Android's challenges

Few would have predicted the meteoric rise of the
Android platform. If you cast your mind back to 2008
Google looked to be suffering from the economic
crash just as badly as the next company. The first
Android smartphone, the HTC Dream (T-Mobile G1),
was fairly well received, but widely written off as
“no iPhone killer”. Many people were denigrating
Chrome because it took four months to secure 1% of
the browser market. Google’s share price took a hit
and didn’t start picking up again until the beginning
of 2009.
Fast forward five years and according to the latest
research from IDC Android claimed an 84.7% global
market share in the second quarter of 2014. Chrome
has around a 45% share, in case you’re wondering.
Google looks stronger and richer than ever, but the
future for Android isn’t entirely bright.
How profitable is the Android scene?
No OEM has benefited more from the rise of Android
than Samsung , but there are signs that its dominance
is under threat. Looking at the Q2 2014 earnings
report we can see that the mobile division’s profit is
declining. It’s hardly panic stations, Samsung still
made more than $6 billion profit and the bulk of it
came from the sale of smartphones, but the mobile
division profit is falling faster and it’s a big drop of
almost 30% compared to the same quarter last year.
HTC was the early star of the Android pack, but it has
had a rough couple of years. The HTC One line has
returned the company to profitability, it made $75
million profit last quarter, but sales are still falling.
Sony has been fighting to get back into the mobile
space with the premium Xperia Z line and an
accelerated six month update schedule, but its mobile
division made a loss of $27 million last quarter.
LG looks like one of the few familiar OEMs going the
other way, with a profit of $83.4 million in the
mobile division for the second quarter, the first
profit in a while, but more importantly based on a
16% bump in sales.
It’s still early days for Nokia’s old phone hardware
division, now part of Microsoft, but the company did
report sales of 5.8 million phones in the partial
quarter since it took over, which looks like it might
be a modest increase over the same quarter last year.
That’s very much based on the budget and mid-range
end of the market, though.
It’s a new dawn
All of the major smartphone players are facing the
same threats. We’ve looked at how commoditization
is driving prices down and OEMs are left with a
choice between low prices and brand power if they
want to stand out and compete. The vast majority of
the growth in smartphones is in developing markets.
China and India are by far the biggest.
The Chinese question
Perhaps it shouldn’t come as a surprise that we’re
seeing so many Chinese manufacturers coming into
play. Lenovo has acquired Motorola after a dive into
the budget end of the market under Google saw it
start to turn things around. Xiaomi claimed the top
spot in Chinese smartphone shipments last quarter
with a 14% share. ZTE , Huawei , Alcatel , and even
newcomers like Oppo and OnePlus are significantly
undercutting the competition.
The big question is how profitable are these Chinese
companies? It can be a little difficult to tell because
they don’t always break down by division or report
on profits. We know that worldwide shipments of
smartphones for Huawei and Lenovo are rising fast,
placing them third and fourth on the chart for Q2
2014. Alcatel shipped a record number of handsets in
Q2 2014 claiming almost 40% growth and a 4% share
of the global market. ZTE made more than $100
million profit last quarter, but we don’t know how
much of that can be attributed to smartphone sales.
Xiaomi is selling a huge number of handsets and it
claimed $5.31 billion revenue in the first half of 2014,
but it is keeping quiet on the subject of profits. Some
people are speculating that margins are very tight
and maybe Xiaomi isn’t turning much of a profit at
all. It’s not clear if Oppo or OnePlus are making any
real cash either.
One company we know isn’t making cash in China is
Google. It refused to continue censoring search
engine results after a Chinese hacking attack and that
led to a lengthy dispute that has seen some Google
services banned in mainland China. Android may be
the dominant platform, but Google doesn’t provide
search on those phones or sell content on them like
it does in much of the rest of the world.
Google doesn’t want to be cut out of another market
the way it was in China and that’s what the Android
One program is really all about. Indian OEMs like
Micromax, Karbonn, and Lava claim a huge share of
the market in India. Now Google is starting to drive
sales of Android One handsets through partnerships
with these OEMs because it wants to make sure that
they carry Google services. The Android One
program also allows it to reduce fragmentation.
Are interests diverging?
There’s always been a weird dichotomy at the heart
of Android. Google and the OEMs don’t really want
the same thing. OEMs want to sell handsets and make
as much profit as possible from the hardware. Google
just wants its services on as many devices as
possible because it is geared up to make money from
advertising. Google can only retain its position at the
top of the search tree by continuing to suck in big
data from us to gain insights that everyone else
desperately wants.
As Internet usage is rapidly becoming all about
mobile devices, Android was a very clever way for
Google to maintain its dominance. Instead of having
to pay a company like Apple a huge sum of money in
order to be the default search provider, it gave OEMs
a platform to use. It actually presented them with the
same proposition that it presents us – you can have
this great, free software, but you have to use our
services and let us collect information from you.
Google has walked a tightrope in terms of pushing
hardware prices down, with the Nexus line and
Motorola, without alienating the OEMs. We’ve
wondered about Samsung jumping ship before, but it
can’t match Google in terms of services, and even
with the decline in profits it is still making money.
There may come a time when the OEMs realize their
interests are diverging and Android can’t deliver
what they need anymore, just as there may come a
time when people prize privacy over the quality of
Google’s services.
Maybe it’s simply too late for OEMs like HTC, LG, and
Sony to break away from Android. Dabbling with
Windows Phone has highlighted the lack of a back
door. Their mobile fates are tied to the Android
platform, so how strong is their bargaining position
with Google now? But the OEMs in China and India
could throw a giant spanner in the works. They can
undercut on hardware and they don’t necessarily
need Google’s involvement in the software space.
Android won’t be toppled by another OS anytime
soon, but the fight for control of the platform is set to
rage on. Google has to continue to be smart and
inventive, it has to continue to add real value for end
users, and it had better keep looking over its
shoulder.