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 (GOOG 0.04%) Android could make it a Goliath -- an unenviable position in this story.
A little history is in order here. Yes, technically Apple (AAPL 0.04%) 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 (AMZN 1.40%) 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.
