Google (GOOG +0.52%) (GOOGL +0.56%) Android is the largest mobile operating system on the planet, but believe it or not it is losing momentum as of late. A recent report from ABI Research states that worldwide Android shipments fell quarter over quarter in the fourth quarter of 2014, dropping from 217 million to 206 million shipments. Meanwhile, Apple's (AAPL 0.01%) iOS nearly doubled its share sequentially from 39.3 million to 74.5 million units.
Source: Flickr, Kenneth Lu
That decline is troubling because Google relies heavily on Android, an open source operating system, to tether users to its mobile search and app ecosystem. It then monetizes Android by funneling users through its search engine and taking a 30% cut of Google Play purchases.
However, Google investors should be aware that a dip in market share is only one of several challenges which could derail Android in 2015. Let's check out three big hurdles that Android could trip over in the coming year.
1. The alarming rise of Apple
Apple and Samsung (NASDAQOTH: SSNLF) both shipped 74.5 million smartphones last quarter, tying for global market share at 20% each, according to research firm Strategy Analytics. Yet Apple's iPhone shipments rose 46% year over year as Samsung's shipments slipped 13%. That's bad news for Google, since Samsung is the world's largest manufacturer of Android phones.
Apple's robust growth also means that the iOS ecosystem is expanding. That could hurt Google, since Apple has been widening its moat against Google's apps on iOS. Apple launched Apple Maps to compete against Google Maps, uses Microsoft (MSFT 0.25%) Bing as the search engine for Siri, OS X Yosemite, and Spotlight search, urges users to use iCloud instead of Google Drive, and even throttles Chrome's speed by forcing it to use an older JavaScript engine than Safari's. The exclusive deal that made Google the default iOS search engine will also expire this year, which means that Bing could soon replace Google.
Therefore, the rise of Apple could steal market share away from Android and impact Google's ability to monetize iOS users.
2. Samsung's open rebellion
Meanwhile, Samsung is fighting a losing battle on two fronts: it's losing the premium market to Apple and being crushed in the mid- and low-end markets by Xiaomi and other cheaper Chinese Android competitors. Last quarter, Samsung's mobile profits plummeted 64% year over year.
Samsung has been trying to escape the overcrowded Android market in two ways. First, it developed its own OS, Tizen, for smart watches, smart TVs, the low-end Samsung Z1. and other devices. Second, it developed its own ecosystem within Android that limits Google's ability to monetize Samsung devices.
Samsung's Tizen could become a threat to Google. Source: Samsung
That ecosystem includes an app store, which Samsung also monetizes by taking a 30% cut, a health-tracking dashboard known as S Health, which is similar to Google Fit, and Milk, a streaming music service that counters Google Play Music All Access. Samsung also integrated Dropbox into its smartphones, TVs, and other products to decrease user dependence on Google Drive.
If Samsung gains enough confidence to install Tizen across all of its smartphones, Android could lose nearly a fourth of its global market.
3. Forking Android away from Google
Android is now installed on 81% of the world's smartphones, according to Strategy Analytics. However, Google can't monetize a large percentage of those phones due to widespread "forking" and fragmentation.
Since Android is open source, hardware manufacturers often modify ("fork") the OS to create their own Android-based custom operating systems. Many forked Android operating systems, like Amazon's (AMZN 0.78%) Fire OS, replace Google services with their own apps. When Kindle users download apps from the Amazon Appstore, Amazon -- not Google -- takes the 30% cut.
As a result, two Android ecosystems now exist: one under Google, which includes Google services, and another under AOSP (Android Open Source Project), an alliance of developers and companies (including Samsung), which modifies Android to prevent it from becoming Google's "closed source" system.
Many Chinese Android manufacturers fork Android, since most Google services -- including YouTube, Search, and Google Play -- are banned across mainland China. For example, Xiaomi has its own app store, which hit 10 billion downloads last November. Baidu, Qihoo 360, Tencent, and other Chinese tech giants also have their own Android app stores. Unfortunately, Google can't monetize any of these apps. Meanwhile, Apple can monetize its Chinese iOS apps, since it runs a special App Store in China which only features government approved content.
Xiaomi's App Store. Source: Xiaomi
Will Android short circuit?
Investors should remember that Google can't control Android the way Apple maintains an iron grip on iOS. Google relies on hardware manufacturers to expand its ecosystem, but it must prevent major players -- like Samsung -- from declaring their independence. Meanwhile, forked Android operating systems throttle Google's ability to monetize mobile devices in critical markets like China, yet inflate its market share figures.
Google took a step in the right direction by launching cheap Android One devices preloaded with Google services last year. Nonetheless, investors should watch out for more market share declines and fragmentation worldwide, which could weaken Google's mobile presence.
