Smartphone manufacturers are stuck with Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) Android, according to Richard Yu, chief executive of the consumer business group at Huawei. The Chinese company has quickly grown to become the third largest smartphone manufacturer in the world. Last quarter, it grew smartphone sales 95% year over year.
Despite Microsoft's (NASDAQ:MSFT) best efforts, Windows Phone hasn't caught on. It's had mild success in several European markets, but it's still trounced by Android and iOS everywhere it goes.
In a recent interview with The Wall Street Journal, Yu said: "It has been difficult to persuade consumers to buy a Windows Phone. It wasn't profitable for us." When asked whether the company planned to make its own OS, Yu said, "It's easy to design a new OS, but the problem is building the ecosystem around it." This points to the root of the problem of Windows Phone, as well as Samsung (NASDAQOTH:SSNLF)-backed Tizen. Smartphones aren't that smart without the apps that people want.
The Windows Phone ecosystem
Last month, Microsoft announced that the Windows Phone Store now had 300,000 apps. That's an increase of 100,000 apps since it last updated us in December.
Despite the impressive growth, it still falls short of Apple and Google. Both have over 1.2 million apps in their app stores, and Apple added approximately 200,000 new apps in the eight months from October to June.
While Microsoft might be able to attract the big fish, such as Facebook and Twitter, it's missing out significantly on the long tail of app downloads. Although smartphone owners spend a lot of time on Facebook, nearly one-third of time spent on mobile devices is playing games, according to mobile analytics firm Flurry.
The mobile game industry has its giants, but it's still extremely fragmented. A small developer can have just as much success as the big names but small developers have limited resources, which means going after the big markets that Android and iOS present. Windows Phone users are forced to wait, sometimes forever.
What's more, the quality of apps on Windows Phone is often subpar. Even big-name apps such as Spotify or Yelp lack features (such as free streaming and video reviews) available in the iOS and Android versions. It seems Microsoft's incentive program for developers has only added low-quality apps to its app store.
OEMs can barely make money with Android
Exacerbating the problem for Windows Phone is that smartphone OEMs are already getting by on extremely thin profit margins. There are only a handful of companies making any profits in smartphones. The vast majority of profits go to Apple, and Samsung makes a fairly good profit as well. Combined, every other smartphone OEM posts a net loss on smartphones.
With OEMs struggling to turn a profit, Microsoft began offering free licenses for Windows Phone in hopes of boosting adoption. Essentially, Microsoft is undercutting the "free" Android license. (OEMs must pay Microsoft royalties for its Android patents.)
Still, Windows Phone is an afterthought for OEMs, repurposing hardware from Android builds. With lower expected sales for Windows Phone units -- because of the lacking app ecosystem -- it would be hard for manufacturers to recoup costs for designing original hardware. As is, it seems sales aren't enough for many OEMs to cover software development to adapt its hardware for Windows Phone.
The inability for smartphone OEMs to extract themselves from a relationship with Google isn't good for them. As Yu pointed out in his interview with The Wall Street Journal, "We have worries about Android being the only option, but we have no choice."
Samsung has been most determined to extricate itself from Google, but it hasn't made much progress. In fact, it seems to be moving backward this year with Tizen. Phone launches have been delayed, and the alternative OS's only presence in the U.S. is in Samsung's Galaxy Gear smart watch line. While Tizen can mask the dearth of apps on the nascent smart watch platform, it won't be nearly as easy on smartphones.
Google has been promoting its agenda with Android more and more in the recent months. It made Samsung curb its TouchWiz UI customization on its phones and makes OEMs feature Google apps more prominently.
Surely, manufacturers would rather have an alternative, but they face a Catch-22 of sorts. They can't sell an alternative OS (including Windows Phone) without strong adoption from app developers, and they won't get strong adoption from app developers without good sales of an alternative OS.
Adam Levy owns shares of Apple. The Motley Fool recommends Apple, Facebook, Google (A and C shares), Twitter, and Yelp and owns shares of Apple, Facebook, Google (A and C shares), Microsoft, and Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.