Google (NASDAQ:GOOG) (NASDAQ:GOOGL) recently unveiled its first three Android One smartphones, which will start from Rs 6,299 ($103) in India. Google's first hardware partners for this low-end push include Micromax, Karbonn, Spice, and chipmaker MediaTek.
The three phones -- the Micromax Canvas A1, Karbonn Sparkle V, and Spice Dream Uno -- all have 4.5-inch screens, 1.3 quad-core MediaTek processors, 1Gb of RAM, 4GB of internal storage, a microSD card slot, a 5-megapixel rear camera, and a 2-megapixel front camera.
Google and its other Android One partners -- which include HTC, Lava, Xolo, and Asus -- will roll out more Android One devices across Indonesia, the Philippines, and South Asia before expanding into other countries in 2015. Could this march across key emerging markets crush Microsoft (NASDAQ:MSFT) and other competitors' dreams of mobile growth in low-end markets?
What Android One means for Google
Google first announced Android One at I/O 2014 in June. The initiative set minimum standards for Android devices to insure that they could run basic Google services and reduce device fragmentation in the low-end market.
Making sure Android devices can run Maps, YouTube, and Google Play is essential to monetizing Android. Google mines data from those services and takes part of the 30% transaction fee that it charges app developers in the Play Store. Meanwhile, it's in Google's best interest to kill off older Android versions like Froyo (2.2) and Gingerbread (2.3), since they are incompatible with many newer features and apps.
Only 21% of Android devices in the world run the latest version of Android, KitKat (4.4), according to a recent report from Open Signal. Many new wearable devices, like Android Wear smart watches, are only compatible with KitKat devices. By comparison, 91% of all iOS devices have been upgraded to iOS 7, thanks to the lack of hardware fragmentation in Apple's (NASDAQ:AAPL) devices.
According to IDC's second-quarter numbers, 85% of the world's smartphones run on Android, compared to 12% for iOS. But with only 18% of all smartphones actually running KitKat, Google's lead over Apple isn't as wide as IDC's numbers suggest.
What Android One means for Microsoft
Yet Android One isn't really about challenging Apple, which has ignored the low-end market's razor-thin margins. In the sub-$200 range, there are only two main players -- Google and Microsoft.
According to IDC, around 60% of Android and Windows Phone devices are sold for under $200. However, Windows Phone only accounted for 2.5% of the global market in the second quarter, compared to 3.4% a year earlier.
Microsoft's top-selling smartphone, the Lumia 520, accounted for 30% of all Windows Phones in 2013, according to AdDuplex. The Lumia 520 launched for around $170 last year, while its successor, the new Lumia 530, will only cost $135. Since Microsoft has been driven out of the high-end and mid-range markets by iOS and Android devices in developed markets, it has launched low-end Windows Phones as a last-ditch effort to regain market share.
Unfortunately, new Android One devices will crush the Lumia 530 for three simple reasons: more apps, better specs, and a lower price.
The Windows Phone Store recently hit 300,000 apps, but it's still dwarfed by Google Play's 1.3 million apps. The Lumia 530 also has a smaller screen, a slower processor, and less RAM than the three new Android One devices. Therefore, the only way for Microsoft to save the Lumia 530 against Android One devices is to dramatically reduce its current price, sacrificing margins to protect its tiny sliver of the market.
A Foolish final word
Sundar Pichai, Google's SVP of Android, Chrome, and Apps, noted in a recent blog post that over 5 billion people in the world still don't own a smartphone, compared to the 1.75 billion who do.
Android One will certainly help Google tap into that market, helping tether millions of new users to its ecosystem of apps, who will subsequently monetize Android. The beauty of Google's plan is that it doesn't shoulder any of the costs of manufacturing new hardware -- those risks are all taken by its hardware partners.
This viciously efficient strategy could easily kick Microsoft -- which foots the bill for its Lumia-branded phones -- out of the low end of the smartphone market and into oblivion.