Apple (NASDAQ:AAPL) iOS just topped Google (NASDAQ:GOOG) (NASDAQ:GOOGL) Android in the U.S. for the first time since the fourth quarter of 2012, according to Kantar Worldpanel ComTech. Apple claimed 47.7% of the U.S. market, up from 43.9% a year earlier, as Android's share slipped from 50.7% to 47.6%. iOS also topped Android in Japan and Australia.
Strong sales of the iPhone 6 and declining demand for Samsung (NASDAQOTH:SSNLF) smartphones -- which account for about a fifth of the Android market -- contributed to that shift. During the fourth quarter of 2014, IDC reported that sales of iPhones surged 46% year over year to 74.5 million units, while sales of Samsung devices slipped 11% to 75.1 million units.
Those numbers are quite impressive when we consider that Apple, which only launched two new phones per year, is starting to match the combined market share of dozens of Android devices in certain markets. Could Apple's victories in the U.S., Japan, and Australia be bright red flags for Google?
Google's delicate balancing act just got tougher
Investors should remember that Android is a dynamic, open source OS that Google doesn't really control. Google only monetizes Android when it funnels traffic through its search and app ecosystem, and when it takes its 30% cut of Google Play sales. As long as smartphone and tablet manufacturers bundle Google services with their phones, Google can monetize the OS.
But other companies are also allowed to modify, or "fork," Android for their own purposes. Amazon did that with Fire OS, replacing Google's services with its own, while Chinese companies like Xiaomi install their own app stores instead of Google Play. An entire alliance of developers and companies, known as the AOSP (Android Open Source Project), has also emerged to prevent Google from claiming Android as its own OS. Even without forking Android, OEMs can undermine Google by launching competing app stores and favoring third-party cloud drives.
To make matters worse, a large portion of the Android market consists of outdated devices. Last August, research firm OpenSignal found that only 20.9% of Android devices were updated to the latest version at the time, 4.4 (KitKat) -- meaning that many newer initiatives, like fitness apps, Google Fit (for 4.0+), and Google Now (for 4.1+) can't run on all Android devices.
Due to all that forking and fragmentation, the actual percentage of Android devices that Google can monetize is likely much smaller than the OS's total market share.
How Apple can exploit Android's fragmentation
By comparison, Apple controls both iOS hardware and software, which allows it to maintain an iron grip over the entire ecosystem. There's also much less fragmentation, thanks to automatic updates. Apple recently reported that 72% of iOS devices already run iOS 8, while 25% remain on iOS 7.
Apple's homogenous hardware specs across each generation make it easier for iOS developers to create apps without worrying about them crashing on incompatible hardware. It also makes it easier for Apple to quickly launch new services, like Apple Pay, HealthKit, and HomeKit, into the mainstream market. Meanwhile, Google's similar initiatives (Google Wallet, Google Fit, and Nest) could face problems due to Android fragmentation and hardware partners like Samsung launching competing services.
As Google tries to deal with forked operating systems, fragmentation, and rebellious hardware partners, Apple's next-gen initiatives (mobile payments, smart homes, and the Internet of Things) could spread faster across its unified base of iPhone users.
Low risks, low rewards
Google's mobile strategy is to give away its free OS, preloaded with its popular services, to hardware manufacturers. That's a low-risk strategy, since Google doesn't take any overhead risks by manufacturing hardware that might flop. But it's also a low-reward one, since Google can't directly profit from sales of popular Android phones.
When Google acquired Motorola Mobility for $12.5 billion in 2012, it wanted to replicate Apple's combined hardware/software ecosystem by launching first party phones. But Google's Moto X efforts flopped, resulting in steep losses, and the company sold Motorola's handset business to Lenovo for $2.9 billion last year. That retreat showed that Google just didn't have the stomach for making its own hardware.
Google is now trying to address fragmentation in lower-end markets with its Android One partnerships, but that doesn't counter its high-end market share losses to Apple in developed markets like the U.S., Japan, and Australia.
What Google got wrong
With Android, Google basically replicated Microsoft's (NASDAQ:MSFT) IBM "clone strategy" in the 1980s -- to spread itself across as many OEMs as possible to dominate the hardware market. But the key difference is that Windows is closed source, and Android is open source. If Microsoft had allowed its OEM partners to fork Windows and cut it out of the loop, it would have lost control of the PC market.
That's the key challenge Android faces today: how to get its fragmented market to face the same direction again. If Android continues ceding market share to iOS throughout 2015, that long-term goal could be very tough to achieve.
Leo Sun owns shares of Apple. The Motley Fool recommends Amazon.com, Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Amazon.com, Apple, Google (A shares), Google (C shares), International Business Machines, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.