android smartphones "act more like" higher-priced devices.

Apple's strategy: Differentiate by pushing chips and iOS to their limits
While Google focuses on maximizing Android's global share, Apple remains focused on protecting the iPhone's premium pricing. To differentiate the iPhone from Android, Apple takes full advantage of the ever-increasing "horsepower" of the company's chipset. Cupertino's goal is to create what the company believes is a unique experience that is highly valued by the user and cannot be replicated on slower chipsets.

As an example, iOS 7 took advantage of the company's new A7 processor to introduce complex graphics that used stacking, layering, blurring, and natural movement to create a three-dimensional feel for the iPhone's user interface.

Investor summary
Google's new mobile operating system strategy represents a bold move by the company to reduce OS fragmentation while increasing the value of Android in emerging markets. A "global version" of Android could significantly reduce app development complexities, increasing the attention of app developers.

However, eroding the pricing power of Android smartphones may be a risk facing Google's new Android strategy. If lower-priced Android smartphones become "good enough" for users, and Apple is successful in differentiating iOS to capture more of the premium smartphone market, Google could see the "search value" of Android users decline over time. Google investors would be wise to track the the impact of Google's new OS strategy on the company's search demographics.

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Comments from our Foolish Readers

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  • Report this Comment On April 17, 2014, at 12:50 PM, MarkSpector wrote:

    Can't say I agree with this premise. Power users will always find value and use for the faster chips in more expensive phones. The bottom of the market will appreciate the unified user experience. Tim Cook may be a better CEO than John Scully or Gil Amielo (sp), but he appears to be making the same mistakes.

  • Report this Comment On April 17, 2014, at 12:58 PM, bshamblin wrote:

    The question is what percentage are power users?

  • Report this Comment On April 17, 2014, at 1:41 PM, Renee wrote:

    I don't understand how the author can find any negative (or negative potential) in having the same OS on lower-end phones as well as higher-end.

    Windows 7 and 8 are available on computers from $300 to $4000, and they don't interfere with each other. Different capabilities and speed mean different price.

    As long as the update to a new OS doesn't cripple the phones (like it does with older iPhones due to their lower speed and inability to run the newer iOS reasonably), there is no downside to this.

  • Report this Comment On April 17, 2014, at 2:47 PM, bobbydig wrote:

    Why can't Android users admit, Android is a mess. Even Google recognizes the issue is trying to be more like Apple and MS. Apple and finally MS realized one OS is easier to update, makes life easier for the end user, and developers can actually properly test their software.

    I know I just opened up the door to be bashed by Fandroid, but your platform is not what you think. The marketshare bench mark is not working! Maybe that's why Google continues to miss expectation AGAIN this quarter, because Ads sells are going. down. Its seems marketshare is not helping. Its time to turn a profit, like Apple.

  • Report this Comment On April 17, 2014, at 3:17 PM, Renee wrote:

    bobbydig: not going to comment on your technical analysis, as this is a financial forum, and you are way-off on that part. So far, in fact, I'm not even going to bother explaining it to you, as it's clear this isn't about being wrong, but about lies or refusing to see the truth.

  • Report this Comment On April 17, 2014, at 3:49 PM, aardman wrote:

    What we will see with Android is the same kind of race-to-the-bottom that PCs underwent. Unless somehow some unearthly being repeals the laws of human behavior and gets the handset manufacturers to stop competing.

    There might still be Android handsets for the real power users, but they won't be anymore profitable for the manufacturers than the low end models. And the Android segment that competes head to head with the iPhone could very well disappear, just like PCs that try to play in Apple's sandbox.

  • Report this Comment On April 17, 2014, at 4:34 PM, Renee wrote:

    what aardman calls "race-to-the-bottom" is called elsewhere in the world "free market competition".

    Only fanbois use that stupid term to somehow justify themselves overpaying for their iDevices.

    Oh, and if the PCs that compete with Macs are so inferior, how come, after nearly 40 years, they STILL comprise only single digits in the personal computer market? Oh, that's right: I guess those "unearthly being[s] repeal[ed] the laws of human behavior", right?

    Fact about (most/rational) humans: they don't want to overpay for their devices, when better (and often cheaper) devices are out there. Then there are the Apple customers....

  • Report this Comment On April 17, 2014, at 4:47 PM, GaryDMN wrote:

    Why isn't it news that Google is the world's largest propagator of the open source OpenSSL bug? Google didn't mention it in their earnings announcement (refer to risk section) and analysts are aware of it, but remain silent.

  • Report this Comment On April 17, 2014, at 4:59 PM, Renee wrote:


    17-60% of websites out there (depending on the source you believe) are affected by the OpenSSL bug. Not just gmail.

    Google did not propagate this, they just happened to be one of the websites affected by it.

    Why not blame flowers that dried up due to the drought in california for the drought itself?

  • Report this Comment On April 17, 2014, at 6:25 PM, aardman wrote:

    @Renee, don't take things personally. I didn't say PCs are inferior to Macs, I said they aren't as profitable. And that's the whole point of the free market you know, profit maximization? Remember? And the more you are able to get people to overpay for your product, well the more successful you are in the free market.

    You can't on one hand extol the virtues of the free market when it drives down prices and profits and then on the other hand complain about companies who play their cards right in the same free market and make money hand over fist.

  • Report this Comment On April 18, 2014, at 9:55 AM, MfromG wrote:

    If Apple would just offer a much bigger screen (5" plus) they would boost their iPhone sales significantly.

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Bill Shamblin

Market analyst, economist, stat geek, and comedy writer. My goal at The Fool? Tell the story behind the numbers. I've developed competitive analysis for Fortune 500 companies, managed an econometric model of US price and wage indices, and written comedy for syndicated radio programs. BA economics/computer science, University of Maryland. MBA Georgia Institute of Technology. Follow me at: @bshammy

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