The smartphone has become the most sought-after device in technology, outpacing PCs and even the new tablet market. Last year, 487.7 million smartphones were sold, more than PCs and tablets combined. The smartphone market also grew at a 62.7% rate, more than quadruple that of PCs.
At the top of this market is a battle for platform supremacy between Google (Nasdaq: GOOG), Apple (Nasdaq: AAPL), and a resurgent effort from Microsoft (Nasdaq: MSFT). I'll analyze which has an advantage and which is worth investing in right now.
Operating system
The operating system is the core of the smartphone and creates the biggest advantage for companies that can get it right. When Apple released the original iPhone, it blew away the old king of the block, Research In Motion's (Nasdaq: RIMM) BlackBerry. The smartphone was so far ahead that it has rendered the BlackBerry nearly obsolete and sent the company on a path toward bankruptcy.
The look and feel of the iPhone hasn't changed much since 2007, but it is still more simple and consistent than either Google or Microsoft's operating systems. But the difference between Apple and Google is in the eye of the beholder. The iPhone's biggest advantage is that it seamlessly integrates with other Apple devices, transferring pictures, calendars, notes, Web pages, and many other things without the push of a button. It is elegant, simple, and easy to understand -- something Android hasn't always been.
But Google has managed to take more than 50% of the smartphone operating system share because its design has improved and it's open for phone developers to tinker with. The keyboard on Android devices may be the biggest thing new users will notice. Unlike iOS, Android is capable of using the swipe feature as well as dictation. Google has definitely closed the gap with iOS, and some may say Android is even better. It's a tight race, and the better operating system between these two could be debated all day long.
Microsoft was as late to the game as it could be with a decent mobile operating system and is still playing catch-up. According to comScore, the company has only a 3.9% share of the market, down from 4% last year. It hopes to change that with Windows Phone 8, a newly announced upgrade to its operating system. The new operating system isn't a departure from the previous colorful boxy shapes that dominated the old operating system. It does have improvements like NFC support, but I see very little to pull iOS or Android users to Windows Phone 8, leaving Microsoft as the clear loser in the operating-system battle.
Hardware
Microsoft has now followed Apple in building its own hardware for its mobile operating system with the Surface tablet. This goes along with the company's partnerships with Nokia (NYSE: NOK) and other manufacturers to make phones. The partnership with Nokia came at a steep price for Microsoft, however, because it will pay billions in development and marketing costs just to keep Nokia away from Google's Android. To me, this is like having Polaroid partner with Kodak -- two has-beens partnering with the goal of world domination. Does anyone really care what Microsoft or Nokia do at this point? I don't.
Over at Apple, the company's fortunes ride with the success or failure of the iPhone. A bad quarter of sales sent the stock lower this week, an indication of just how important the iPhone has become. This is the precise reason Apple has a lot of risk every time it unveils a new device. If people love it (as they have in the past), Apple will take share and sell oodles of iPhones. But Apple investors behave especially skittishly if they miss their expected sales figures. This isn't a big deal, even though the stock's recent downward march might make you think otherwise.
This is where Google takes the advantage, because it provides an operating system that's similar in quality to Apple's, but it allows manufacturers to take the risk of getting form factor right. They can offer removable batteries, memory cards, and other advantages that Apple intentionally blocks. Score one point for Google in hardware in my book.
Integration
In the integration department, Apple and Google are in something of an arms race. Google has more of its own apps and services like Google Wallet, Gmail, Calendar, G+, Maps, Search, and so on, but Apple has made it easy to sync photos and songs to our phones along with calendars, notes, and the like. These two keep going back and forth, stealing ideas from each other, so the integration game will probably only improve both operating systems.
Microsoft has the advantage of owning not only the smartphone operating system, but also the dominant PC operating system, providing an advantage for enterprise users or those who want to word-process on their phones, however destructive that might be for your personal life. The details of how Windows Phone 8 and Windows 8 will work together isn't clear right now, but look for Microsoft to try to make this a reason for PC users to switch to a Windows smartphone. Until we know more, I can't give the edge to Microsoft, and while Google and Apple are adding features at a similar pace, I'd give a small advantage to Apple in integration.
Partners
In the mobile market, you're only as strong as your partners. I highlighted how the Microsoft-Nokia partnership doesn't do anything to make either company achieve or regain relevance in the smartphone market, so I'd give Microsoft a failing grade here.
Apple has the most power over its partners, with AT&T, Verizon, and Sprint Nextel having clamored to get the iPhone over the last five years. It also has the largest app store for developers, so it has partners galore, but only where it sees fit.
Google has an advantage with the Android market, offering fewer restrictions for developers. With handset developers such as Samsung able to develop their own devices, Google can leverage the creativity of others, unlike Apple.
When it comes to partners, I give a clear advantage to Google. Having Samsung and other manufacturers on your side, along with a growing network of developers, makes Google's partners slightly stronger than the closed loop Apple keeps.
Foolish bottom line
If I had to bet on the future of one of these companies in the smartphone battle, it would be Google. The company has the largest market share, a huge app store, and the ability to integrate with a plethora of its own apps.
The problem for Google is that is doesn't make a lot of money on its smartphone business directly. Its operating system is an open platform, and it intends to make money from advertising and search, the same way it would on an iPhone.
For this simple reason, I have to give the advantage to Apple from an investor's standpoint. Apple makes a killing on each phone, makes money on app store and music purchases, and ties customers to its products with the iCloud. The Android platform may have better, more cost-effective devices for many people, but Apple is the one that will make you money. This is just one of the reasons to buy Apple. For more, check out our premium report written by our resident Apple expert.
