With the release of KitKat, the latest version of the Android operating system, Google (GOOG 0.17%) (GOOGL +0.05%) 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 (AAPL 0.31%)?
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.
