Is Samsung's Decline a Bad Sign for Google's Android?

Samsung's mobile dominance appears to be slipping. As Google's largest hardware partner, Samsung's weakness could put pressure on Google's version of Android.

Aug 14, 2014 at 7:55AM

Samsung (NASDAQOTH:SSNLF) is struggling. Last month, when the Korean tech giant reported earnings, it revealed that its revenue and profits have declined sharply. Meanwhile, its smartphone market share has begun to slip.

As Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) single largest hardware partner, and the one handset manufacturer most responsible for Android's global domination, Samsung's decline could be a problem for Google's mobile ambitions.

Samsung dominates Android
Samsung's share of the Android market is massive. In February, analytics firm Localytics estimated that Samsung had manufactured nearly two-thirds of the Android devices currently in use -- LG came in a distant second, with just 7% of the market.

Samsung's flagship Galaxy smartphones comprised the bulk of those devices, but Samsung has also emerged as the dominant player in the Android tablet market. With a plethora of tablets offered in nearly every size and at every price point, Samsung has been steadily growing its share of the tablet market, with shipments rising to 11.2 million in the first quarter, up from just 8.5 million in the first quarter of 2013.

Samsung's Galaxy brand has become so synonymous with Android that Microsoft, in a presentation outlining its rationale for acquiring Nokia's handset unit, referred to all Android handsets as "Android/Galaxy" phones.

Google has many other hardware partners
Samsung is the largest and most dominant Android OEM, but it isn't the only one -- Google has many other hardware partners, some of which produce high-end Android devices as good or better than Samsung's. In addition to the aforementioned LG, there's Sony with the Xperia line, HTC with its well-regarded One, Motorola and Asus, in addition to emerging Chinese upstarts like OnePlus and low-end players like Karbonn and Micromax.

Although Samsung is struggling, Google's other hardware partners are seeing some limited success. Last month, LG reported a sharp rise in profit for the second quarter, boosted by growing smartphone sales. HTC's results were similar, with net profit and revenue rising. Motorola, meanwhile, appears to be on the upswing, with its low-cost Moto G capturing a sizable share of Indian smartphone market: According to Flipkart, one of India's largest e-commerce websites, Motorola has become a top five smartphone vendor in the country.

Android forks are pressuring Samsung
But given Samsung's size, the Galaxy brand would be difficult to replace, and Samsung's decline does pose a real risk for Google. Much of Samsung's struggle appears to be emanating from the low-end, in markets like China, where heavily modified versions -- called forks -- of Android are common. Some analysts were quick to see Samsung's recent problems as a positive sign for Apple, but when Samsung reported earnings, it blamed emerging market competition rather than pressure from high-end competitors.

One company that appears to be giving Samsung fits is Xiaomi, a relatively new Chinese upstart that has, within the last four years, risen to the top of China's smartphone market. Unlike Samsung, and most of Google's other hardware partners, Xiaomi relies on a forked version of the Android operating system -- called MIUI -- that strips out Google's services in favor of its own. Thus far, Xiaomi has been contained to China, but has begun to branch out into new markets, including India.

Xiaomi's recent growth appears to be a major factor behind the increasing popularity of Android forks: According to a recent report from ABI Research, forked versions of Android composed roughly 20% of the smartphones shipped in the second quarter, up 3% sequentially.

Does Google need Samsung?
In that sense, Samsung's recent weakness is a poor sign for Google's mobile ecosystem -- despite widespread speculation that it would eventually introduce a fork of its own, Samsung has remained loyal to Google's mobile operating system.

To be clear, Google's version of Android is still overwhelmingly dominant -- it shipped on nearly two-thirds of the world's smartphones last quarter. Samsung's decline won't doom Google's mobile ecosystem by any means, but the weakness of what Google calls its "fellow traveler" certainly won't help.

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Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Google (A shares) and Google (C shares). The Motley Fool owns shares of Google (A shares), Google (C shares), 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.

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